UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2002
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 May 15, 2002: 16,937,917 shares
EDGAR ONLINE, INC.
FORM 10-Q
FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001.................................................. 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2002 (unaudited) and 2001 (unaudited)................................ 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 (unaudited) and 2001 (unaudited)................................ 5
Notes to Condensed Consolidated Financial Statements....................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................. 20
ITEM 2. Changes in Securities and Use of Proceeds.......................................................... 20
ITEM 3. Defaults Upon Senior Securities.................................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 20
ITEM 5. Other Information.................................................................................. 20
ITEM 6. Exhibits and Reports on Form 8-K................................................................... 20
Signatures................................................................................................. 21
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, 2002
(unaudited) December 31, 2001
-------------- -----------------
ASSETS
Cash and cash equivalents $ 6,096 $ 3,461
Accounts receivable, less allowance of $224 and $298, respectively 2,615 2,026
Other current assets 295 278
-------- --------
Total current assets 9,006 5,765
Property and equipment, net 2,290 2,519
Goodwill and intangibles 23,893 24,301
Other assets 891 901
-------- --------
Total assets $ 36,080 $ 33,486
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,308 $ 1,680
Deferred revenues 1,520 1,393
Notes payable and accrued interest 2,275 2,621
Capital lease payable, current portion 17 25
-------- --------
Total current liabilities 5,120 5,719
Notes payable 3,800 3,800
Capital lease payable, long-term 3 7
-------- --------
Total liabilities 8,923 9,526
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares authorized, 16,924,917
and 15,421,917 shares issued and outstanding at March 31, 2002
and December 31, 2001, respectively 169 154
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares
issued or outstanding -- --
Additional paid-in capital 58,131 54,741
Accumulated deficit (31,143) (30,935)
-------- --------
Total stockholders' equity 27,157 23,960
-------- --------
Total liabilities and stockholders' equity $ 36,080 $ 33,486
======== ========
See accompanying notes to condensed consolidated financial statements.
3
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
2002 2001
-------- --------
Revenues:
Data sales $ 1,443 $ 1,268
Technical services 1,143 1,920
Seat-based subscriptions 1,108 648
Advertising and e-commerce 392 447
-------- --------
Total revenues 4,086 4,283
Cost of revenues: 693 1,401
-------- --------
Gross profit 3,393 2,882
Operating expenses:
Sales and marketing 593 607
Development expenses 488 623
General and administrative 1,788 2,122
Restructuring charges (100) --
Depreciation and amortization 725 1,165
-------- --------
3,494 4,517
Loss from operations (101) (1,635)
Interest and other expense, net (94) (71)
-------- --------
Loss before income taxes (195) (1,706)
Income tax provision (13) --
-------- --------
Net loss $ (208) $ (1,706)
======== ========
Weighted average shares outstanding-basic
and diluted 16,789 14,909
Net loss per share-basic and diluted $ (0.01) $ (0.11)
See accompanying notes to condensed consolidated financial statements.
4
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2002 2001
------- -------
Cash flows from operating activities:
Net loss $ (208) $(1,706)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 290 326
Amortization of intangibles 435 839
Provisions for bad debts (74) (89)
Stock compensation expense 2 3
Changes in assets and liabilities:
Accounts receivable (516) 535
Other assets (32) (118)
Accounts payable and accrued expenses (372) (229)
Deferred revenues 127 (146)
------- -------
Total adjustments (140) 1,121
------- -------
Net cash used in operating activities (348) (585)
Cash used in investing activities:
Purchases of property and equipment (61) (218)
------- -------
Net cash used in investing activities (61) (218)
Cash flows from financing activities:
Proceeds from issuances of common stock and warrants 3,402 --
Proceeds from exercise of stock options 1 --
Principal payments on notes payable (346) (33)
Payments on capital lease obligations (13) (25)
------- -------
Net cash provided by (used in) financing activities 3,044 (58)
------- -------
Net change in cash and cash equivalents 2,635 (861)
Cash and cash equivalents at beginning of period 3,461 2,284
------- -------
Cash and cash equivalents at end of period $ 6,096 $ 1,423
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 118 $ 115
See accompanying notes to condensed consolidated financial statements.
