SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25779
TheStreet.com, Inc.
-------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1515824
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
14 Wall Street
New York, New York 10005
------------------------
(Address of principal executive offices)
(212) 321-5000
--------------
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed,
since last report.)
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 August 10, 2001:
Common Stock, par value $0.01 per share 29,298,048
- --------------------------------------- ----------
(Class) (Number of Shares)
TheStreet.com, Inc.
Form 10-Q
For the Six Months Ended June 30, 2001
Part I - FINANCIAL INFORMATION.....................................................................................1
Item 1. Condensed Consolidated Financial Statements......................................................1
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000..................1
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2001 and 2000.....................................................................2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000.....................................................................3
Notes to Condensed Consolidated Financial Statements.............................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................13
PART II - OTHER INFORMATION.......................................................................................24
Item 1. Legal Proceedings...............................................................................24
Item 2. Changes in Securities and Use of Proceeds.......................................................24
Item 3. Defaults Upon Senior Securities.................................................................24
Item 4. Submission of Matters to a Vote of Security Holders.............................................24
Item 5. Other Information...............................................................................25
Item 6. Exhibits and Reports on Form 8-K................................................................25
SIGNATURES........................................................................................................26
ii
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THESTREET.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
June 30, 2001 December 31, 2000
-----------------------------------------------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 43,641,811 $ 46,339,561
Short-term investments 5,032,201 25,820,764
Accounts receivable, net of allowance for doubtful
accounts of $686,691 as of June 30, 2001 and
$749,159 as of December 31, 2000 1,335,049 4,009,132
Other receivables 1,448,595 707,266
Receivable from related party 292,754 160,000
Prepaid expenses and other current assets 4,033,542 2,881,815
Net current assets of discontinued operations 44,023 1,841,980
-----------------------------------------------------
Total current assets 55,827,975 81,760,518
Property and equipment, net of accumulated
depreciation and amortization of $4,873,328 as of
June 30, 2001 and $3,165,598 as of December 31, 2000 9,338,282 10,278,567
Other assets 813,062 779,559
Goodwill and intangibles, net of accumulated
amortization of $918,190 and $50,000 as of
June 30, 2001 and December 31, 2000, respectively. 4,290,949 4,913,386
Investment in held to maturity security 2,023,044 -
Long-term investments 2,250,000 2,250,000
Non-current assets of discontinued operations - 426,218
-----------------------------------------------------
Total assets $ 74,543,312 $ 100,408,248
=====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,330,859 $ 3,118,661
Accrued expenses 5,348,131 12,266,857
Restructuring reserve 4,959,865 6,485,125
Deferred revenue 4,280,377 3,896,884
Other current liabilities 331,164 1,264,607
-----------------------------------------------------
Total current liabilities 17,250,396 27,032,134
Deferred rent 1,870,917 1,995,645
-----------------------------------------------------
Total liabilities 19,121,313 29,027,779
-----------------------------------------------------
Stockholders' equity
Preferred stock; $0.01 par value; 10,000,000 shares
authorized; none issued and outstanding - -
Common stock; $0.01 par value; 100,000,000 shares
authorized; 28,197,633 shares issued and 26,912,045
shares outstanding at June 30, 2001, and 28,074,483
shares issued and outstanding at December 31, 2000 281,976 280,745
Additional paid-in capital 182,765,748 182,888,343
Deferred compensation (1,419,612) (2,149,572)
Accumulated deficit (123,773,056) (109,639,047)
Treasury stock at cost; 1,285,588 shares (2,433,057) -
-----------------------------------------------------
Total stockholders' equity 55,421,999 71,380,469
-----------------------------------------------------
Total liabilities and stockholders' equity $ 74,543,312 $ 100,408,248
=====================================================
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
1
THESTREET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Net revenues:
Advertising & e-commerce revenues $1,117,073 $ 3,906,360 $ 3,060,538 $ 6,529,715
Subscription revenues 2,099,089 2,127,411 4,137,378 4,164,897
Other revenues 354,820 299,304 764,098 1,029,780
------------------------------------ ------------------------------------
Total net revenues 3,570,982 6,333,075 7,962,014 11,724,392
Cost of revenues 2,117,426 3,450,204 5,096,430 6,826,351
------------------------------------ ------------------------------------
Gross profit 1,453,556 2,882,871 2,865,584 4,898,041
------------------------------------ ------------------------------------
Operating expenses:
Product development expenses 2,666,419 3,616,120 5,384,252 7,588,074
Sales and marketing expenses 2,963,327 7,261,049 6,476,981 12,701,054
General and administrative expenses 3,094,999 3,932,314 6,160,813 7,873,141
Noncash compensation expense 218,672 281,656 448,154 826,385
Restructuring expenses (375,000) - (899,124) -
Severance expense 419,728 - 971,668 -
------------------------------------ ------------------------------------
Total operating expenses 8,988,145 15,091,139 18,542,744 28,988,654
------------------------------------ ------------------------------------
Loss from continuing operations (7,534,589) (12,208,268) (15,677,160) (24,090,613)
Interest income 603,147 1,394,953 1,543,151 2,931,293
------------------------------------ ------------------------------------
Net loss from continuing operations (6,931,442) (10,813,315) (14,134,009) (21,159,320)
Loss from discontinued operations - (3,009,861) - (6,546,654)
------------------------------------ ------------------------------------
Net loss $ (6,931,442) $ (13,823,176) $ (14,134,009) $ (27,705,974)
==================================== ====================================
Net loss per share - basic and diluted:
Continuing operations $ (0.25) $ (0.42) $ (0.51) $ (0.83)
Discontinued operations - (0.12) - (0.26)
------------------------------------ ------------------------------------
Net loss $ (0.25) $ (0.54) $ (0.51) $ (1.09)
==================================== ====================================
Weighted average basic and diluted shares
outstanding 27,603,900 25,403,586 27,727,801 25,347,314
==================================== ====================================
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
2
THESTREET.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
-----------------------------------------
2001 2000
-----------------------------------------
Cash Flows from Operating Activities:
Net Loss $ (14,134,009) $ (27,705,974)
Adjustments to reconcile net loss to cash used in
operating activities, net of acquired businesses:
Noncash compensation expense 448,154 826,385
Noncash advertising expense - 347,503
Provision for doubtful accounts 263,841 542,957
Minority interest - (3,144,861)
Depreciation and amortization 2,573,895 1,364,061
Decrease (Increase) in accounts receivable 2,403,242 (1,880,493)
(Increase) decrease in other receivables (111,975) 1,758,081
Increase in receivable from related party (132,754) -
Increase in prepaid expenses and other current assets (1,151,727) (1,858,683)
Decrease in net current assets of discontinued operations 1,797,957 350,771
(Increase) decrease in other assets (156,207) 35,970
Increase in goodwill and intangibles - (715,000)
Decrease (increase) in non-current assets of discontinued
operations 426,218 (1,614,976)
(Decrease) increase in accounts payable and accrued expenses (2,228,957) 3,002,697
Decrease in restructuring reserve (1,525,260) -
Increase in deferred revenue 223,138 1,501,532
(Decrease) increase in other current liabilities (933,443) 728,685
Increase in deferred rent - 70,000
-----------------------------------------
Net cash used in operating activities (12,237,887) (26,391,345)
-----------------------------------------
Cash Flows from Investing Activities:
Purchase of short-term investments (3,711,437) (32,354,389)
Sale of short-term investments 24,500,000 17,890,000
Purchase of investment in held to maturity security (2,023,044) -
Loans to Business Net Online Ltd. (629,354) -
Capital expenditures (767,445) (4,444,941)
Acquisition of business, net of cash acquired (5,400,000) 274,998
-----------------------------------------
Net cash provided by (used in) investing activities 11,968,720 (18,634,332)
-----------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 4,474 263,214
Purchase of treasury stock (2,433,057) -
Proceeds from sale / leaseback - 2,160,555
-----------------------------------------
Net cash (used in) provided by financing activities (2,428,583) 2,423,769
-----------------------------------------
Effect of exchange rate on changes in cash - (594,723)
-----------------------------------------
Net increase (decrease) in cash (2,697,750) (43,196,631)
Cash and cash equivalents, beginning of period 46,339,561 108,239,811
-----------------------------------------
Cash and cash equivalents, end of period $ 43,641,811 $ 65,043,180
=========================================
Supplemental disclosures of cash flow Information:
Cash paid during the period for:
Equipment acquired under capital leases $ - $ 2,388,239
Issuance of common stock - acquisition of business $ 155,968 $ 275,000
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
3
TheStreet.com, Inc.
