1
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, 1999
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. [ ] Yes [x ] No
Number of shares of common stock outstanding at November 15, 1999: 12,446,834
shares
1
2
EDGAR ONLINE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
[PAGE NUMBERS TO BE ADDED BEFORE FILING]
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statements of Operations
Three and Nine Months Ended September 30, 1998 (unaudited) and 1999 (unaudited)................. ......... 3
Balance Sheets
December 31, 1998 and September 30, 1999 (unaudited)..................................................... 4
Statements of Cash Flows
Nine Months Ended September 30, 1998 (unaudited) and 1999 (unaudited).................................... 5
Notes to Financial Statements..................................................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................................................... 19
ITEM 2. Changes in Securities and Use of Proceeds................................................................. 19
ITEM 3. Defaults Upon Senior Securities........................................................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders....................................................... 19
ITEM 5. Other Information......................................................................................... 19
ITEM 6. Exhibits and Reports on Form 8-K.......................................................................... 19
Signatures........................................................................................................ 20
Exhibit Index..................................................................................................... 21
2
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EDGAR ONLINE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Individual subscriptions $ 387 $ 246 $ 992 $ 646
Corporate contracts 271 77 583 177
Advertising 481 119 835 321
Barter advertising 346 50 686 199
Other barter 34 19 103 50
-------- -------- -------- --------
Total revenues 1,519 511 3,199 1,393
Cost of revenues:
Software and Web site
costs 145 57 290 228
Barter advertising expense 346 50 686 199
-------- -------- -------- --------
491 107 976 427
Gross profit 1,028 404 2,223 966
Operating expenses:
Sales and marketing 905 93 1,697 267
Development expenses 302 95 571 266
General and administrative 952 444 2,481 989
Amortization of intangibles 109 -- 109 --
-------- -------- -------- --------
2,268 632 4,858 1,522
Loss from operations (1,240) (228) (2,635) (556)
Interest and other income
(expense), net 376 (38) 378 (73)
-------- -------- -------- --------
Loss before income taxes (864) (266) (2,257) (629)
Income tax provision -- -- -- --
-------- -------- -------- --------
Net loss $ (864) $ (266) $ (2,257) $ (629)
======== ======== ======== ========
Basic and diluted weighted
average shares outstanding 11,736 6,121 8,922 6,090
Basic and diluted net loss per share $ (0.07) $ (0.04) $ (0.25) $ (0.10)
See accompanying notes to financial statements
3
4
EDGAR ONLINE, INC.
BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
--------- --------
ASSETS
Cash and cash equivalents $ 9,018 $ 148
Marketable securities 18,084 --
Accounts receivable, less allowance of
$54 and $32 at September 30, 1999 and December
31, 1998, respectively 476 135
Other 300 7
-------- --------
Total current assets 27,878 290
Property and equipment, net 1,236 412
Intangibles 9,851 --
Other assets 32 83
-------- --------
Total assets $ 38,997 $ 785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable $ -- $ 59
Accounts payable 403 329
Accrued expense 1,024 67
Deferred revenues 315 208
Due to employee -- 15
Capital lease payable, current portion 70 53
-------- --------
Total current liabilities 1,812 731
Notes payable, long-term -- 1,414
Capital lease payable, long-term 94 83
Accrued interest payable -- 134
Due to officers, net -- 644
-------- --------
Total liabilities 1,906 3,006
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares authorized, 12,446,834 and
6,331,290 shares issued and outstanding at September 30, 1999 and December
31, 1998, respectively
124 63
Additional paid-in capital 43,970 2,462
Accumulated deficit (7,003) (4,746)
-------- --------
Total stockholders' equity 37,091 (2,221)
-------- --------
Total liabilities and stockholders' equity $ 38,997 $ 785
======== ========
See accompanying notes to financial statements
4
5
EDGAR ONLINE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (2,257) $ (629)
-------- --------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 244 83
Accretion and amortization of debt discount 14 --
Provisions for bad debts 57 --
Noncash services, net (30) (31)
Stock compensation expense 6 --
Changes in assets and liabilities:
Accounts receivable (347) (49)
Other assets (228) (109)
Accounts payable and accrued expenses (651) (138)
Accrued interest (134) 17
Due to employee (15) 14
Due to officers, net (644) 94
Deferred revenues 46 77
-------- --------
Total adjustments (1,682) 42
-------- --------
Net cash (used in) operating activities (3,939) (671)
