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 September 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 November 14, 2001: 14,916,917
shares
Page 1
EDGAR ONLINE, INC.
FORM 10-Q
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 (unaudited) and December 31, 2000 .................................. 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2001 (unaudited) and 2000 (unaudited)........ 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 (unaudited) and 2000 (unaudited) ................. 5
Notes to Condensed 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
Page 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30,
2001 December 31,
(unaudited) 2000
----------- ----
ASSETS
Cash and cash equivalents $ 2,166 $ 2,284
Marketable securities -- 1,498
Accounts receivable, less allowance for doubtful accounts of
$329 and $345 at September 30, 2001 and December 31,
2000, respectively 2,206 2,790
Income tax receivable -- 979
Other current assets 302 127
-------- --------
Total current assets 4,674 7,678
Property and equipment, net 2,940 3,356
Goodwill and intangible assets, net 25,144 27,307
Other assets 950 1,125
-------- --------
Total assets $ 33,708 $ 39,466
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,318 $ 2,358
Deferred revenues 1,431 966
Notes payable and accrued interest 550 583
Capital lease payable, current portion 32 68
-------- --------
Total current liabilities 4,331 3,975
Notes payable 6,000 6,000
Capital lease payable, non-current portion 12 8
-------- --------
Total liabilities 10,343 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 53,491 53,483
Unrealized holding losses -- (2)
Accumulated deficit (30,275) (24,147)
-------- --------
Total stockholders' equity 23,365 29,483
Total liabilities and stockholders' equity $ 33,708 $ 39,466
======== ========
See accompanying notes to condensed consolidated financial statements
Page 3
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Corporate contracts $ 3,400 $ 924 $ 9,936 $ 2,363
Individual subscriptions 726 577 1,923 1,619
Advertising and other 131 552 836 2,344
-------- -------- -------- --------
Total revenues 4,257 2,053 12,695 6,326
Cost of revenues 993 555 3,539 2,028
-------- -------- -------- --------
Gross profit 3,264 1,498 9,156 4,298
Operating expenses:
Sales and marketing 618 931 1,878 3,692
Development expenses 512 592 1,775 1,683
General and administrative 2,437 1,417 6,469 4,199
Depreciation and amortization 1,239 805 3,594 2,240
Restructuring costs 84 -- 995 --
-------- -------- -------- --------
4,890 3,745 14,711 11,814
Loss from operations (1,626) (2,247) (5,555) (7,516)
Loss on investment -- -- (275) --
Interest and other income (expense) (107) 280 (281) 905
-------- -------- -------- --------
Loss before income taxes (1,733) (1,967) (6,111) (6,611)
Income tax provision -- -- (17) --
-------- -------- -------- --------
Net loss $ (1,733) $ (1,967) $ (6,128) $ (6,611)
======== ======== ======== ========
Weighted average shares outstanding - basic and
diluted 14,909 12,459 14,909 12,459
Net loss per share - basic and diluted $ (0.12) $ (0.16) $ (0.41) $ (0.53)
See accompanying notes to condensed consolidated financial statements
Page 4
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $ (6,128) $ (6,611)
-------- --------
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation 984 684
Amortization of intangibles 2,610 1,557
Provisions for bad debts (14) 4
Stock compensation expense 8 8
Loss on investment 275 --
Changes in assets and liabilities:
Accounts receivable 598 (800)
Other assets (436) (347)
Income tax receivable 902 --
Accounts payable and accrued expenses (248) (73)
Deferred revenues 465 809
-------- --------
Total adjustments 5,144 1,842
Net cash (used in) operating activities (984) (4,769)
Cash flows from investing activities:
Purchases of property and equipment (536) (1,247)
Purchase of other investments -- (978)
Sales of available-for-sale investments 1,499 14,314
Purchases of available-for-sale investments -- (12,201)
-------- --------
Net cash provided by (used in) investing activities 963 (112)
Cash flows from financing activities:
Proceeds from issuances of common stock -- 2
Principal payments on notes payable (33) --
Payments on capital lease obligations (64) (59)
-------- --------
Net cash (used in) financing activities (97) (57)
Net change in cash and cash equivalents (118) (4,938)
Cash and cash equivalents at beginning of period 2,284 10,109
-------- --------
Cash and cash equivalents at end of period $ 2,166 $ 5,171
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest and taxes $ 488 $ 8
Equipment acquired under capital leases $ 32 --
See accompanying notes to condensed consolidated financial statements.