Notes to Condensed Consolidated Financial Statements
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Business
TheStreet.com is a leading multimedia provider of original,
timely, insightful and trustworthy financial commentary, analysis and news.
Our content is available across diverse product offerings, including the
Internet, print media, books and conferences. Our staff of more than 50
professional reporters and editors, together with approximately 30 outside
contributors, produce more than 60 original news, analysis and commentary
pieces each business day that are aimed at helping readers of our web sites
and other products make informed investment decisions.
We have developed a loyal audience of investors at various
experience levels who turn to our product offerings for all their financial
and investing information needs. In addition, we have important strategic
relationships with leading companies in the media, technology and financial
services sectors that also help us create brand awareness and increase
subscription and advertising revenues.
Basis of Presentation
The information presented as of June 30, 2001 and 2000, and for
the three and six month periods then ended, is unaudited, but in the
opinion of management of TheStreet.com, the accompanying unaudited
financial statements contain all adjustments (consisting only of normal
recurring adjustments) which we consider necessary for the fair
presentation of our financial position as of June 30, 2001, the results of
our operations for the three and six month periods ended June 30, 2001 and
2000, and our cash flows for the six month periods ended June 30, 2001 and
2000. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the
instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in
conjunction with our audited financial statements and accompanying notes
for the year ended December 31, 2000, included in our Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of
TheStreet.com, Inc. and our subsidiary TheStreet.com (UK) Limited, whose
operations were discontinued in November 2000. All intercompany balances
and transactions have been eliminated in consolidation.
Results for the interim periods are not necessarily indicative of
results that may be expected for the entire year.
2. NET LOSS PER SHARE OF COMMON STOCK
TheStreet.com computes net loss per share of common stock in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"). Under the provisions of SFAS No.
128, basic net loss per share ("Basic EPS") is computed by dividing net
loss by the weighted average number of shares of common stock outstanding.
4
3. RESTRUCTURING
During the year ended December 31, 2000, we recorded restructuring
expenses of $17,575,522. These restructuring charges were taken to align
our cost structure with changing market conditions and decreased dependence
on the advertising market to create a more flexible and efficient
organization. The plan resulted in approximately a 20% headcount reduction
throughout the organization.
The restructuring charges consisted of the following:
Expense for year ended Payments and Accrual at
December 31, 2000 writeoffs to date June 30, 2001
------------------------ ------------------- -------------------
Headcount reductions $ 478,278 $ 478,278 $ 0
Consolidation of facilities and reduction
in non-performing assets 3,695,648 1,740,556 1,955,092
Extinguishment of marketing and
technology related contracts 13,401,596 10,396,823 3,004,773
------------------------ ------------------- -------------------
$ 17,575,522 $ 12,615,657 $ 4,959,865
======================== =================== ===================
4. DISCONTINUED OPERATIONS
In November 2000, the Company's Board of Directors decided to
discontinue our U.K. operations. As a result, the operation's assets and
liabilities have been substantially liquidated. In accordance with British
law, the operation went into Members Voluntary Liquidation in May 2001.
Accordingly, the operating results relating to the U.K. operations have
been segregated from continuing operations and reported as a separate line
item on the consolidated statements of operations. The Company has restated
its consolidated financial statements for prior years to conform to the
current year presentation.
In December 2000, the Company recorded a provision to accrue for
additional future costs to be incurred to complete the liquidation process.
The Company believes that any remaining costs associated with these
discontinued operations have been adequately provided for by this
provision.
As of June 30, 2001, the fair market value of the remaining assets
was $44,023, consisting of a VAT tax refund receivable.
5. ACQUISITION
On December 20, 2000, the Company acquired substantially all of
the assets and certain liabilities of SmartPortfolio.com, Inc. The Company
paid total consideration of $5,400,000 cash and 77,984 shares of our common
stock, having a value on the closing date of approximately $156,000, plus
up to an additional 489,644 shares of common stock at future dates subject
to continued employment conditions being met. As of December 31, 2000, the
total consideration of approximately $5,556,000 in cash and common stock
was reflected in accrued expenses, and was paid in January 2001.
5
6. NEW ACCOUNTING PRONOUNCEMENTS
In July 1999, the FASB approved SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
date of FASB Statement No. 133". SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met.
The adoption of SFAS No. 133 in 2001 did not have a material effect on the
Company's Condensed Consolidated Financial Statements.
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under
SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets
that are not deemed to have indefinite lives will continue to be amortized
over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt SFAS 142
effective January 1, 2002. The Company is currently evaluating the effect
that adoption of the provisions of SFAS 142 that are effective January 1,
2002 will have on its results of operations and financial position.
7. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements
within the meaning of Section 27(a) of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21(E) of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
regarding our expectations, beliefs, intentions or future strategies that
are signified by the words "expects", "anticipates", "intends", "believes",
or similar language. All forward-looking statements included in this
quarterly report on Form 10-Q are based on information available to us on
the date hereof, and we assume no obligation to update any such
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ.
The following discussion and analysis should be read in
conjunction with the unaudited condensed consolidated financial statements
and notes thereto.
6
Overview
TheStreet.com is a leading multimedia provider of original,
timely, insightful and trustworthy financial commentary, analysis and news.
Our content is available across diverse product offerings, including the
Internet, print media, books and conferences. We were originally organized
as a limited liability company in June 1996. In May 1998, we converted to a
C corporation, incorporated in Delaware, and in May 1999, we completed our
initial public offering.
We have developed a loyal audience of investors at various
experience levels who turn to our product offerings for all their financial
and investing information needs. In addition, we have important strategic
relationships with leading companies in the media, technology and financial
services sectors that also help us create brand awareness and increase
subscription and advertising revenues.
Results of Operations
In November 2000, the Company's Board of Directors decided to
discontinue our U.K. operations. As a result, the operation's assets and
liabilities have been substantially liquidated. In accordance with British
law, the operation went into Members Voluntary Liquidation in May 2001. The
following information has been presented on a basis consistent with
discontinued operations treatment. Accordingly, the operating results
relating to the U.K. operations have been segregated from continuing
operations and reported as a separate line item on the statement of
operations.
Recent Developments
On July 30, 2001, we broadcast our first nationally syndicated
financial radio program pursuant to our previously announced agreement with
Premier Radio Networks.
On June 13, 2001, we announced that David Morrow, former articles
editor of SmartMoney magazine, would become editor-in-chief, succeeding
Dave Kansas. Prior to working for SmartMoney, Mr. Morrow worked at The New
York Times, The Detroit Free Press and Fortune.