-------- --------
Cash used in investing activities:
Purchases of property, plant and equipment (204) (77)
Net cash acquired from acquisition of FreeEDGAR 41 --
Purchases of investments (18,084) --
-------- --------
Net cash (used in) investing activities (18,247) (77)
Cash flows from financing activities:
Proceeds from issuances of common stock 35,280 --
Costs incurred in connection with issuances of common stock (3,725) --
Proceeds from exercise of warrants 1,015 --
Principal payments on notes payable (1,459) 1,000
Payments on capital lease obligations (55) (10)
-------- --------
Net cash provided by financing activities 31,056 990
-------- --------
Net change in cash and cash equivalents 8,870 242
Cash and cash equivalents at beginning of period 148 17
-------- --------
Cash and cash equivalents at end of period $ 9,018 $ 259
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 153 $ 3
Notes payable settled in exchange for services provided $ 56 $ 36
Stock warrants issued in exchange for services provided $ 26 $ 5
Equipment acquired under capital leases $ 83 $ 164
Shares issued in acquisition of Partes Corporation $ 7,805 $ --
See accompanying notes to financial statements
5
6
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 an
Internet-based commercial provider of business, financial and competitive
information contained in corporate filings made by public companies with the
Securities and Exchange Commission ("SEC").
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 $30.5 million.
These financial statements should be read in conjunction with the
financial statements and related footnotes included in the Company's Form S-1
registration statement, as amended, filed with the SEC in connection with the
Company's IPO.
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. These
risks include general economic and business conditions (including in the online
business and financial information industry), actions of our competitors, the
extent to which we are able to develop new services and markets for our
services, the time and expense involved in such development activities, the
level of demand and market acceptance of our services and changes in our
business strategies. Inherent in the Company's mission are various risks and
uncertainties, including its limited operating history, unproven business model
and the limited history of commerce on the Internet. The Company's success may
depend in part upon the emergence and acceptance of the Internet as a
communication and information medium, prospective project development efforts
and the acceptance by the market place of the Company's products and services.
(2) UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements of the Company as of September
30, 1999 and for the three and nine months ended September 30, 1999 and 1998,
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 1933, as amended. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles 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, 1999, and the results of its operations and its cash
flows for the three and nine months ended September 30, 1999 and 1998,
respectively. The results for the three and nine months ended September 30, 1999
are not necessarily indicative of the expected results for the full fiscal year
or any future period. Certain prior period balances have been reclassified to
conform to the current period presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reopened 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.
(3) LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No.
128, "Earnings Per Share" (SFAS 128) and SEC Staff Accounting Bulletin No 98.
Under SFAS 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
6
7
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 794,053 and 689,771
for the three months ended September 30, 1998 and 1999, respectively, and
559,250 and 1,187,339 for the nine months ended September 30, 1998 and 1999,
respectively.
(4) STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
On March 25, 1999, the Board of Directors of the Company declared and
approved an increase in the number of authorized shares of common stock to
30,000,000, par value $0.01 per share, and authorized 1,000,000 shares of
preferred stock, par value $0.01 per share. There were no preferred shares
issued or outstanding at September 30, 1999.
On March 30, 1999, the Company completed the sale of an aggregate of
240,000 shares of its common stock to three investors at $4.50 per share
resulting in net proceeds of $1,055,250.
On May 26, 1999, the Company sold 3,600,000 shares of its common stock to
the public at $9.50 per share for net proceeds of approximately $30.5 million.
In connection with this offering, the Company, its underwriters and the holder
of the Convertible Debenture agreed that such holders would convert the
Convertible Debenture into 670,000 shares of the Company's common stock prior to
the close of the IPO. In addition, certain holders of warrants to purchase
Company common stock also agreed to exercise the warrants into an aggregate of
696,667 shares of common stock prior to the close of the IPO.