Page 5
EDGAR ONLINE, INC.
NOTES TO CONDENSED 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 September 30,
2001 and for the three and nine months ended September 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 September 30, 2001, and the results of its operations for the three and
nine months ended September 30, 2001 and 2000, and its cash flows for the nine
months ended September 30, 2001 and 2000. The results for the three and nine
months ended September 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 Annual Report on 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.
Significant estimates embedded in the condensed consolidated financial
statements for the periods presented concern the allowance for doubtful
accounts, the fair value of purchased intangible assets, and the estimated
useful lies of purchased intangible assets.
(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 $9.9 million. The purchase price
included (1) the issuance of 908,877 shares of EDGAR Online common stock valued
at $7.8 million, (2) the issuance of 75,039 EDGAR Online stock options and
warrants, with a fair value of $0.3 million, in exchange for all outstanding
Partes stock options, (3) the assumption of net liabilities totaling $0.8
million and (4) $1.0 million in fees and acquisition related expenses.
Subsequent to the acquisition, we also repaid Partes bank indebtedness of $0.9
million. 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 $28.1
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 and (3) approximately $0.8 million in
cash for the payment of fees and acquisition related expenses. 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
Page 6
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):
Net Assets Acquired $ 2,066
Accumulated Knowhow 9,124
Assembled Workforce 4,194
Customer Based Intangibles 4,045
Excess Cost Over Fair Value of Assets Acquired (Goodwill) 8,708
-------
Purchase Price $28,137
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 nine months ended September 30, 2001 and the pro forma combined results of
operations of the Company and FIS for the nine-month period ended September 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):
Nine Months Ended September 30,
2001 2000
(actual) (pro forma)
-------- -----------
Revenue $12,695 $ 12,381
Operating loss $(5,555) $(9,306)
Net loss $(6,128) $(9,558)
Basic and diluted loss per share $ (0.41) $ (0.64)
(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 site 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 nine months ended September 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 DoubleClick, which comprised 10% and 14% of the
Company's total gross receivable balance at September 30, 2001 and December 31,
2000, respectively. No other customer accounted for more than 10% of accounts
receivable at September 30, 2001 or December 31, 2000. NASDAQ also accounted for
39% and 0% of total revenues for the nine months ended September 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 revenues for the three or nine months ended September 30, 2001 or 2000.
Page 7
(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) RESTRUCTURING COSTS
In May 2001, the Company announced that it would close the Kirkland, Washington
office. The office closing completed 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. In September 2001, the Company accrued $84,000 of additional
severance costs relating to restructuring at FIS. Restructuring costs include
the following (in thousands):
<Caption> Total Payments Through Balance at
Costs September 30, 2001 September 30, 2001
----- ------------------ ------------------
Write down of fixed assets $234 $ -- $234
Non-recoverable lease payments 170 22 148
Non-cancelable service contracts 188 71 117
Employment termination payments 319 209 110
Employment termination payments--FIS 84 -- 84
---- ---- ----
Total restructuring costs $995 $302 $693
==== ==== ====
(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 434,145 and 459,963 for
the three months ended September 2001 and 2000, respectively, and 399,114 and
567,861 for the nine months ended September 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 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.
Page 8
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 four 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, consulting services and information systems solutions 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 products and 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 $28.1
million. The purchase price included (1) the issuance of 2,450,000 restricted
shares of EDGAR Online common stock valued at approximately $9.8 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 and (3) approximately $0.8 million in
cash for the payment of fees and acquisition related expenses. 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 107% to approximately $4.3 million in the three-month period
ended September 30, 2001, from $2.1 million for the comparable period in 2000.