5
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 (SEC) data and
developer of financial and business system solutions. The Company sells to the
corporate market and Internet portals as well as running five destination Web
sites. The Company has entered into several arrangements with other Internet
service providers to market financial information services.
The unaudited interim financial statements of the Company as of March 31, 2002
and for the three months ended March 31, 2002 and 2001, 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 March 31, 2002, and the results of its operations and cash flows for the
three months ended March 31, 2002 and 2001. The results for the three months
ended March 31, 2002 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 2002.
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 lives of certain purchased intangible assets.
(2) RECLASSIFICATIONS
The Company has reclassified revenues into data sales, technical services,
seat-based subscriptions and advertising and e-commerce revenues. Prior
quarterly comparative amounts have been reclassified to conform to this
presentation.
(3) BUSINESS COMBINATIONS
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 $28,148,575. The
purchase price included (1) the issuance of 2,450,000 restricted shares of EDGAR
Online common stock valued at $9,579,500, (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) $804,075 for the payment of fees and acquisition related
expenses. The aggregate purchase price of $28,148,575 has been allocated to the
purchased assets and liabilities based on their relative fair market values at
the date of acquisition. The excess purchase price over the estimated fair value
of the tangible assets acquired has been allocated as follows: (1) $9,124,338 to
accumulated knowhow with an estimated useful life of 10 years, (2) $4,044,645 to
customer based intangibles with an estimated useful life of 12 years, (3)
$4,194,264 to accumulated work force with an estimated useful life of 5 years
and (4) $8,796,406 to goodwill with an estimated useful life of 12 years.
On March 21, 2002, the Company concluded negotiations to extend the maturity
date of certain of the FIS Notes. The holders of $5,700,000 in principal amount
of FIS Notes agreed to amend and restate their notes to provide for the
following schedule of
6
principal payments: $1,900,000 on April 1, 2002, $1,900,000 on April 1, 2003 and
$1,900,000 on January 2, 2004. Interest will remain at 7.5% and will be payable
according to the original terms.
(4) REVENUE RECOGNITION
We derive revenues from four primary sources: contracts with corporate customers
for customized data, sale of our technical services to construct and/or operate
the technical systems our customers use to integrate our data and data from
other sources into their products and services, seat based subscriptions to our
Web site services and advertising and other e-commerce based revenues. Revenue
from data sales is recognized over the term of the contract, which are typically
non-cancelable, one-year contracts with automatic renewal clauses, or, in the
case of certain up-front fees, over the estimated customer relationship period.
Revenue from technical services, consisting primarily of time and materials
based contracts, is recognized in the period services are rendered. Revenue from
seat-based subscriptions is recognized ratably over the subscription period,
which is typically three or twelve months. Advertising and e-commerce revenue is
recognized as the services are provided.
Revenue is recognized provided acceptance, or delivery if applicable, has
occurred, collection of the resulting receivable is probable and no significant
obligations remain. If amounts are received in advance of the services being
performed, the amounts are recorded and presented as deferred revenues.
(5) CONCENTRATION OF RISK AND FINANCIAL INSTRUMENTS
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 44%
and 17% of the Company's total gross receivable balance at March 31, 2002 and
December 31, 2001, respectively. No other customer accounted for more than 10%
of accounts receivable at March 31, 2002 or December 31, 2001. NASDAQ comprised
34% and 40% of the company's total revenue during the three months ended March
31, 2002 and 2001, respectively. The other customers are geographically
dispersed throughout the United States with no one customer accounting for more
than 10% of revenues during the three months ended March 31, 2002 or 2001. In
addition, the Company has not experienced any significant credit losses to date
from any one customer. The fair value of the Company's cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities at
March 31, 2002 and December 31, 2001, approximate their financial statement
carrying value because of the short-term maturity of these instruments. The fair
values of the Company's long-term obligations are based on the amount of future
cash flows associated with the notes, discounted using an appropriate interest
rate.