On May 30, 2001, we launched Action Alerts PLUS, a
subscription-based product providing email distribution of investment
insight from James J. Cramer and access to Mr. Cramer's continuously
updated personal stock portfolio on the web. Mr. Cramer is a director and
stockholder of TheStreet.com as well as Markets Commentator for us and the
CNBC cable television network.
Results Of Operations
Three Months Ended June 30, 2001 And June 30, 2000
Net Revenues
Advertising & E-Commerce Revenues. Advertising and e-commerce
revenues are derived from Internet sponsorship arrangements and from the
delivery of banner and e-mail advertisements, as well as from conference
sponsorships. Advertising and e-commerce revenues decreased to $1,117,073
for the three months ended June 30, 2001, as compared to $3,906,360 for the
three months ended June 30, 2000. This decrease is primarily due to a
significant slowdown in the overall online advertising market, resulting in
7
reduced sales of Internet sponsorship, banner and e-mail advertisements.
For the three months ended June 30, 2001, 30% of our advertising and
e-commerce revenues were derived from sponsorship contracts, as compared to
53% for the three months ended June 30, 2000. The number of our advertisers
for the three months ended June 30, 2001 was 61, as compared to 98 for the
three months ended June 30, 2000. For the three months ended June 30, 2001,
our top five advertisers accounted for approximately 45% of our total
advertising and e-commerce revenues, as compared to approximately 27% for
the three months ended June 30, 2000.
Subscription Revenues. Subscription revenues are derived from
annual and monthly subscriptions. Subscription revenues totaled $2,099,089
for the three months ended June 30, 2001, as compared to $2,127,411 for the
three months ended June 30, 2000. This is primarily the result of decreased
subscription revenue associated with our RealMoney.com web site, offset by
subscription revenue associated with SmartPortfolio.com, which was acquired
in December 2000, as well as the recent launch of several new
subscription-based products, such as TheStreet(TM)View for Hedge Funds and
Action Alerts PLUS. For the three months ended June 30, 2001, approximately
76% of our net subscription revenue was derived from annual subscriptions,
as compared to approximately 82% for the three months ended June 30, 2000.
We calculate net subscription revenues by deducting cancellation
chargebacks and refunds from gross revenues. During the three months ended
June 30, 2001, cancellation chargebacks and refunds approximated 21% of
gross subscription revenues.
Our RealMoney.com subscriber base has decreased to approximately
65,800 annual and monthly subscribers as of June 30, 2001 (not including
free trials, but including subscribers paid for as part of bulk
subscription contracts), as compared to approximately 109,300 as of June
30, 2000. This decrease is primarily the result of the increase in the
subscription price of our RealMoney.com web site, introduced in June 2000.
We anticipate that the decline in our subscriber level will stabilize in
the future as the remaining lower priced annual subscriptions come up for
renewal at the higher price in July 2001.
Other Revenues. Other revenues are primarily derived from
syndication revenues, barter arrangements, reprint revenues, conference
attendees and reprint revenues. Other revenues increased to $354,820 for
the three months ended June 30, 2001, as compared to $299,304 for the three
months ended June 30, 2000. This increase is primarily the result of
increased syndication revenue, conference attendee revenue and royalties
from our investing book, partially offset by fewer barter arrangements with
online and print media companies, as well as the absence of revenues
associated with TheStreet.com television show. Barter transactions are
recognized at the fair value as determined by the comparable advertising
market rates at the time of placement.
Cost Of Revenues
Cost of revenues includes compensation and benefits for editorial
staff, fees paid to outside contributors and content licensing fees payable
to content providers. Cost of revenues decreased to $2,117,426 for three
months ended June 30, 2001, as compared to $3,450,204 for the three months
ended June 30, 2000. This decrease is primarily the result of reductions
within our editorial staff to 56 employees as of June 30, 2001, as compared
to 103 as of June 30, 2000.
8
Product Development Expenses
Product development expenses include compensation and benefits for
software developers and graphic designers, expenses for contract
programmers and developers, communication lines and other technology costs.
Product development expenses decreased to $2,666,419 for the three months
ended June 30, 2001, as compared to $3,616,120 for the three months ended
June 30, 2000. This decrease is primarily the result of reduced consulting
fees that were incurred in 2000 as a result of the expansion of our
capacity to handle the increase in traffic related to the conversion of our
subscription-based TheStreet.com web site to a completely free,
advertising-supported site, accompanied by RealMoney.com, a new
subscription-based site. Additionally, reductions within our technology and
product development staff to 37 employees as of June 30, 2001, as compared
to 53 employees as of June 30, 2000, resulted in reduced compensation and
related expenses. These savings were partially offset by increased
depreciation and amortization expenses related to equipment purchased to
meet the demands of the increased traffic and equipment from our
acquisition of SmartPortfolio.com, Inc. in late December 2000.
Sales And Marketing Expenses
Sales and marketing expenses consist primarily of advertising and
promotion on television, radio and online, advertising agency fees,
promotional materials, content distribution fees, and compensation expenses
for our direct sales force and customer service department. Sales and
marketing expenses decreased to $2,963,327 for the three months ended June
30, 2001, as compared to $7,261,049 for the three months ended June 30,
2000. This decrease is primarily the result of reduced advertising and
promotion expenses resulting from our strategy of eliminating non-web based
advertising, as well as a reduction in our sales and marketing staff to 35
employees as of June 30, 2001, as compared to 58 as of June 30, 2000.
General And Administrative Expenses
General and administrative expenses consist primarily of
compensation for general management, finance and administrative personnel,
occupancy costs, professional fees, equipment rental and other office
expenses. General and administrative costs decreased to $3,094,999 for the
three months ended June 30, 2001, as compared to $3,932,314 for the three
months ended June 30, 2000. This decrease is primarily the result of
reduced outside counsel fees that were incurred in 2000 in connection with
the cancellation of TheStreet.com television show in May 2000, as well as
lower occupancy costs, partially offset by increased goodwill amortization
related to our acquisition of SmartPortfolio.com, Inc. in December 2000.
Noncash Compensation Expense
In 1998, and the first three months of 1999, we granted options to
purchase shares of our common stock at exercise prices that were less than
the fair market value of the underlying shares of common stock on the date
of grant. This resulted in noncash compensation expense incurred over the
period that these specific options vest. The noncash compensation expense
decreased to $218,672 for the three months ended June 30, 2001, as compared
to $281,656 for the three months ended June 30, 2000. The remaining noncash
compensation expense for 2001 is currently estimated to be approximately
$430,286.
9
Restructuring Expenses
During the year ended December 31, 2000, we recorded restructuring
expenses to align our cost structure with changing market conditions and
decreased dependence on the advertising market to create a more flexible
and efficient organization. The restructuring expense of ($375,000) for the
three months ended June 30, 2001 represents the reversal of previously
estimated expenses as a result of a negotiated settlement for less than the
amount initially estimated.
Interest Income
For the three months ended June 30, 2001, interest income was
$603,147, as compared to $1,394,953 for the three months ended June 30,
2000. This decrease is the result of reduced cash balances and lower
interest rates.
Loss From Discontinued Operations
In November 2000, our Board of Directors decided to discontinue
our U.K. operations. As a result, the assets and liabilities of the
discontinued operations are being liquidated as promptly as possible.
Accordingly, the operating results relating to the U.K. operations have
been segregated from continuing operations and reported as a separate line
item on the statement of operations.
For the three months ended June 30, 2001, there was no loss from
discontinued operations, as compared to the net effect of a loss of
$3,009,861 for the three months ended June 30, 2000, while the U.K. company
was in operation. No additional loss amounts were recorded for the three
months ended June 30, 2001 because we believe that any remaining net
operating losses and related costs associated with these discontinued
operations have been adequately provided for by a provision recorded in
December 2000.