(5) COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130) during 1998. SFAS 130 requires the Company to
report in its financial statements, in addition to its net income (loss),
comprehensive income (loss), which includes all changes in equity during a
period from non-owner sources including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no differences between the
Company's comprehensive loss and its net loss as reported for any of the periods
presented.
(6) ACQUISITION OF PARTES CORPORATION
On September 10, 1999, the Company acquired Partes Corporation ("Partes"),
owner of the FreeEDGAR.com Web site. Under the terms of the agreement, the
Company purchased all of the outstanding equity of Partes for approximately $9.0
million. The purchase price included (1) the issuance of 908,877 shares of EDGAR
Online common stock valued at approximately $7.8 million, (2) the issuance of
75,039 EDGAR Online stock options and warrants, with a fair value of
approximately $0.3 million, in exchange for all outstanding Partes stock
options, and (3) approximately $0.9 million in fees and acquisition related
expenses. The acquisition was accounted for under the purchase method of
accounting and accordingly the assets, liabilities and operating results of
Partes have been included in the accompanying financial statements from the
effective date of the acquisition. The Company is in the process of finalizing
the assignment of the purchase price to the fair values of the assets acquired
and liabilities assumed. Until the valuation of the fair values of the net
assets acquired is completed, the excess of the purchase price over the
estimated fair value of the net assets acquired is currently identified as
intangible assets in the accompanying balance sheet and is being amortized over
five years, the estimated blended useful life of the excess purchase price.
The following table presents pro forma results of operations as if the
acquisition had occurred at the beginning of each of the periods presented. The
pro forma information is not necessarily indicative of the combined results
that would have occurred had the acquisition taken place at the beginning of
1998 or 1999, nor is it necessarily indicative of results that may occur in the
future.
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
---- ----
(IN THOUSANDS EXCEPT
PER SHARE DATA)
Revenues $ 3,555 $ 1,461
Net loss $(6,248) $(4,302)
Net loss per share $ (0.64) $ (0.61)
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-
7
8
looking statements as a result of certain factors, including, but not limited
to, those set forth under "Risk Factors that May Affect Future Results" included
elsewhere in this Quarterly Report.
OVERVIEW
EDGAR Online is an Internet-based commercial provider of business,
financial and competitive information contained in corporate filings made by
U.S. public companies with the SEC. We were founded in November 1995 as Cybernet
Data Systems, Inc. In January 1999, we changed our corporate name to EDGAR
Online, Inc.
We had no revenue in 1995. Our primary activities in 1995 related to
beginning development of our proprietary systems. In January 1996, we launched
our Web site and began selling our subscription services and establishing
contractual relationships with large Web portal and business and financial
information sites to supply EDGAR content for display on these sites. We started
selling advertising banners and sponsorships on our site in February 1997. We
have a limited operating history and are still in the early stages of
development.
We derive revenues from three primary sources: individual subscriptions,
corporate contracts and advertising. Revenue from individual subscriptions and
corporate contracts is deferred and recognized as income over the subscription
period. Revenue from advertising is recognized as the services are provided.
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. Services
related to corporate contracts are typically billed quarterly in advance.
Advertising revenue is paid to us by DoubleClick, net of advertising placed and
commission fees, in the month following the month in which the revenue is
earned.
In addition, a portion of our revenues is derived from barter transactions.
Barter advertising revenue is a non-cash item and relates to advertising placed
on our Web site 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 estimated fair market value of the services received or
provided, whichever is more objectively determinable. Other barter revenue is
also non-cash and relates to corporate contract sales for which we received
computer equipment or other non-cash consideration for services provided. The
amount of such revenues are recorded at the estimated fair market value of the
equipment or services received or services provided, whichever is more
objectively determinable. Barter expenses reflect the expense offset to barter
revenue.
We intend to increase our operating expenses to fund increased marketing
and advertising, to enhance our Web site and to continue to establish
relationships critical to our success.