(6) RESTRUCTURING COSTS
In 2001, the Company closed the Kirkland, WA 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 statement of operations. In September
2001, the Company incurred $84,000 of additional severance costs related to
restructuring at FIS. In March 2002, the Company negotiated a contract
termination, thereby eliminating $100,000 of future obligations. Restructuring
costs include the following:
Remaining Remaining
Total Obligation at 2002 Activity Obligation at
Costs March 31,2001 Cash Non-Cash March 31, 2002
----------------------------------------------------------------------------------------
Write down of fixed assets $ 234 $ -- $ -- $ -- $ --
Non-recoverable lease payments 170 97 (31) (10) 56
Non-cancelable service contracts 188 182 (5) (101) 76
Employment termination payments 319 28 (39) 11 --
Employment termination payments - FIS 84 -- -- -- --
-----------------------------------------------------------------------------------------
Total restructuring costs $ 995 $ 307 $ (75) $(100) $ 132
All restructuring obligations are included in accrued expenses at March 31, 2002
and December 31,2001.
7
(7) LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No. 128,
Earnings Per Share, and the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 98. Under SFAS No. 128, Basic 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. Basic earnings per share are
computed using the weighted average number of common shares outstanding during
the period.
Diluted loss per share has not been presented separately, as the outstanding
stock options and warrants are anti-dilutive for each of the periods presented.
Anti-dilutive securities outstanding were 3,382,638 and 2,389,255 for the three
months ended March 31, 2002 and 2001, respectively.
(8) PRIVATE PLACEMENT OF COMMON STOCK
In December 2001 and January 2002, we consummated a private sale of common stock
and warrants to certain institutional investors. Pursuant to these transactions,
we sold an aggregate of 2,000,000 shares of Common Stock, at a purchase price of
$2.50 per share, along with four-year warrants to purchase an aggregate of
400,000 shares of Common Stock at an exercise price of $2.875 per share
resulting in gross proceeds of $5,000,000. In connection with the transaction,
the Company paid a transaction fee to Atlas Capital Services, LLC equal to
4.625% of the gross proceeds and issued Atlas a four-year warrant to purchase
40,000 shares of Common Stock at an exercise price of $2.50 per share.
(9) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS No. 141 also specifies the criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed 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" (SFAS No. 121).
SFAS No. 141 was effective July 1, 2001, except with regard to business
combinations that were initiated prior to that date, which the Company accounted
for using the purchase method of accounting. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, and was adopted by the Company
on January 1, 2002. The adoption of these accounting standards required that
assembled workforce be included in goodwill and also eliminated the amortization
of goodwill commencing January 1, 2002. However, impairment reviews may result
in future periodic write-downs that could have a material adverse effect on the
results of operations in the period recognized. SFAS No. 142 will also require
the Company to perform a transitional assessment by June 30, 2002, to determine
whether there is an impairment of goodwill. Any such transitional impairment
loss will be recognized as a change in accounting principle in the consolidated
statement of operations. The Company has not yet completed the initial goodwill
impairment test prescribed in SFAS No. 142. The following table reflects the
reconciliation of reported net loss and net loss per share to amounts adjusted
for the exclusion of goodwill amortization:
Three months ended March 31,
2002 2001
- ---------------------------------- --------- ---------
NET LOSS (IN THOUSANDS)
Reported net loss $ (208) $ (1,706)
Add back: Goodwill amortization -- 349
--------- ---------
Adjusted net loss $ (208) $ (1,357)
========= =========
PER SHARE OF COMMON STOCK
Basic and Diluted:
Reported net loss $ (0.01) $ (0.11)
Add back: Goodwill amortization -- 0.02
--------- ---------
Adjusted net loss $ (0.01) $ (0.09)
========= =========
8
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. This statement supercedes SFAS No. 121, and
amends APB 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business." SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The adoption of SFAS No. 144 did not have a significant impact on the
consolidated financial statements.
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.
OVERVIEW
We are 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 four primary sources: contracts with corporate customers
for customized data, sale of our technical services to construct and/or operate
the technical systems our customers use to integrate our data and data from
other sources into their products and services, seat-based subscriptions to our
Web site services and advertising and other e-commerce based revenues. Revenue
from data sales is recognized over the term of the contract or, in the case of
certain up-front fees, over the estimated customer relationship period. Revenue
from technical services is recognized in the period services are rendered.