As of June 30, 2001, the book value of the remaining current
assets of the discontinued operations was $44,023. There were no remaining
non-current assets.
Six Months Ended June 30, 2001 And June 30, 2000
Net Revenues
Advertising & E-Commerce Revenues. Advertising and e-commerce
revenues decreased to $3,060,538 for the six months ended June 30, 2001, as
compared to $6,529,715 for the six months ended June 30, 2000. This
decrease is primarily due to a significant slowdown in the overall online
advertising market, resulting in reduced sales of Internet sponsorship,
banner and e-mail advertisements. For the six months ended June 30, 2001,
32% of our advertising and e-commerce revenues were derived from
sponsorship contracts, as compared to 54% for the three months ended June
30, 2000. The number of our advertisers for the six months ended June 30,
2001 was 96, as compared to 144 for the six months ended June 30, 2000. For
the six months ended June 30, 2001, our top five advertisers accounted for
approximately 38% of our total advertising and e-commerce revenues, as
compared to approximately 24% for the six months ended June 30, 2000.
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Subscription Revenues. Subscription revenues totaled $4,137,378
for the six months ended June 30, 2001, as compared to $4,164,897 for the
six months ended June 30, 2000. This is primarily the result of decreased
subscription revenue associated with our RealMoney.com web site, offset by
revenue associated with subscription newsletters from SmartPortfolio.com,
Inc., which was acquired in December 2000, as well as the recent launch of
several new subscription-based products, such as TheStreet(TM)View for
Hedge Funds and Action Alerts PLUS. For the six months ended June 30, 2001,
approximately 77% of our net subscription revenue was derived from annual
subscriptions, as compared to approximately 80% for the six months ended
June 30, 2000. We calculate net subscription revenues by deducting
cancellation chargebacks and refunds from gross revenues. During the six
months ended June 30, 2001, cancellation chargebacks and refunds
approximated 24% of gross subscription revenues.
Other Revenues. Other revenues decreased to $764,098 for the six
months ended June 30, 2001, as compared to $1,029,780 for the six months
ended June 30, 2000. This decrease is primarily the result of fewer barter
arrangements with online and print media companies, as well as the absence
of revenues associated with TheStreet.com television show, partially offset
by increased syndication revenue, conference attendee revenue and royalties
from our investing book. Barter transactions are recognized at the fair
value as determined by the comparable advertising market rates at the time
of placement.
Cost Of Revenues
Cost of revenues decreased to $5,096,430 for six months ended June
30, 2001, as compared to $6,826,351 for the six months ended June 30, 2000.
This decrease is primarily the result of reductions within our editorial
staff to 56 employees as of June 30, 2001, as compared to 103 as of June
30, 2000, partially offset by increased costs associated with outside
contributors.
Product Development Expenses
Product development expenses decreased to $5,384,252 for the six
months ended June 30, 2001, as compared to $7,588,074 for the six months
ended June 30, 2000. This decrease is primarily the result of reduced
consulting fees that were incurred in 2000 as a result of the expansion of
our capacity to handle the increase in traffic related to the conversion of
our subscription-based TheStreet.com web site to a completely free,
advertising-supported site, accompanied by RealMoney.com, a new
subscription-based site. Additionally, reductions within our technology and
product development staff to 37 employees as of June 30, 2001, as compared
to 53 employees as of June 30, 2000, resulted in reduced compensation and
related expenses. These savings were partially offset by increased
depreciation and amortization expenses related to equipment purchased to
meet the demands of the increased traffic and equipment from our
acquisition of SmartPortfolio.com, Inc. in late December 2000.
Sales And Marketing Expenses
Sales and marketing expenses decreased to $6,476,981 for the six
months ended June 30, 2001, as compared to $12,701,054 for the six months
ended June 30, 2000. This decrease is primarily the result of reduced
advertising and promotion expenses resulting from our strategy of
eliminating non-web based advertising, as well as a reduction in our sales
and marketing staff to 35 employees as of June 30, 2001, as compared to 58
as of June 30, 2000.
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General And Administrative Expenses
General and administrative costs decreased to $6,160,813 for the
six months ended June 30, 2001, as compared to $7,873,141 for the six
months ended June 30, 2000. This decrease is primarily the result of
reduced outside counsel fees that were incurred in 2000 in connection with
the cancellation of TheStreet.com television show in May 2000, as well as
lower salary and related expenses, and occupancy costs, partially offset by
increased goodwill amortization related to our acquisition of
SmartPortfolio.com, Inc. in December 2000.
Noncash Compensation Expense
Noncash compensation expense decreased to $448,154 for the six
months ended June 30, 2001, as compared to $826,385 for the six months
ended June 30, 2000. We estimate that this expense will total approximately
$900,000 for the year ended December 31, 2001. The remaining noncash
compensation expense beyond the year 2001 is currently estimated to be $1.1
million.
Restructuring Expenses
During the year ended December 31, 2000, we recorded restructuring
expenses to align our cost structure with changing market conditions and
decreased dependence on the advertising market to create a more flexible
and efficient organization. The restructuring expense of ($899,124) for the
six months ended June 30, 2001 represents the reversal of previously
estimated expenses as a result of negotiated settlements for less than the
amounts initially estimated.
Interest Income
For the six months ended June 30, 2001, interest income was
$1,543,151, as compared to $2,931,293 for the six months ended June 30,
2000. This decrease is the result of reduced cash balances and lower
interest rates.
Loss From Discontinued Operations
For the six months ended June 30, 2001, there was no loss from
discontinued operations, as compared to the net effect of a loss of
$6,546,654 for the six months ended June 30, 2000, while the U.K. company
was in operation. No additional loss amounts were recorded for the six
months ended June 30, 2001 because we believe that any remaining net
operating losses and related costs associated with these discontinued
operations have been adequately provided for by a provision recorded in
December 2000.
Liquidity and Capital Resources
We currently invest in money market funds and other short-term,
investment grade instruments that are highly liquid, of high-quality, and
have maturities of up to two years, with the intent that such funds easily
be made available for operating purposes. As of June 30, 2001, our cash and
cash equivalents, short-term investments and our investment in a
held-to-maturity security amounted to $50,697,056, representing 68% of our
total assets.
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Net cash used in operating activities of $12,237,887 for the six
months ended June 30, 2001 was primarily due to a net loss of $14,134,009,
offset by noncash charges, decreases in accounts receivable, net current
assets of discontinued operations, and non-current assets of discontinued
operations, and increases in deferred revenue, partially offset by
increases in prepaid expenses and other current assets, and other assets,
and decreases in accounts payable and accrued expenses, restructuring
reserve, and other current liabilities.
Net cash provided by investing activities of $11,968,720 for the
six months ended June 30, 2001 consisted of net sales of short-term
investments, partially offset by a payment in January 2001 in connection
with the acquisition of SmartPortfolio.com, Inc. in December 2000, the
purchase of an investment in a held to maturity security, capital
expenditures, and loans to Business Net Online Ltd. Capital expenditures
generally consisted of purchases of computer software and hardware.
Net cash used in financing activities of $2,428,583 for the six
months ended June 30, 2001 consisted primarily of the purchase of treasury
stock.
We believe that our current cash and cash equivalents, short-term
investments and investment in a held-to-maturity security will be
sufficient to meet our anticipated cash needs 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 additional funding, if needed,
will be available on terms attractive to us, or at all. Strategic
relationships, if necessary to raise additional funds, may require us to
provide rights to certain of our content. 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. Furthermore, these equity
securities might have rights, preferences or privileges senior to those of
our common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe that our market risk exposures are immaterial as we do
not have instruments for trading purposes, and reasonable possible
near-term changes in market rates or prices will not result in material
near-term losses in earnings, material changes in fair values or cash flows
for all instruments.