We also have interest income from the investment of the net proceeds of our
initial public offering. In May 1999, we sold 3,600,000 shares of our common
stock at a price of $9.50 per share resulting in net proceeds of approximately
$30.5 million. After the application of a portion of the proceeds as described
in our prospectus, we have invested the remaining funds in short term, interest
bearing investment grade securities.
RESULTS OF OPERATIONS
Revenues
Revenues increased 197% to $1.52 million in the three-month period ended
September 30, 1999, from $511,000 for the comparable period in 1998. The growth
in revenues is primarily attributable to a $141,000 or 57%, increase in
individual subscription revenues, a $194,000 or 252%, increase in corporate
contract revenues a $362,000 or 304%, increase in advertising revenues and an
increase of $311,000 or 451% in barter revenues. Revenues increased 130% to
$3.20 million for the nine-month period ended September 30, 1999, from $1.4
million for the comparable period in 1998. The growth in revenues is primarily
attributable to a $346,000 or 54%, increase in individual subscription revenues,
a $406,000 or 229%, increase in corporate contract revenues, a $514,000 or 160%
increase in advertising revenues, and an increase of $540,000 or 217% in barter
revenues. The number of individual subscriptions increased from approximately
5,400 subscriptions at September 30, 1998 to approximately 11,200 subscriptions
at September 30, 1999, offset by a decrease in average revenue per subscriber in
the first nine months of 1999 due to a larger percentage of new subscribers
joining at our lowest subscription rate of $9.95 per month. The increase in
corporate contract revenue resulted from an increase in the number of corporate
contracts in excess of $500 per month from approximately 10 at September 30,
1998 to approximately 35 at September 30, 1999. The increase in advertising
revenues is
8
9
primarily due to the increase in the number of advertisers and ads delivered,
offset by a decrease in advertising rates. Revenue increases were primarily due
to increased marketing efforts, which resulted in an expanded customer base of
individual subscribers, a larger number of corporate contracts and additional
content distribution agreements with other Web sites. All of these increases
contributed to increased traffic on our Web site. The increase in barter
advertising revenue is a result of additional exchange of advertising with other
Web sites, offset by the decrease in advertising rates noted above.
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 and the costs
associated with our computer equipment and communications lines used in
conjunction with our Web site. 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 359% to $491,000 in the
three-month period ended September 30,1999, from $107,000 for the comparable
period in 1998. Total cost of revenues increased 129% to $976,000 in the
nine-month period ended September 30, 1999, from $427,000 for the comparable
period in 1998. The increase in cost of revenues is primarily attributable to
increases in software and Web site maintenance and communications lines needed
to handle increased traffic. Gross margins related to the sale of services were
68% in the three-month period ended September 30, 1999 and 79% for the
comparable period in 1998. Gross margins were 69% in the nine-month period ended
September 30, 1999 and 69% for the comparable period in 1998. The decrease in
gross margins for the three month period ended September 30, 1999 is mainly
attributable to the fact that our software and Web site maintenance costs
increased.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and benefits, advertising commissions, advertising expenses, public relations,
and costs of marketing materials. Sales and marketing expenses increased 873% to
$905,000 in the three months ended September 30, 1999 from $93,000 in the
equivalent period in 1998. As a percentage of revenues, sales and marketing
expenses increased to 60% in the three months ended September 30, 1999 from 18%
for the comparable period in 1998. Sales and marketing expenses increased 536%
to $1.7 million in the nine months ended September 30, 1999 from $267,000 for
the comparable period in 1998. As a percentage of revenues, sales and marketing
expenses increased to 53% in the nine months ended September 30, 1999 from 19%
for the comparable period in 1998. The increase in sales and marketing expenses
in dollar terms in both the three and nine months ended September 30, 1999 was
due to an expansion of our sales force, higher advertising commissions due to
increased advertising volume, increased marketing activities, including the
development of our marketing materials and expenditures to increase the EDGAR
brand awareness. We expect sales and marketing expenses to increase as we expand
our marketing campaign and hire additional sales and marketing personnel.