Revenue from seat-based subscriptions is recognized ratably over the
subscription period, which is typically three or twelve months. Advertising and
e-commerce revenue is recognized as the services are provided.
We intend to increase our operating expenses to fund increased sales and
marketing, to enhance our corporate 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 $28,148,575. The
purchase price included (1) the issuance of 2,450,000 restricted shares of EDGAR
Online common stock valued at $9,579,500, (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 ("FIS Notes") and (3) $804,075 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.
On March 21, 2002, the Company concluded negotiations to extend the maturity
date of a substantial majority of principal amount of the FIS Notes. The holders
of $5,700,000 in principal amount of FIS Notes agreed to amend and restate their
notes to provide for the following schedule of principal payments: $1,900,000 on
April 1, 2002, $1,900,000 on April 1, 2003 and $1,900,000 on January 2, 2004.
Interest will remain at 7.5% per annum and will be payable according to the
original terms.
9
RESULTS OF OPERATIONS
REVENUES
Revenues decreased 5% to $4.1 million for the three months ended March 31, 2002,
from $4.3 million for the three months ended March 31, 2001. The net decrease in
revenues is attributable to a $175,000, or 14%, increase in data sales to $1.4
million in 2002 from $1.3 million in 2001and a $460,000, or 71%, increase in
seat-based subscriptions to $1.1 million in 2002 from $648,000 in 2001. These
increases were offset by a $777,000, or 40%, decrease in technical services to
$1.1 million in 2002 from $1.9 million in 2001 and a $55,000, or 12%, decrease
in advertising and e-commerce revenues to $392,000 in 2002 from $447,000 in
2001.
The $175,000 increase in data sales is due to an increase in the number of
corporate contracts to 215 at March 31, 2002, from 170 at March 31, 2001. The
enhancements to our application programming interfaces and addition of new
products, such as fundamental data and institutional holdings, as well as an
increase in the number of salespeople also contributed to the increase in new
corporate contracts. Data sales represented 35% of revenues for the three months
ended March 31, 2002, compared to 30% of revenues in the same quarter last year.
The $460,000 increase in seat-based subscriptions is due to the increase in the
number of seat-based contracts and individual accounts, as well as an increase
in the average price per seat. The number of subscribers increased to
approximately 23,100 as of March 31, 2002, from approximately 16,300 as of March
31, 2001. Sales leads, which were primarily provided by the traffic to our Web
sites and our free to fee initiatives, contributed to the increase in new seats
sold. Seat-based subscriptions represented 27% of revenues for the three months
ended March 31, 2002, compared to 15% of revenues in the same quarter last year.
The $777,000 decrease in technical services revenue is primarily due to the
discontinuance of services to non-core consulting clients. In 2001, as part of
completing the integration of the FIS acquisition, we shifted some of the
technology resources formerly devoted to consulting services to support the
growth of our higher margin data and web businesses. Technical services
represented 28% of revenues for the three months ended March 31, 2002, compared
to 45% of revenues in the same quarter last year.
The $55,000 decrease in advertising and e-commerce revenues is primarily due to
the decrease in advertising rates and reflects the significant decline in the
online and overall advertising industry that has taken place in the past year.
This decrease was offset by the addition of list rentals and sales of third
party data in 2002. Advertising and e-commerce represented 10% of revenues for
both the three months ended March 31, 2002 and 2001.
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. Total cost of
revenues decreased $707,000, or 51%, to $693,000 for the three months ended
March 31, 2002, from $1.4 million for the three months ended March 31, 2001. The
decrease in cost of revenues is primarily due to a decrease in software and Web
site maintenance, content feeds and communications lines. Gross margins
increased to 83% for the three months ended March 31, 2002, from 67% for the
three months ended March 31, 2001.
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 $14,000, or
2%, to $593,000 for the three months ended March 31, 2002, from $607,000 for the
three months ended March 31, 2001. As a percentage of revenues, sales and
marketing expenses increased slightly to 15% for the three months ended March
31, 2002, from 14% for the three months ended March 31, 2001. The net decrease
in sales and marketing expenses was due to the addition of salespeople in 2002
offset by a reduction in our advertising spending and marketing campaign. We
expect sales and marketing expenses to increase as we continue to hire
additional sales personnel.