Risk Factors
You should carefully consider the following risks before making an
investment decision. The risks described below are all the material risks
facing TheStreet.com. We may also face some non-material risks which we
have not discussed in the following description of our risk factors. If any
of the following risks occur, our business, results of operations or
financial condition could be materially adversely affected.
We Have a History of Losses, and Although We Have Diversified Our Sources
of Revenue, Potential Fluctuations In Our Quarterly Financial Results Make
Financial Forecasting Difficult
As of June 30, 2001, we had an accumulated deficit of $123.8
million. We have not achieved profitability and expect to continue to incur
net losses in 2001. We expect to continue to incur significant
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operating expenses and, as a result, will need to generate significant revenues
to achieve profitability, which may not occur. Even if we do achieve
profitability, we may be unable to sustain or increase profitability on a
quarterly or annual basis in the future.
We have developed a loyal audience of investors at various
experience levels who turn to our product offerings for all their financial
and investing information needs. In addition, we have important strategic
relationships with leading companies in the media, technology and financial
services sectors that also help us create brand awareness and increase
subscription and advertising revenues. Our goal is to monetize and leverage
our financial content across a variety of platforms. However, we cannot
assure you that our initiatives will result in increases in revenues
sufficient to enable us to achieve profitability. In such an event, the
price of our common stock is likely to decrease.
Due to the uncertainty surrounding the likelihood of a significant
improvement in the online advertising market in the second half of 2001, we
cannot assure you that we will be able to achieve our previously announced
goal of becoming EBITDA-positive by the end of 2001. EBITDA, defined as
operating income before depreciation and amortization is one of the primary
measures we use to evaluate performance. We believe that EBITDA is an
appropriate measure of evaluating our operations. However, EBITDA should be
considered in addition to, not as a substitute for or superior to,
operating income, net earnings, cash flows, and other measures of financial
performance prepared in accordance with generally accepted accounting
principles ("GAAP"). As EBITDA is not a measure of performance calculated
in accordance with GAAP, this measure may not be comparable to similarly
titled measures employed by other companies.
Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. We believe that advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. Similar seasonal patterns are developing in our
industry. We believe that quarter-to-quarter comparisons of our operating
results may not be a good indication of our future performance, nor would
our operating results for any particular quarter be indicative of future
operating results. In some future quarters our operating results may be
below the expectations of public market analysts and investors. In such an
event, the price of our common stock is likely to decrease.
We May Have Difficulty Selling Our Advertising Inventory, A Significant
Portion Of Which Is Concentrated Among Our Top Advertisers
The market for online advertising sales has continued its severe
decline over the last several months. Both traditional and new media
advertisers continue to scale back their online media budgets. In addition,
seasonal fluctuations in the markets for consumer products cause
advertisers to generally place fewer advertisements during the first and
third calendar quarters of each year. As a result, many advertising
supported web sites are experiencing difficulty selling their available
inventories and maintaining their rate structures. Although we believe that
our network of sites and corresponding demographic profiles will continue
to enable us to maintain our high sell-through, we expect that our overall
advertising rates will decrease as a result of increased inventory and the
continued decline in the online advertising market. Additionally, we have
entered into headline indexing and content distribution agreements with a
variety of Internet portals and content providers to distribute our news
and headlines to their users, thus driving potential readers to our web
sites. We believe that these arrangements will continue to provide a
cost-effective way to increase our unique visitors and page view inventory.
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However, our actual traffic is subject to a variety of factors, including
seasonal fluctuations in financial news consumption and overall online
usage that generally cause weakness in the first and third calendar
quarters of each year, technical difficulties associated with the
implementation and ongoing delivery of the news distribution arrangements,
and editorial policy changes by our partners. If we are unable to attract
significantly increased traffic, or if despite increased traffic,
advertising revenues continue to decrease due to continued softness in the
online advertising market, our business, results of operations and
financial condition could be materially adversely affected.
In the second quarter of 2001, our top five advertisers accounted
for approximately 45% of our total advertising revenues. Our business,
results of operations and financial condition could be materially adversely
affected by the loss of a number of our top advertisers, and such a loss
could be concentrated in a single quarter. Further, if we do not continue
to increase our revenue from financial-services advertisers or attract
advertisers from non-financial industries, our business, results of
operations and financial condition could be materially adversely affected.
As is typical in the advertising industry, our advertising contracts have
cancellation provisions.
We May Have Difficulty Retaining Current Subscribers
We continue to seek to retain our current subscribers and to
attract new subscribers. As of June 30, 2001, we had approximately 66,000
paid subscribers, including both retail and corporate, down from
approximately 109,000 when we launched our flagship site. We believe we
have significantly enhanced our subscription offerings to differentiate
them from the free financial news web sites that are widely available on
the web, including on our own flagship site. However, given the
availability of such free financial information, we may not be able to
retain our current subscribers and attract additional subscribers in a
cost-effective manner. If our subscription base declines more than we
anticipate or our cost of subscriber acquisition increases, our business,
results of operations and financial condition could be materially adversely
affected.
Difficulties In Developing New And Enhanced Products and Services Could
Harm Our Business
We intend to introduce additional and enhanced products and
services in order to retain our current readers and attract new readers. If
we introduce a product or service that is not favorably received, our
current readers may choose a competitive service over ours. We may also
experience difficulties that could delay or prevent us from introducing new
products and services, or the new products or services we introduce could
contain errors that are discovered after they are introduced. In some
cases, we are dependent on third parties, including software companies,
application service providers and technology consulting firms, to help us
develop and implement new products and services. If these third parties are
not able to fulfill their responsibilities to us on schedule or if the
technology developed by them for our use does not function as anticipated,
implementation may be delayed and the cost of implementation may be higher
than anticipated. Such developments could materially adversely affect our
business, results of operations and financial condition.
Unforeseen Development Difficulties May Hinder Our Efforts
We have significantly enhanced our design and our technological
infrastructure to further improve our sites and to accommodate the expected
increase in traffic, and intend to continue such development activities.
However, unforeseen development difficulties could prevent us from
implementing such improvements or cause the costs to implement such
improvements, including design, technology and related costs, to be higher
than anticipated.
15
In the past, we have experienced significant spikes in traffic on
our web sites when there have been important financial news events. In
addition, the number of our readers has continued to increase over time and
we expect our reader base to increase over time since our flagship site has
been converted to a totally free site. Accordingly, our web sites must
accommodate a high volume of traffic, often at unexpected times. Although
we have upgraded and continue to upgrade our systems, our web sites have in
the past, and may in the future, experience publishing problems, slower
response times than usual or other problems for a variety of reasons. These
occurrences could cause our readers to perceive our web sites as not
functioning properly and, therefore, cause them to use other methods to
obtain their financial news and information. In such a case, our business,
results of operations and financial condition could be materially adversely
affected.
We Face A Risk Of System Failure That May Result In Reduced Traffic,
Reduced Revenue And Harm To Our Reputation
Our ability to provide timely information and continuous news
updates 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. In February 2000, our Internet-hosting agreement with Exodus
Communications, Inc. was renewed, and we currently continue to maintain all
of our production servers at Exodus's New Jersey data center. Our
operations depend on the ability of Exodus to protect its own systems and
our systems in its data center against damage from fire, power loss, water
damage, telecommunications failure, vandalism and similar unexpected
adverse events. Although Exodus provides comprehensive facilities
management services, including human and technical monitoring of all
production servers 24 hours per day, seven days per week, Exodus 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
Exodus could materially adversely affect our business, results of
operations and financial condition. Our own internal systems and
operations, as well as those of Exodus, may be subject to damage or
interruption from human error, natural disasters, fire, water damage, power
loss, 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 our relations with our advertisers and e-commerce
partners.