Development. Development expenses increased 218% to $302,000 for the three
months ended September 30, 1999 from $95,000 in the comparable period of 1998.
As a percentage of revenues, development expenses increased to 20% in the three
months ended September 30, 1999 from 19% for the comparable period in 1998.
Development expenses increased 115% to $571,00 for the nine months ended
September 30, 1999 from $266,000 for the comparable period of 1998. As a
percentage of revenues, development expenses decreased slightly to 18% in the
nine months ended September 30, 1999 from 19% for the comparable period in 1998.
The increase in development expenses is primarily due to the expansion of
content on our web site and development of corporate products.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits, fees for professional services, general
corporate expenses and facility expenses, including depreciation of assets.
General and administrative expenses increased 114% to $952,000 in the three
months ended September 30, 1999 from $444,000 for the comparable period in 1998.
As a percentage of revenues, general and administrative expenses decreased to
63% in the three months ended September 30, 1999 from 87% for the comparable
period in 1998. General and administrative expenses increased 151% to $2.5
million in the nine months ended September 30, 1999 from $989,000 for the
comparable period in 1998. As a percentage of revenues, general and
administrative expenses increased to 78% in the nine months ended September 30,
1999 from 71% for the comparable period in 1998. The increase in general and
administrative expenses in dollar terms in both the three and nine months ended
September 30, 1999 was primarily due to increased personnel, professional
service fees and general corporate expenses necessary to support our growth. We
expect that general and administrative expenses will increase in future periods
as we hire additional personnel and incur additional costs related to the growth
of our business and our operations as a public company.
9
10
LIQUIDITY AND CAPITAL RESOURCES
In May 1999 we completed an IPO of 3,600,000 shares of our common stock
resulting in net proceeds of approximately $30.5 million.
Net cash used in operating activities was $3.9 million and $671,000 for the
nine months ended September 30, 1999 and 1998, respectively. We have
historically financed these activities through private debt placements and the
sale of equity instruments to investors. Net cash provided by financing
activities was $31.1 million for the nine months ended September 30, 1999.
Capital expenditures, primarily for computers, office and communications
equipment, totaled $204,000 for the nine months ended September 30, 1999 and
$77,000 for the nine months ended September 30, 1998. The purchases were
required to support our expansion and increased infrastructure.
At September 30, 1999, we had cash and cash equivalents on hand of $9.0
million and marketable securities of $18.0 million. We believe that our existing
capital resources and 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 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.
IMPACT OF THE YEAR 2000
Awareness: The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (Year 2000)
approaches. Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems may recognize a date using "00" as the Year 1900 rather than the
Year 2000. As a result, computer systems and/or software used by many companies
and governmental agencies will need to be upgraded to comply with such Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness: We have assessed the Year 2000 readiness of our
information technology ("IT") systems, including the hardware and software that
we utilize in connection with managing our Web sites and providing our
value-added services to customers, and our non-IT systems. Our Year 2000
assessment plan consists of the following:
- quality assurance testing of our proprietary software;
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related
to the delivery of our services over the Internet;
- contacting providers of material non-IT systems; and
- assessment of repair or replacement requirements.
Our Web site developer has advised us that our proprietary software has
been designed to be Year 2000 compliant and has performed on our behalf Year
2000 compliance simulations on our proprietary software to test system
readiness. This testing was completed in June, 1999. All of our systems tested
performed correctly under test conditions. Based on the results of these Year
2000 simulation tests, there is no current need to revise the code of our
proprietary software to improve its Year 2000 compliance. We have been informed
by many of the vendors of material hardware and software components of our IT
systems, including Globix and TRW (which acts under contract as the SEC's
dissemination agent for the EDGAR system and from which we purchase our Level I
EDGAR feed), and by our advertising services provider, DoubleClick, that the
products used by them to provide services to us are currently Year 2000
compliant. We have finalized our process of obtaining assurances from other
vendors of our
10
11
material hardware and software components of our IT systems with respect to
their Year 2000 compliance. Similarly, we have obtained assurances from
providers of material non-IT systems of their year 2000 compliance.