The growth in revenues is primarily attributable to a $2.5 million, or 268%,
increase in corporate contract revenues and a $149,000, or 26%, increase in
individual subscription revenues, offset by a $421,000, or 76% decrease in
advertising and other revenues. Revenues increased 101% to approximately $12.7
million in the nine-month period ended September 30, 2001, from $6.3 million for
the comparable period in 2000. The growth in revenue is primarily attributable
to a $7.6 million or 320% increase in corporate contract revenues and a $304,000
or 19% increase in individual subscription revenues offset by a $1.5 million or
64% decrease in advertising and other revenues. The $2.5 million increase in
corporate contract revenue in the third quarter of 2001 over the comparable
period in 2000 resulted from the FIS acquisition ($2.0 million) and an increase
in the number of corporate contracts to approximately 660 at September 30, 2001,
from approximately 133 at September 30, 2000. The number of individual
subscriptions increased to approximately 20,000 subscriptions at September 30,
2001, from approximately 16,000 subscriptions at September 30, 2000. The
decrease in advertising and other revenues is primarily due to the decrease in
the advertising rates and impressions for the quarter which decreased to 56
million impressions for the quarter ended September 30, 2001 from 67 million
impressions for the quarter ended September 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 79%
to $993,000 in the three-month period ended September 30, 2001, from $555,000
for the comparable period in 2000. Total cost of revenues increased 75% to $3.5
Page 9
million for the nine-month period ended September 30, 2001, from $2.0 million
for the comparable period in 2000. The $438,000 increase in cost of revenues in
the third quarter of 2001 over the comparable period in 2000 is primarily
attributable to the FIS acquisition ($802,000) offset by a decrease in software
and Web site maintenance, content feeds and communications lines. Gross margins
were 77% in the three-month period ended September 30, 2001, and 73% for the
comparable period in 2000. Gross margins were 72% for the nine month period
ended September 30, 2001, and 68% for the comparable period in 2000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and benefits, sales commissions, advertising expenses, public relations, and
costs of marketing materials. Sales and marketing expenses decreased 34% to
$618,000 in the three months ended September 30, 2001, from $931,000 million in
the equivalent period in 2000. As a percentage of revenues, sales and marketing
expenses decreased to 15% in the three months ended September 30, 2001 from 45%
for the comparable period in 2000. Sales and marketing expenses decreased 49% to
$1.9 million for the nine-month period ended September 30, 2001, from $3.7
million for the comparable period in 2000. As a percentage of revenues, sales
and marketing expenses decreased to 15% for the nine months ended September 30,
2001, from 58% 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 decreased 14% to $512,000 for the three months
ended September 30, 2001, from $592,000 in the comparable period of 2000. As a
percentage of revenues, development expenses decreased to 12% in the three
months ended September 30, 2001, from 29% for the comparable period in 2000.
Development expenses increased 5% to $1.8 million in the nine-month period ended
September 30, 2001, from $1.7 million in the comparable period in 2000. As a
percentage of revenue, development expenses decreased to 14% for the nine months
ended September 30, 2001, from 27% for the nine months ended September 30, 2000.
The decrease in the third quarter of 2001 compared to the comparable period in
2000 is due to the closing of the Kirkland, WA office, as well as internalizing
development expenses previously outsourced. 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 72% to $2.4 million in the three months ended September 30, 2001, from
$1.4 million for the comparable period in 2000. As a percentage of revenues,
general and administrative expenses decreased to 57% in the three months ended
September 30, 2001, from 69% for the comparable period in 2000. General and
administrative expenses increased 54% to $6.5 million for the nine-month period
ended September 30, 2001 from $4.2 million in the comparable period in 2000. As
a percentage of revenue, general and administrative expenses decreased to 51%
for the nine-month period ended September 30, 2001, from 66% for the comparable
period in 2000. The $1.0 million increase in general and administrative expenses
in the third quarter of 2001 over the comparable period in 2000 was primarily
due to the FIS acquisition ($840,000) 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.
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 54% to $1.2 million
for the three months ended September 30, 2001, from $805,000 for the three
months ended September 30, 2000. As a percentage of revenues, depreciation and
amortization decreased to 29% for the three months ended September 30, 2001,
from 39% for the three months ended September 30, 2000. Depreciation and
amortization expenses increased 60% to $3.6 million for the nine-month period
ended September 30, 2001 from $2.2 million in the comparable period in 2000. As
a percentage of revenue, general and administrative expenses decreased to 28%
for the nine-month period ended September 30, 2001 from 35% 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 historical and
projected declines
Page 10
in the operating results of the company in which the investment was made. This
investment was accounted for under the cost method.
Restructuring Costs. Restructuring costs are primarily 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 service contracts for operating expenses such as
phone lines and equipment leases. Restructuring costs also include severance
expenses for certain FIS employees.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $984,000 and $4.8 million for the nine
months ended September 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 increase cash provided by operations in the fourth quarter of 2001 and
continue to be cash flow positive throughout 2002, although no assurance can be
given in this regard.