Like most web sites, we may be vulnerable to computer viruses,
physical or electronic break-ins and other deliberate attempts to disrupt
our technological operations, which could lead to interruptions, delays or
loss of data. In addition, unauthorized persons may improperly access our
data. 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 our delivery of content. 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.
Our Future Success Depends On Our Ability To Attract And Retain Key Personnel
Our future success depends upon our ability to attract and retain
key personnel, including executives, editors, writers, and technology
personnel. Only a few of our key employees are bound by employment or
non-competition agreements. The loss of one or more of our key personnel,
or our inability to attract replacements with appropriate expertise, could
materially adversely affect our business, results of operations and
financial condition.
16
Intense Competition Could Reduce Our Market Share And Harm Our Financial
Performance
A number of financial news and information sources compete for
consumers' and advertisers' attention and spending. We compete for
advertisers, readers, staff and outside contributors with many types of
companies, including:
o online services or web sites focused on business, finance and
investing, such as CBS.MarketWatch.com, CNBC on MSN Money,
CNNfn.com, The Wall Street Journal Interactive Edition, The
New York Times on the Web, DowJones.com, SmartMoney.com, and
The Motley Fool;
o publishers and distributors of traditional media, including
print, radio and television, such as The Wall Street Journal,
Fortune, Bloomberg Business Radio and CNBC;
o providers of terminal-based financial news and data, such as
Bloomberg Business News, Reuters News Service, Dow Jones
Markets and Bridge News Service;
o web "portal" companies, such as Yahoo! and America Online;
and
o online brokerage firms, many of which provide financial and
investment news and information, such as Charles Schwab,
E*TRADE and Merrill Lynch.
Our ability to compete depends on many factors, including the
originality, timeliness, insightfulness and trustworthiness of our content
and that of our competitors, the ease of use of services developed either
by us or our competitors and the effectiveness of our sales and marketing
efforts.
Many of our existing competitors, as well as a number of potential
new competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than we do. This may allow them to devote greater
resources than we can to the development and promotion of their services.
These competitors may also engage in more extensive research and
development, undertake more far-reaching marketing campaigns, adopt more
aggressive pricing policies (including offering more of their financial
news and commentary for free) and make more attractive offers to existing
and potential employees, outside contributors, strategic partners and
advertisers. Our competitors may develop content that is equal or superior
to ours or that achieves greater market acceptance than ours. It is also
possible that new competitors may emerge and rapidly acquire significant
market share. We may not be able to compete successfully for advertisers,
readers, staff or outside contributors, which could materially adversely
affect our business, results of operations and financial condition.
Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could materially adversely affect our
business, results of operations and financial condition.
We also compete with other web sites, television, radio and print
media for a share of advertisers' total advertising budgets. If advertisers
perceive the Internet or our web sites to be a limited or an ineffective
advertising medium, they may be reluctant to devote a portion of their
advertising budget to Internet advertising or to advertising on our web
sites.
17
A Failure To Establish And Maintain Strategic Relationships With Other
Companies Could Decrease Our Subscriber And Reader Base, Which May Harm Our
Business
We depend on establishing and maintaining content syndication and
headline indexing relationships with high-traffic web sites for a
significant portion of our current subscriber and reader base. There is
intense competition for relationships with these firms and placement on
these sites, and we may have to pay significant fees to establish
additional content syndication and headline indexing relationships or
maintain existing relationships in the future. We may be unable to enter
into or successfully renew relationships with these firms or sites on
commercially reasonable terms or at all. These relationships may not
attract significant numbers of subscribers or readers.
Many companies that we may approach for a strategic relationship
or who already have strategic relationships with us also provide financial
news and information from other sources. As a result, these companies may
be reluctant to enter into or maintain strategic relationships with us. Our
business, results of operations and financial condition could be materially
adversely affected if we do not establish additional, and maintain
existing, strategic relationships on commercially reasonable terms or if
any of our strategic relationships do not result in an increase in the
number of subscribers or readers of our web sites.
We May Be Unable To Grow Through Acquisitions And Integrate Future
Acquisitions Into Our Business
We intend to pursue a growth strategy that may involve
acquisitions of other companies. However, we may be unable to successfully
pursue and complete acquisitions in a timely and cost-effective manner.
Further, the pursuit and integration of acquisitions will require
substantial attention from our senior management, which will limit the
amount of time these individuals will have available to devote to our
existing operations. There can be no assurance that we can successfully
integrate these acquisitions into our business or implement our plans
without delay or substantial cost. In addition, future acquisitions by us
could result in the incurrence of debt and contingent liabilities, which
could have a material adverse effect upon our financial condition and
results of operations. Any failure or any inability to effectively manage
and integrate growth may have a material adverse effect on our financial
condition and results of operations.
Any Failure Of Our Internal Security Measures Or Breach Of Our Privacy
Protections Could Cause Us To Lose Users And Subject Us To Liability
Users who subscribe to one of our subscription-based web sites are
required to furnish certain personal information (including name, email
address and credit card information), which we use to administer our
services. Although we no longer need credit-card information to process
subscription payments for our flagship site now that it has converted to a
free site, we continue to gather credit card information for the
subscription-based sites in our network. Additionally, we recently
implemented a registration system that will collect certain information
(although not payment information) from users of our free flagship site who
wish to gain access to certain features of our site. If the security
measures that we use to protect personal information are ineffective, we
may lose users and our business may be harmed. Additionally, we rely on
security and authentication technology licensed from third parties to
perform real-time credit card authorization and verification. We cannot
predict whether technological developments or human error could allow these
security measures to be circumvented. We may need to use significant
resources to prevent security breaches or to alleviate problems caused by
any security breaches. If we are not able to prevent all security breaches,
our business, results of operations and financial condition could be
materially adversely affected.
18
Our users depend on us to keep their personal information private
and to not disclose it to third parties. We therefore maintain a privacy
policy, under which, with certain limited exceptions, we will not disclose
to any third parties any personal information about our subscribers or
other users. We have retained the ability to modify the privacy policy at
any time. If our users perceive that we are not protecting their privacy,
our business, results of operations and financial condition could be
materially adversely affected.
Difficulties Associated With Our Brand Development May Harm Our Ability To
Attract Subscribers And Readers
We believe that maintaining and growing awareness about the
TheStreet.com brand is an important aspect of our efforts to continue to
attract users. The importance of brand recognition will increase in the
future because of the growing number of web sites providing financial news
and information. The new site that we have introduced, RealMoney.com, and
those that we have acquired, do not have widely recognized brands, and we
will need to increase awareness of these brands among potential users.
Although our efforts to build brand awareness have been successful to date,
they may not be cost effective or successful in the future in reaching
potential users, and some potential users may not be receptive to our
advertising campaign or other efforts. Accordingly, we cannot assure you
that such efforts will be successful in raising awareness of TheStreet.com
brand or in persuading potential users to visit our sites.
Failure To Maintain Our Reputation For Trustworthiness May Reduce The
Number Of Our Readers, Which May Harm Our Business
It is very important that we maintain our reputation as a
trustworthy news organization. The occurrence of events, including our
misreporting a news story or the non-disclosure of a stock ownership
position by one or more of our writers in breach of our compliance policy,
could harm our reputation for trustworthiness. These events could result in
a significant reduction in the number of our readers, which could
materially adversely affect our business, results of operations and
financial condition.