Costs to Address Year 2000 Issues: To date, we have not incurred any
material costs in identifying or evaluating Year 2000 compliance issues. Most of
our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, we do not
possess the information necessary to estimate the potential costs of revisions
to our proprietary software, should such revisions be required, or the
replacement of third-party software, hardware or services that are eventually
determined not to be Year 2000 compliant. Although we do not anticipate that
such expenses will be material, such expenses, if higher than anticipated, could
have a material adverse effect on our business, results of operations and
financial condition.
Risks: We are not currently aware of any Year 2000 compliance problems
relating to our proprietary software or our IT or non-IT systems that would have
a material adverse effect on our business, results of operations and financial
condition. There can be no assurance that we will not discover Year 2000
compliance problems in our proprietary software that will require substantial
revisions or replacements. In addition, there can be no assurance that
third-party software, hardware or services incorporated into our material IT and
material non-IT systems will not need to be revised or replaced, which could be
time consuming and expensive. Our failure to fix, if necessary, our proprietary
software or to fix or replace, if necessary, third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material
adverse effect on our business, results of operations and financial condition.
Moreover, the ultimate Year 2000 failure of our proprietary software and our IT
and non-IT systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by such entities to
be Year 2000 compliant could result in a systemic failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could prevent us from operating our Web site.
Contingency Plan: The Company is considering certain contingency plans
that are available in the event of a Year 2000 failure. For instance, since our
two Web sites utilize distinct computer and communications hardware and
software systems, in the event one of our sites experiences a Year 2000
failure, we would divert user traffic to our alternate site. We are continuing
to investigate other solutions and contingency plans to meet our Year 2000
compliance requirements.
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, located at
http://www.edgar-online.com, in January 1996 and began operating our Free EDGAR
Website, located at http://www./Freeedgar.com, following our acquisition of
Partes in September 1999. 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:
- create and successfully implement a marketing plan to (1) attract
more individual online users to our services, (2) convert visitors
to paying subscribers and (3) increase corporate sales;
11
12
- continue to improve our market position as an Internet-based
commercial provider of information services based on EDGAR filings;
- maintain our current, and develop new, content distribution
relationships with popular Web sites and providers of business and
financial information;
- maintain our current, and continue to increase, advertising revenues
by increasing traffic to our Web site 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 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 ANTICIPATE THAT LOSSES WILL CONTINUE.
As of September 30, 1999, we had an accumulated deficit of $7,003,000. We
may not ever generate sufficient revenues to achieve profitability. We incurred
net losses of $835,853 for the year ended December 31, 1996, $1,497,899 for the
year ended December 31, 1997, $2,221,474 for the year ended December 31, 1998
and $2,257,000 for the nine months ended September 30, 1999. We expect operating
losses to continue for the foreseeable future as we 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.
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 site 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 recently 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 site, our business, results of operations and
financial condition would be materially adversely affected.
WE FACE INTENSE COMPETITION FROM OTHER PROVIDERS OF BUSINESS AND FINANCIAL
INFORMATION.
We compete with many providers of business and financial information,
including other Internet companies, for consumers' and advertisers' attention
and spending. Because our market poses no substantial barriers to entry, we
expect this competition to continue to intensify. The types of companies with
which we compete for users and advertisers include:
- traditional vendors of financial information, such as Disclosure;
- proprietary information services and Web sites targeted to business,
finance and investing needs, including those providing EDGAR
content, such as Bloomberg, 10K Wizard and LIVEDGAR; and
12
13
- Web-based providers of free EDGAR information.
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 and (3) 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 SEC has, as part of the modernization of the EDGAR system, introduced a new
dissemination system effective November 1, 1998 that reduced the annual
subscription cost of a Level I feed by approximately 73%.
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 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 EDGAR Online Web site. 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 traffic to our Web
site. We have devoted a significant portion of the proceeds from our IPO 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 SITE.
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
13
14
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, which form a significant component of our
total revenues, depend to a great extent on the traffic to our Web site, 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 site. We rely on
establishing and maintaining content distribution relationships with
high-traffic Web sites for a significant portion of the traffic on our Web site.