Development. Development expenses decreased $135,000, or 22%, to $488,000 for
the three months ended March 31, 2002 from $623,000 for the three months ended
March 31, 2001. As a percentage of revenues, development expenses decreased to
12% for the three months ended March 31, 2002, from 15% for the three months
ended March 31, 2001. The decrease in development expenses is due to the closing
of the Kirkland, WA office, as well as internalizing development expenses
previously outsourced.
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
decreased $334,000, or 16%, to $1.8 million for the three months ended March 31,
2002, from $2.1 million for the three months ended March 31, 2001. As a
percentage of revenues, general and administrative expenses decreased to 44% in
the three months ended March 31, 2002, from 50% for the three months ended March
31, 2001. The decrease in general and administrative expenses was primarily due
to a
10
decrease in personnel, professional service fees and general corporate expenses.
We expect general and administrative expenses 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 decreased $440,000, or 38%, to
$725,000 for the three months ended March 31, 2002, from $1.2 million for the
three months ended March 31, 2001. As a percentage of revenues, depreciation and
amortization decreased to 18% for the three months ended March 31, 2002, from
27% for the three months ended March 31, 2001. The decrease in depreciation and
amortization is due to the adoption of SFAS 142 which requires that goodwill no
longer be amortized, as well as the retirement of assets associated with the
shut down of the Kirkland, WA office. The elimination of goodwill amortization
resulted in a decrease in amortization expense of $349,000 or $0.02 per share.
Restructuring Costs. During the last half of 2001, the Company recorded a
$995,000 pre-tax charge 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, as
well as severance expenses for certain FIS employees. In March 2002, the Company
negotiated a contract termination, thereby eliminating $100,000 of future
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $348,000 and $585,000 for the three
months ended March 31, 2002 and 2001, 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 and to be cash flow positive for
the year ended 2002, although no assurance can be given in this regard.
Capital expenditures, primarily for computers, office and communications
equipment, totaled $61,000 for the three months ended March 31, 2002 and
$218,000 for the three months ended March 31, 2001. The purchases were required
to support our expansion and increased infrastructure.
In December 2001 and January 2002, we consummated a private sale of common stock
and warrants to certain institutional investors. Pursuant to these transactions,
we sold an aggregate of 2,000,000 shares of Common Stock, at a purchase price of
$2.50 per share, along with four-year warrants to purchase an aggregate of
400,000 shares of Common Stock at an exercise price of $2.875 per share
resulting in gross proceeds of $5,000,000.
At March 31, 2002, we had cash and cash equivalents on hand of $6.1 million. We
believe that our existing capital resources and expected 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. 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. 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 ("FIS Notes"). The FIS Notes were originally
scheduled to mature on October 27, 2002. In March 2002, we concluded
negotiations to extend the maturity date of a substantial majority of principal
amount of the FIS Notes. Based on these negotiations, holders of $5,700,000 in
principal amount of FIS Notes agreed to amend and restate their notes to provide
for, among other things, the following schedule of principal payments:
$1,900,000 on April 1, 2002, $1,900,000 on April 1, 2003 and $1,900,000 on
January 2, 2004. If cash generated from operations is insufficient to satisfy
these revised debt repayment terms, 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.
11
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The condensed consolidated financial statements and notes thereto included in
this report and the related discussion describe and analyze the Company's
financial performance and condition for the periods indicated. For the most
part, this information is historical. The Company's prior results, however, are
not necessarily indicative of the Company's future performance or financial
condition. The Company therefore has included the following discussion of
certain factors which could affect the Company's future performance or financial
condition. These factors could cause the Company's future performance or
financial condition to differ materially from its prior performance or financial
condition or from management's expectations or estimates of the Company's future
performance or financial condition. These factors, among others, should be
considered in assessing the Company's future prospects and prior to making an
investment decision with respect to the Company's stock.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO INCREASE REVENUES.