Potential Liability For Information Displayed On Our Web Sites May Require
Us To Defend Against Legal Claims, Which May Cause Significant Operational
Expenditures
We may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to the
information we publish on our web sites. 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 subject to claims based
upon the content that is accessible from our web sites through links to
other web sites. We have stock ticker-based message boards that allow users
to post comments about individual stocks. We undertake no obligation to
moderate these message boards, and potential liability for providers of
message board services has not yet been well established. We may choose to
allow our editorial staffers or outside contributors to post on our boards,
thus increasing our potential liability. Our insurance may not adequately
protect us against these claims.
Failure To Protect Our Intellectual Property Rights Could Harm Our
Brand-Building Efforts And Ability To Compete Effectively
To protect our rights to our intellectual property, we rely on a
combination of trademark and copyright law, trade secret protection,
confidentiality agreements and other contractual arrangements with
19
our employees, affiliates, clients, strategic partners and others. The
protective steps we have taken may be inadequate to deter misappropriation
of our proprietary information. We may be unable to detect the unauthorized
use of, or take appropriate steps to enforce, our intellectual property
rights. We have registered our trademarks in the United States and we have
pending U.S. and foreign applications for other trademarks. Effective
trademark, copyright and trade secret protection may not be available in
every country in which we offer or intend to offer our services. Failure to
adequately protect our intellectual property could harm our brand, devalue
our proprietary content and affect our ability to compete effectively.
Further, defending our intellectual property rights could result in the
expenditure of significant financial and managerial resources, which could
materially adversely affect our business, results of operations and
financial condition.
We May Have To Defend Against Intellectual Property Infringement Claims,
Which May Cause Significant Operational Expenditures
Although we believe that our proprietary rights do not infringe on
the intellectual property rights of others, other parties may assert
infringement claims against us or claims that we have violated a patent or
infringed a copyright, trademark or other proprietary right belonging to
them. We incorporate licensed third-party technology in some of our
services. In these license agreements, the licensors have generally agreed
to defend, indemnify and hold us harmless with respect to any claim by a
third party that the licensed software infringes any patent or other
proprietary right. We cannot assure you that these provisions will be
adequate to protect us from infringement claims. Any infringement claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources on our part, which could materially
adversely affect our business, results of operations and financial
condition.
Our Ability To Maintain And Increase Our Readership Depends On The
Continued Growth In Use And Efficient Operation Of The Web
The web-based information market is new and rapidly evolving. Our
business would be materially adversely affected if web usage does not
continue to grow or grows slowly. Web usage may be inhibited for a number
of reasons, such as:
o inadequate network infrastructure;
o security and privacy concerns;
o inconsistent quality of service; and
o unavailability of cost-effective, high-speed access to the
Internet.
Our readers depend on Internet service providers, online service
providers and other web site operators for access to our web sites. Many of
these services have experienced significant service outages in the past and
could experience service outages, delays and other difficulties due to
system failures unrelated to our systems. These occurrences could cause our
readers to perceive the web in general or our web sites in particular as an
unreliable medium and, therefore, cause them to use other media to obtain
their financial news and information. We also depend on a number of
information providers to deliver information and data feeds to us on a
timely 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, which could materially adversely affect our business,
results of operations and financial condition.
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A General Decline In Online Advertising Could Harm Our Business
Our future success is dependent on the use of the Internet as an
advertising medium. The Internet advertising industry is new and rapidly
evolving, and it cannot yet be compared with traditional advertising media
to gauge its effectiveness. As a result, demand and market acceptance for
Internet advertising solutions is uncertain and its growth in recent months
has slowed significantly. Most of our current or potential advertising
customers have little or no experience using the Internet for advertising
purposes and they have allocated only a limited portion of their
advertising budgets to Internet advertising. The adoption of Internet
advertising, particularly by those entities that have historically relied
upon traditional media for advertising, requires the acceptance of a new
way of conducting business, exchanging information and advertising products
and services. These customers may find Internet advertising to be less
effective for promoting their products and services relative to traditional
advertising media. In addition, most of our current and potential web
publisher customers have little experience in generating revenue from the
sale of advertising space on their web sites. We cannot assure you that
current or potential advertising customers will continue to allocate a
portion of their advertising budget to Internet advertising or that the
demand for Internet advertising will continue to develop to sufficiently
support Internet advertising as a significant advertising medium. If the
demand for Internet advertising develops more slowly than we expect, then
our business, results of operations and financial condition could be
materially and adversely affected.
No standards have been widely accepted to measure the
effectiveness of web advertising. If standards do not develop, existing
advertisers may not continue or increase their levels of web advertising.
If standards develop and we are unable to meet these standards, advertisers
may not continue advertising on our site. Furthermore, advertisers that
have traditionally relied upon other advertising media may be reluctant to
advertise on the web. Our business, results of operations and financial
condition could be materially adversely affected if the market for web
advertising declines or develops more slowly than expected.
Different pricing models are used to sell advertising on the web.
It is difficult to predict which, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future
advertising rates and revenues. We cannot assure you that we will be
successful under alternative pricing models that may emerge. Moreover,
"filter" software programs that limit or prevent advertising from being
delivered to a web user's computer are available. Widespread adoption of
this software could materially adversely affect the commercial viability of
web advertising, which could materially adversely affect our advertising
revenues. In addition, some Internet commentators, privacy advocates and
federal and state officials have recently suggested that legislation may be
needed to better safeguard online privacy, by the limitation or elimination
of the use of cookies or by other methods. If such legislation is passed,
it is likely to restrict the ability of online advertisers to target their
ads, which may result in a decrease in online advertising rates or online
advertising spending generally. Such a decrease could materially adversely
affect our advertising revenues.
We also derive advertising revenues from email services, which
exposes us to potential liabilities or claims resulting from unsolicited
email, lost or misdirected messages, illegal or fraudulent use of email,
privacy violations or interruptions or delays in email service. Any
allegation of impropriety or any successful claim could materially
adversely affect our business, results of operations and financial
condition.
We compete with other web sites, television, radio and print media
for a share of advertisers' total advertising budgets. If advertisers
perceive the web in general or our web sites in particular to be a limited
or an ineffective advertising medium, they may be reluctant to devote a
portion of their advertising budget to online advertising or to advertising
on our web sites.
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Government Regulation And Legal Uncertainties Relating To The Web Could
Increase Our Costs Of Transmitting Data And Increase Our Legal And
Regulatory Expenditures And Could Decrease Our Readership
Existing domestic and international laws or regulations and
private industry guidelines specifically regulate communications or
commerce on the web. Further, laws and regulations that address issues such
as user privacy, pricing, online content regulation, taxation of e-commerce
transactions and the characteristics and quality of online products and
services are under consideration by federal, state, local and foreign
governments and agencies and by private industry groups. Several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services
providers in a manner similar to the regulation of long distance telephone
carriers and to impose access fees on such companies. The governments of
other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities.
These regulations, if imposed, could increase the cost of transmitting data
over the web.
In addition, the growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws, both
in the United States and abroad, that may impose additional burdens on
companies conducting business over the Internet. Our business, results of
operations and financial condition could be materially and adversely
affected by the adoption or modification of laws or regulations relating to
the Internet.
The interpretation and application of existing securities laws to
web-based financial news providers, including laws governing investment
advisors, investment companies and broker/dealers, by the Securities and
Exchange Commission and state securities regulators, is a developing area.
If, as this area matures, our activity is interpreted as subjecting us to
regulation, we could be subject to liability, and our business, results of
operations and financial condition could be materially and adversely
affected.