For example, in the month of September 1999, approximately 25% of our traffic
came to us from the Web sites to which we have licensed our EDGAR-based content.
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 site may not continue to
receive significant traffic or receive additional new users from these
relationships.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A DOWNTURN IN THE FINANCIAL SERVICES
INDUSTRY.
We are dependent upon the continued demand for the distribution of business
and financial information over the Internet, making our business susceptible to
a downturn in the financial services industry. For example, a decrease in the
number of individuals investing their money in the equity markets could result
in a decrease in the number of subscribers utilizing our Web site for real-time
access to EDGAR filings. This downturn could have a material adverse effect on
our business, results of operations and financial condition.
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 two 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 twelve months ended December 31, 1998, our
DoubleClick-related paid advertising revenue was 24% of our total 1998 revenues.
For the nine months ended September 30, 1999, our DoubleClick-related paid
advertising revenue was 26% of our total revenues for this period.
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 site. If DoubleClick is unable or unwilling to
provide these advertising services to us in the future, we would be required to
obtain them from another provider or perform them ourselves. We would likely
lose significant advertising revenues while we are in the process of replacing
DoubleClick's services.
WE FACE INTENSE COMPETITION FOR ADVERTISING REVENUES AND THE VIABILITY OF THE
INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN.
14
15
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 24% and 26% of our
total revenues for the year ended December 31, 1998 and the nine months ended
September 30, 1999, 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 site, we
could potentially lose advertising revenues to other Web sites that generate
higher user traffic. Because advertising sales make up a significant component
of our revenues, either 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 recently, we
had not employed any sales executives to sell our corporate services. During the
period March 1, 1999 through November 1, 1999, we hired six corporate salesmen
whose task is to market and sell our services to the corporate market. These
efforts may not be successful.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH.
We have experienced and are currently experiencing a period of significant
growth. If we are unable to manage our growth effectively, our business will be
adversely affected. This growth has placed, and our anticipated future growth
will continue to place, a significant strain on our technical, financial and
managerial resources. As part of this growth, we may have to implement new
operational and financial systems and procedures and controls to expand, train
and manage our employees, especially in the areas of sales and product
development.
WE FACE RISKS IN CONNECTION WITH OUR RECENT ACQUISITION AND OTHER ACQUISITIONS
AND BUSINESS COMBINATIONS THAT WE MAY CONSUMMATE.
We plan to continue to expand our operations and market presence by making
acquisitions, such as our recent FreeEDGAR acquisition 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
partnres.
We may not succeed in addressing these risks. In addition, the business we have
acquired, and in the future may acquire, may continue to incur operating
losses.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF OUR NEWLY-HIRED EXECUTIVES CANNOT WORK
TOGETHER EFFECTIVELY.
Several members of our senior management joined us recently, including our
President and Chief Operating Officer in March 1998 and both our Vice President
of Corporate Sales and Chief Financial Officer in March 1999. These individuals,
who are becoming integrated as a management team, have not previously worked
together and may not be able to work together effectively to successfully manage
our growth.
WE DEPEND ON KEY PERSONNEL.
Our future success will depend to a significant extent on the continued
services of our senior management and other key personnel, particularly Susan
Strausberg, Chief Executive Officer, Marc Strausberg, Chairman and Chief
Information Officer, Tom Vos, President and Chief Operating Officer and Greg
Adams, Chief Financial Officer, 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 DEPEND ON THIRD PARTIES FOR IMPORTANT ASPECTS OF OUR BUSINESS OPERATIONS.
We depend on third parties to develop and maintain the software and
hardware we use to operate our Web site. iXL Enterprises, Inc., an Internet
strategy consulting company, develops, maintains and upgrades our proprietary
software, which includes those features which enable users to locate and
retrieve data, as well as our database of EDGAR filings, Web-based customer
interfaces and customer support and billing systems. While our contract with iXL
is currently on a month-to-month basis, we are in negotiations with iXL to amend
our agreement to provide for a more definitive term. If iXL were unable or
unwilling to provide these services, we would need to find a suitable
replacement. The failure to find a suitable replacement or to
15
16
come to an agreement with an acceptable alternate provider on terms acceptable
to us could materially adversely affect our business, results of operations and
financial condition.