Capital expenditures, primarily for computers, office and communications
equipment, totaled $536,000 for the nine months ended September 30, 2001, and
$1.2 million for the nine months ended September 30, 2000. The purchases were
required to support our expansion and increased infrastructure.
At September 30, 2001, we had cash and cash equivalents on hand of $2.2 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. The closing of
the Kirkland, WA office completed 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 promissory
notes to the former owners of FIS, which notes mature October 27, 2002. We are
currently in negotiations with the note holders to restructure the terms of the
repayment of the notes. We believe that these negotiations will result in the
maturity dates of the notes being extended beyond 2002. If cash generated from
operations is insufficient to satisfy the debt repayment (on its current terms
or on the restructured terms, if any), 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 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.
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 Long-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, and tested for impairment in accordance with SFAS 121, but will
continue to be evaluated for impairment in
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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 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.
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.
In August 2001, the FASB issued FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement 144 requires an entity to test an asset for recoverability whenever
events or changes in circumstances indicate that the entity may not be able to
recover the asset's carrying amount. Companies are required to adopt Statement
142 for fiscal years beginning after December 15, 2001, therefore the Company
plans to adopt this statement on January 1, 2002. The adoption of SFAS No. 142
is not expected to have a significant impact on the Company's financial position
or results of operations.
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;
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- maintain our current, and 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;
- 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 September 30, 2001, we had an accumulated deficit of $30,275,000. 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 $6,128,000 for the nine months ended September 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 could 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
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- 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.
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.
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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
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 AND/OR THE BUSINESS ECONOMY IN GENERAL
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 or the business economy in general.
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.
Page 15
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.
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 September 30, 2001, our
DoubleClick-related paid advertising revenue was 2% 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.
OUR CONTRACTS WITH NASDAQ ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR NET
REVENUES
For the nine months ended September 30, 2001, our contracts with Nasdaq
accounted for 39% of our net revenues. We expect that Nasdaq will continue to be
a significant client, but that sales to Nasdaq as a percentage of total revenues
will decline in future fiscal periods. Although we enjoy a satisfactory
relationship with Nasdaq, the loss of this client would have a material adverse
affect on our business, results of operation and financial condition.
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 2% and 16% of our total revenues
for the quarters ended September 30, 2001 and September 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 nine months
ended September 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 with respect to certain segments of our business 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
Page 16
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;
- 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, 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.
Page 17
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 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,
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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.
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
Page 19
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 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 September 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.
We held our annual meeting of stockholders on August 1, 2001. At the meeting the
following matters were submitted to a vote: (i) the elections of the following
seven directors to serve until the 2002 Annual Meeting of Stockholders or until
their respective successors are duly elected and qualified: Albert E. Girod
(FOR: 11,359,346 AGAINST OR ABSTENTIONS: 54,589), Bruce Bezpa (FOR: 11,359,346
AGAINST OR ABSTENTIONS: 54,589), Stefan Chopin (FOR: 11,359,346 AGAINST OR
ABSTENTIONS: 54,589), Mark Maged (FOR: 11,359,346 AGAINST OR ABSTENTIONS:
54,589),Marc Strausberg (FOR: 11,359,346 AGAINST OR ABSTENTIONS: 54,589), Susan
Strausberg (FOR: 11,359,346 AGAINST OR ABSTENTIONS: 54,589), and Tom Vos (FOR:
11,359,346 AGAINST OR ABSTENTIONS: 54,589; (ii) the ratification of the
appointment of KMPG LLP as the Company's independent public accountants (FOR:
11,530,136 AGAINST OR ABSTENTIONS: 63,799), and (iii) the approval of an
approved amendment to the Company's 1999 Stock Option Plan, increasing the
shares available for the grants from 1,400,00 to 1,900,000 (FOR: 11,407,901
AGAINST OR ABSTENTIONS: 186,034).
ITEM 5. OTHER INFORMATION
None
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 September 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: November 14, 2001 /s/ Greg D. Adams
--------------------------------------
Greg D. Adams
Chief Financial Officer
Dated: November 14, 2001 /s/ Tom Vos
--------------------------------------
Tom Vos
President and Chief Operating Officer
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