We are also subject to various federal and state regulations
concerning the collection and use of information regarding individuals.
These laws include the Children's Online Privacy Protection Act, and state
laws which limit or preclude the use of voter registration and drivers
license information, as well as other laws that govern the collection and
use of consumer credit and financial information, including the
Gramm-Leach-Bliley Act. Although our compliance with applicable federal and
state laws, regulations and industry guidelines has not had a material
adverse effect on us, governments, trade associations and industry
self-regulatory groups may enact more burdensome laws, regulations and
guidelines, including antitrust and consumer privacy laws, for us and our
clients. The U.S. federal and various state governments have been
investigating certain Internet companies regarding their use of personal
information and have recently proposed limitations on the collection and
use of information regarding Internet users. The European Union has enacted
its own privacy regulations that may result in limits on the collection and
use of certain information from users in Europe. We could incur additional
expenses if any new regulations regarding the use of personal information
are introduced or if these agencies chose to investigate our privacy
practices. Also, as a consequence of governmental legislation or regulation
or enforcement efforts or evolving standards of fair information collection
practices, we may be required to make changes to our products or services
in ways that could diminish the effectiveness of the product or service or
its attractiveness to potential customers, which could materially and
adversely affect our business, financial condition or results of
operations. Any new laws or regulations relating to the web, or certain
application or interpretation of existing laws, could decrease the growth
in the use of the web, decrease the demand for our web sites or otherwise
materially adversely affect our business.
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Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent, and
new laws and regulations are under consideration by the U.S. Congress and
state legislatures. Any legislation enacted or restrictions arising from
current or future government investigations or policy could dampen the
growth in use of the Internet generally and decrease the acceptance of the
Internet as a communications, commercial and advertising medium. The laws
governing the Internet remain largely unsettled, even in areas where there
has been some legislative action. Moreover, it may take years to determine
the extent to which existing laws relating to issues such as intellectual
property ownership and infringement, libel, obscenity and personal privacy
apply to the Internet and Internet advertising.
Concerns About Web Security Could Reduce Our Advertising Revenues, Decrease
Our Reader Base And Increase Our Web Security Expenditures
Concern about the transmission of confidential information over
the Internet has been a significant barrier to electronic commerce and
communications over the web. Any well-publicized compromise of security
could deter more people from using the web or from using it to conduct
transactions that involve the transmission of confidential information,
such as signing up for a paid subscription, executing stock trades or
purchasing goods or services. Because many of our advertisers seek to
advertise on our web sites to encourage people to use the web to purchase
goods or services, our business, results of operations and financial
condition could be materially adversely affected if Internet users
significantly reduce their use of the web because of security concerns. We
may also incur significant costs to protect ourselves against the threat of
security breaches or to alleviate problems caused by these breaches.
Control By Principal Stockholders, Officers And Directors Could Adversely
Affect Our Stockholders
Our officers, directors and greater-than-five-percent stockholders
(and their affiliates), acting together, have the ability to control
substantially all matters submitted to our stockholders for approval
(including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets) and to
control our management and affairs. Accordingly, this concentration of
ownership may have the effect of delaying, deferring or preventing a change
in control of us, impeding a merger, consolidation, takeover or other
business combination involving us or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us,
which in turn could materially adversely affect the market price of the
common stock.
Volatility Of Our Stock Price Could Adversely Affect Our Stockholders
The stock market has experienced significant price and volume
fluctuations and the market prices of securities of technology companies,
particularly Internet- related companies, have been highly volatile. The
trading price of our stock has been and may continue to be subject to wide
fluctuations. From April 1, 2001 through June 30, 2001, the closing sale
price of our common stock on the Nasdaq National Market ranged from $2.625
to $1.24. As of August 10, 2001, the closing sale price was $1.23. Our
stock price may fluctuate in response to a number of events and factors,
such as quarterly variations in operating results, announcements of
technological innovations or new products and media properties by us or our
competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable, and news reports relating to
trends in our markets. In addition, the stock market in general, and the
market prices for Internet-related companies in particular, have
experienced extreme volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our common stock, regardless
of our operating performance.
23
Anti-Takeover Provisions Could Prevent Or Delay A Change Of Control
Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws and Delaware law could make
it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders.
We Do Not Intend To Pay Dividends
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for funding growth
and, therefore, do not expect to pay any dividends in the foreseeable
future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 3, 2001, AremisSoft Corporation ("AremisSoft") filed a
complaint in the U.S. District Court for the Northern District of
California against TheStreet.com, West Highland Capital, Inc., J. David
Scially, Michael Wilkens, Wells Fargo Van Kasper LLC, Martin Svanda, Apex
Capital LLC and Rocker Partners L.P. The complaint alleges that, in concert
with the other defendants, we published false, defamatory statements about
AremisSoft and conspired to disseminate such statements in order to
facilitate profitable short sales of AremisSoft's stock. The complaint
contains four causes of action and asks for unspecified damages including
compensatory damages, special damages, disgorgement of wrongful profits,
injunctive relief, punitive damages and attorneys' fees and costs.
TheStreet.com believes that the allegations contained in
AremisSoft's complaint are unfounded, lack evidentiary support and that the
claims and legal contentions in the complaint are not warranted under the
law, and intends to defend against the lawsuit vigorously.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
The following matters were submitted to a vote at the annual
meeting of stockholders of the Company, held on June 26, 2001:
(i) the election of James M. Meyer and Darryl Otte as Class II
directors of the Company, to serve until the annual meeting in 2004; (votes
for 18,487,373 and 18,979,765, respectively)
(ii) the ratification of the appointment of Arthur Andersen LLP
as our independent certified public accountants for the fiscal year ending
December 31, 2001; (votes for: 19,044,136; votes against: 57,396;
abstained: 1,796)
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Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
*3.1 .........Amended and Restated Certificate of Incorporation
**3.2 .........Amended and Restated Bylaws
*4.1 .........Amended and Restated Registration Rights Agreement, dated as of
December 21, 1998 among TheStreet.com and the stockholders named
therein
*4.2 .........The Street.com Rights Agreement
*4.3 .........Amendment No. 1, dated as of August 7, 2000, to Rights Agreement
+4.4 .........Amended and Restated 1998 Stock Incentive Plan
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the Quarter Ended June 30, 2001.
* Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-1 dated
February 23, 1999 (File No. 333-72799).
** Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K dated
March 30, 2000 (File No. 0-25779).
+ Incorporated by reference to Exhibits to the Company's Annual Report on Form 10-K dated
March 30, 2001 (File No. 0-25779).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TheStreet.com, Inc.
(Registrant)
Date: August 14, 2001 By: /s/ Thomas J. Clarke, Jr.
-------------------------
Name: Thomas J. Clarke, Jr.
Title: Chief Executive Officer
Date: August 14, 2001 By: /s/ Lisa A. Mogensen
-------------------------
Name: Lisa A. Mogensen
Title: Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
*3.1 Amended and Restated Certificate of Incorporation
**3.2 Amended and Restated Bylaws
*4.1 Amended and Restated Registration Rights Agreement, dated as
of December 21, 1998 among TheStreet.com and the stockholders
named therein
*4.2 The Street.com Rights Agreement
*4.3 Amendment No. 1, dated as of August 7, 2000, to Rights
Agreement
+4.4 Amended and Restated 1998 Stock Incentive Plan
* Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 dated February 23, 1999
(File No. 333-72799).
** Incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10-K dated March 30, 2000 (File No.
0-25779)
+ Incorporated by reference to Exhibits to the Company's Annual
Report on Form 10-K dated March 30, 2001 (File No. 0-25779).
27