As a 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. 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, seat-based subscription fees and advertising and e-commerce 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 increase, advertising and e-commerce 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; 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 March 31, 2002, we had an accumulated deficit of $31,143,000. 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, $6,788,000 for the year ended December 31, 2001, and $208,000 for the
three months ended March 31, 2002. In addition, we expect to continue to incur
significant operating costs and capital expenditures. As a result, we will need
to generate significant additional 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 note holders in connection with our acquisition of Financial
Insight Systems, Inc. (FIS) or to respond to
12
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 currently
provides free access to EDGAR filings on a time-delayed basis of 24 to 72 hours,
although it recently announced its intention to provide free real-time access to
such filings. If the SEC, which has announced that it intends to modernize the
EDGAR system, were to make other changes to its Web site such as providing
value-added services comparable to those provided on our Web sites, our
business, results of operations and financial condition would be materially
adversely affected.
Although the SEC recently initiated a non-exclusive pilot program to link its
sec.gov web site to our web site in order to provide users of the SEC web site
access to real time filings, there can be no assurance that the SEC will
continue this program (which is at the SEC's sole discretion) or the SEC will
not initiate similar programs with other commercial providers of EDGAR
information.
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 10KWizard.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.
13
OUR CONTRACTS WITH NASDAQ ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR NET
REVENUES.
For the three months ended March 31, 2002, our contracts with Nasdaq accounted
for 34% 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 operations and financial conditions.
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
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
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
14
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.
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 advertising revenues in any given period will continue to
depend to a significant extent upon 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 three months ended March 31, 2002, our DoubleClick-related paid
advertising revenue was 2% of our total net 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
15
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. Advertising and e-commerce revenues represented 10% of our total
revenues for the three months ended March 31, 2002 and 2001, 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 14 people. Ten of our sales people have been hired from outside the
company, six of these within the last twelve months. 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 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 PRIOR ACQUISITIONS AND BUSINESS
COMBINATIONS THAT WE MAY CONSUMMATE.
We plan to continue to expand our operations and market presence by making
acquisitions, 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 or impairment 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
16
personnel, particularly Susan Strausberg, Chief Executive Officer, Marc
Strausberg, Chairman, 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 became come 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. In March 2002, Globix announced that it had filed for
bankruptcy protection as part of its efforts to restructure its debt. To date,
Globix provision of services under our contract has not been affected, but this
could change unexpectedly in the future. 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.
17
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 and communication
line 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 2009. 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.
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.
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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 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 March 31, 2002, we had no available-for-sale
investments and as a result, 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-
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U.S. currencies to the U.S. dollar. We do not use derivative financial
instruments to limit our foreign currency risk exposure.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As previously reported in our Form 10-K for the fiscal year ended December 31,
2002, pursuant to the terms of an Amended and Restated Common Stock Purchase
Agreement (the "Stock Purchase Agreement"), we sold an aggregate of 2,000,000
unregistered shares of common stock, par value $0.01 ("Common Stock") to select
institutional investors at a purchase price of $2.50 per share, resulting in
gross proceeds of $5,000,000. The transaction was consummated as to 500,000
shares and $1,250,000 in proceeds on December 31, 2001 and 1,500,000 shares and
$3,750,000 in proceeds on January 8, 2002. Pursuant to this private financing,
the Company also issued the purchasers four-year warrants to purchase an
aggregate of 400,000 shares of Common Stock at an exercise price of $2.875 per
share. In connection with the transaction, the Company paid a transaction fee to
Atlas Capital Services, LLC equal to 4.625% of the gross proceeds and issued
Atlas a four-year warrant to purchase 40,000 shares of Common Stock at an
exercise price of $2.50 per share. The securities were sold pursuant to an
exemption provided in Section 4(2) of the Securities Act of 1933 on the basis
that the transaction did not involve a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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: On January 11, 2002, we filed a Current Report on
Form 8-K detailing a private placement of securities. On March 24, 2002,
we filed a Current Report on Form 8-K detailing certain note restructuring
and an amendment to the employment agreement with Albert E. Girod.
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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: May 15, 2002 /s/ Greg D. Adams
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Greg D. Adams
Chief Financial Officer
Dated: May 15, 2002 /s/ Tom Vos
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Tom Vos
President and Chief Operating Officer
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