We also 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 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 site
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 site 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 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 our users 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 site must accommodate an increasingly high volume
of traffic and deliver frequently updated information. Our Web sites 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 as not
functioning properly and cause them to use other methods, including the SEC's
Web site or those of our competitors, to obtain EDGAR-based information.
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.
16
17
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 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 more rapid
expansion, to develop new or enhance existing services, 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.
WE FACE YEAR 2000 RISKS.
Because our business is completely dependent on the ability of our
customers to access our services through their computer systems and the
Internet, any serious disruption of this computer infrastructure caused by the
Year 2000 problem could have a material adverse effect on our business,
financial condition and results of operations. A disruption of this type could
result from problems experienced by our information providers, our information
technology systems, such as our Web servers, or from external problems affecting
the Internet and the methods our customers use to gain access to our services,
such as Internet service providers and online service providers. Efforts to
comply with Year 2000 requirements may disrupt or delay our ability to continue
developing and marketing our services, or we may incur unexpected costs in
connection with our Year 2000 compliance efforts. Any such Year 2000 related
disruptions could have a material adverse effect on our business, operating
results and financial condition.
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 site 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.
17
18
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. Despite this policy, 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 SITE.
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 site, 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 site 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 SENSITIVITY. The primary objective of our investment
activities is to preserve principal while at the same time maximizing the income
we receive from our investments without significantly increasing risk. Some of
the securities that we have invested in may be subject to market risk. This
means that a change in prevailing interest rates may cause the principal amount
of the investment to fluctuate. For example, if we hold a security that was
issued with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the principal amount of our investment will probably
decline. To minimize this risk, we maintain our portfolio of cash equivalents in
money market funds. In general, money market funds are not subject to market
risk because the interest paid on such funds fluctuates with the prevailing
interest rate. As of September 30, 1999, all of our investments mature in less
than one year.
18
19
EXCHANGE RATE SENSITIVITY. We consider our exposure to foreign currency
exchange rate fluctuations to be minimal, as we do not have any sales
denominated in foreign currencies. Therefore, we also have not engaged in any
hedging transactions to date.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 26, 1999, the Company's Registration Statement on Form S-1 (File
No.333-75291) was declared effective by the Securities and Exchange Commission
which registration statement related to the Company's initial public offering of
common stock. Net proceeds of the offering to the Company were approximately
$30.5 million. As of September 30, 1999, the net proceeds to the Company have
been applied as follows: (i) $1.3 million for repayment of outstanding
indebtedness, (ii) $345,000 expansion of sales and marketing efforts, and (iii)
$28.9 million in temporary investments.
On September 10, 1999, the Company acquired all of the issued and
outstanding securities of FreeEDGAR.com,Inc. (formerly known as Partes
Corporation ("Partes")) pursuant to a merger of a newly formed, wholly-owned
subsidiary of the Company with and into partes, in exchange for 908,877 shares
of the Company's common stock. In addition, the Company assumed vested options
and warrants and non-vested options to purchase capital stock of Partes, which
options are exercisable for an aggregate of [76,751] [your number in the 8K/A
was 75,039 shares of the Company's common stock. The issuance of shares of
the Company's common stock and the assumption of options and warrants were made
in reliance on Section 4(2) and/or Regulation D promulgated under the
Securities Act.
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. The exhibits listed in the accompanying Index to Exhibits are
submitted as part of this Report on Form 10-Q.
b. Reports on Form 8-K:
On September 24, the Company filed a Current Report on Form 8K under Item 2
announcing the Company's acquisition of Partes Corporation.
19
20
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 15, 1999
Greg D. Adams
Chief Financial Officer
Dated: November 15, 1999
Tom Vos
President and Chief Operating Officer
20
21
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(27) Financial Data Schedule
21