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 September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25779
TheStreet.com, Inc.
-------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1515824
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 November 9, 2001:
Common Stock, par value $0.01 per share 23,502,259
- --------------------------------------- ----------
(Class) (Number of Shares)
TheStreet.com, Inc.
Form 10-Q
For the Nine Months Ended September 30, 2001
Part I - FINANCIAL INFORMATION.....................................................................................1
Item 1. Condensed Consolidated Financial Statements......................................................1
Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.............1
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2001 and 2000................................................................2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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........................................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................15
PART II - OTHER INFORMATION.......................................................................................26
Item 1. Legal Proceedings...............................................................................26
Item 2. Changes in Securities and Use of Proceeds.......................................................26
Item 3. Defaults Upon Senior Securities.................................................................26
Item 4. Submission of Matters to a Vote of Security Holders.............................................26
Item 5. Other Information...............................................................................26
Item 6. Exhibits and Reports on Form 8-K................................................................27
SIGNATURES........................................................................................................28
ii
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THESTREET.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
September 30, 2001 December 31, 2000
------------------------------------------------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 29,282,628 $ 46,339,561
Short-term investments 6,523,192 25,820,764
Accounts receivable, net of allowance for doubtful
accounts of $736,720 as of September 30, 2001 and
$749,159 as of December 31, 2000 1,079,100 4,009,132
Other receivables 1,964,295 707,266
Receivable from related party 311,188 160,000
Prepaid expenses and other current assets 2,015,537 2,881,815
Net current assets of discontinued operations 45,943 1,841,980
------------------------------------------------------
Total current assets 41,221,883 81,760,518
Property and equipment, net of accumulated
depreciation and amortization of $5,271,249
as of September 30, 2001
and $3,165,598 as of December 31, 2000 6,553,690 10,278,567
Other assets 771,186 779,559
Goodwill and intangibles, net of accumulated
amortization of $1,352,285 as of September 30,
2001 and $50,000
as of December 31, 2000 3,856,854 4,913,386
Investment in held to maturity securities 4,027,386 -
Long-term investments 2,250,000 2,250,000
Non-current assets of discontinued operations - 426,218
------------------------------------------------------
Total assets $ 58,680,999 $ 100,408,248
======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,067,879 $ 3,118,661
Accrued expenses 4,974,795 12,266,857
Restructuring reserve 2,698,059 6,485,125
Deferred revenue 3,774,067 3,896,884
Other current liabilities 319,214 1,264,607
------------------------------------------------------
Total current liabilities 13,834,014 27,032,134
Deferred rent 1,808,553 1,995,645
------------------------------------------------------
Total liabilities 15,642,567 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; 28,323,883 shares issued and 23,697,351
shares outstanding at September 30, 2001, and
28,074,483 shares issued and outstanding at
December 31, 2000 283,239 280,745
Additional paid-in capital 183,030,848 182,888,343
Deferred compensation (1,254,419) (2,149,572)
Accumulated deficit (132,653,791) (109,639,047)
Treasury stock at cost; 4,626,532 shares (6,367,445) -
------------------------------------------------------
Total stockholders' equity 43,038,432 71,380,469
------------------------------------------------------
Total liabilities and stockholders' equity $ 58,680,999 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Net revenues:
Advertising & e-commerce revenues $ 913,736 $ 2,794,878 $ 3,974,274 $ 9,324,593
Subscription revenues 2,328,101 2,111,364 6,465,479 6,276,261
Other revenues 212,083 407,653 976,181 1,437,433
----------------------------------------------------------------------
Total net revenues 3,453,920 5,313,895 11,415,934 17,038,287
Cost of revenues 1,980,622 3,416,081 7,077,052 10,242,432
----------------------------------------------------------------------
Gross profit 1,473,298 1,897,814 4,338,882 6,795,855
----------------------------------------------------------------------
Operating expenses:
Product development expenses 2,850,952 2,761,053 8,235,204 10,349,127
Sales and marketing expenses 2,575,220 5,394,951 9,052,201 18,096,005
General and administrative expenses 2,196,924 2,167,155 8,357,737 10,040,296
Noncash compensation expense 430,768 276,660 878,922 1,103,045
Restructuring expenses 182,035 - (717,089) -
Settlement charge 2,535,660 - 2,535,660 -
Severance expense - - 971,668 -
----------------------------------------------------------------------
Total operating expenses 10,771,559 10,599,819 29,314,303 39,588,473
----------------------------------------------------------------------
Loss from continuing operations (9,298,261) (8,702,005) (24,975,421) (32,792,618)
Interest income 417,526 1,400,711 1,960,677 4,332,004
----------------------------------------------------------------------
Net loss from continuing
operations (8,880,735) (7,301,294) (23,014,744) (28,460,614)
Loss from discontinued operations - (2,329,342) - (8,875,996)
----------------------------------------------------------------------
Net loss $ (8,880,735) $ (9,630,636) $ (23,014,744) $ (37,336,610)
======================================================================
Net loss per share - basic and diluted:
Continuing operations $ (0.35) $ (0.28) $ (0.86) $ (1.11)
Discontinued operations - (0.09) - (0.35)
----------------------------------------------------------------------
Net loss $ (0.35) $ (0.37) $ (0.86) $ (1.46)
======================================================================
Weighted average basic and diluted
shares outstanding 25,191,797 26,268,851 26,873,177 25,656,735
======================================================================
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 Nine Months Ended September 30,
-----------------------------------------
2001 2000
-----------------------------------------
Cash Flows from Operating Activities:
Net Loss $ (23,014,744) $ (37,336,610)
Adjustments to reconcile net loss to cash used in
operating activities, net of acquired businesses:
Noncash compensation expense 878,922 1,103,045
Noncash advertising expense - 1,009,817
Provision for doubtful accounts 362,582 548,479
Minority interest - (4,162,888)
Depreciation and amortization 3,839,868 2,290,899
Decrease (Increase) in accounts receivable 2,560,450 (1,151,690)
(Increase) decrease in other receivables (315,175) 1,248,524
Increase in receivable from related party (151,188) -
Decrease (increase) in prepaid expenses and other current assets 866,278 (2,413,179)
Decrease (increase) in net current assets of discontinued
operations 1,796,037 (111,506)
(Increase) decrease in other assets (185,646) 42,989
Decrease (increase) in non-current assets of discontinued
operations 426,218 (1,457,539)
(Decrease) increase in accounts payable and accrued expenses (2,865,273) 5,192,604
Decrease in restructuring reserve (1,657,782) -
(Decrease) increase in deferred revenue (283,172) 1,482,471
(Decrease) increase in other current liabilities (945,393) 959,072
Increase in deferred rent - 149,524
-----------------------------------------
Net cash used in operating activities (18,688,018) (32,605,988)
-----------------------------------------
Cash Flows from Investing Activities:
Purchase of short-term investments (8,744,216) (51,285,484)
Sale of short-term investments 28,041,788 33,390,000
Purchase of investment in held to maturity securities (6,051,786) -
Sale of investment in held to maturity securities 2,024,400 -
Loans to Business Net Online Ltd. (941,854) -
Capital expenditures (935,064) (4,990,788)
Acquisition of business, net of cash acquired (5,400,000) (250,000)
-----------------------------------------
Net cash provided by (used in) investing activities 7,993,268 (23,136,272)
-----------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 5,262 7,313,572
Purchase of treasury stock (6,367,445) -
Proceeds from sale/leaseback - 2,388,239
Repayments under sale/leaseback - (383,138)
-----------------------------------------
Net cash (used in) provided by financing activities (6,362,183) 9,318,673
-----------------------------------------
Effect of exchange rate on changes in cash - (738,687)
-----------------------------------------
Net decrease in cash (17,056,933) (47,162,274)
Cash and cash equivalents, beginning of period 46,339,561 108,239,811
-----------------------------------------
Cash and cash equivalents, end of period $ 29,282,628 $ 61,077,537
=========================================
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 consolidated statements.
3
TheStreet.com, Inc.
Notes to Condensed Consolidated Financial Statements
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Business
TheStreet.com, Inc. (the "Company" or "TheStreet.com") is a
leading multimedia provider of original, timely, insightful and trustworthy
financial commentary, analysis and news. The Company's content is available
across diverse product offerings, including the Internet, print media,
books and conferences. The Company's staff of more than 50 professional
reporters and editors, together with approximately 25 outside contributors,
produce more than 50 original news, analysis and commentary pieces each
business day that are aimed at helping readers of the Company's web sites
and other products make informed investment decisions.
The Company has developed a loyal audience of investors at various
experience levels who turn to its product offerings for all their financial
and investing information needs. In addition, the Company has important
strategic relationships with leading companies in the media, technology and
financial services sectors that also help the Company to create brand
awareness and increase subscription and advertising revenues.
Basis of Presentation
The information presented as of September 30, 2001 and 2000, and
for the three and nine 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 the Company considers necessary for the fair
presentation of its financial position as of September 30, 2001, the
results of its operations for the three and nine month periods ended
September 30, 2001 and 2000, and its cash flows for the nine month periods
ended September 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 the Company's audited financial
statements and accompanying notes for the year ended December 31, 2000,
included in the Company's 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 its 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.
4
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.
Diluted net loss per share is calculated by dividing net loss attributable
to common shareholders by the weighted average number of common shares
outstanding, adjusted for potentially dilutive securities. Diluted net loss
per share is identical to basic net loss per share since all outstanding
stock options and warrants were excluded from the calculation as their
effect is antidilutive.
3. INVESTMENT IN HELD TO MATURITY SECURITIES
As of September 30, 2001, the Company owns $4,027,386 of
Government Agency Notes bearing interest ranging from 4.07% to 4.48%, with
a maturity range of 404 to 684 days. Management's intention is to hold
these securities until maturity. Held to maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity.
4. TREASURY STOCK
In December 2000, the Company's Board of Directors authorized the
repurchase of up to $10 million worth of the Company's common stock, in
private purchases or in the open market. Under this program, the Company
has purchased 4,626,532 shares of common stock at an aggregate cost of
$6,367,445 as of September 30, 2001.
5. RESTRUCTURING
During the year ended December 31, 2000, the Company recorded
restructuring expenses of $17,575,522. These restructuring charges were
taken to align the 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 following table displays the activity and balances of the
restructuring reserve account from inception to September 30, 2001:
Initial 4 Qtr 2000 Balance 1 Qtr 2001 Activity Balance
Charge Deductions 12/31/00 Deductions Adjustments 03/31/01
----------------------------------------------------------------------------
Headcount reductions $ 478,278 $ (478,278) $ 0 $ 0 $ 0 $ 0
Consolidation of
facilities and
reduction in
non-performing
assets 3,695,648 (1,643,896) 2,051,752 (904) 2,050,848
Extinguishment of
marketing and
technology related
contracts 13,401,596 (8,968,223) 4,433,373 (529,476) (524,124) 3,379,773
----------------------------------------------------------------------------
$17,575,522 $(11,090,397) $6,485,125 $(530,380) $(524,124) $5,430,621
============================================================================
(Chart Continued)
2 Qtr 2001 Activity Balance 3 Qtr 2001 Activity Balance
Deductions Adjustments 06/30/01 Deductions Adjustments 09/30/01
-----------------------------------------------------------------------------
Headcount reductions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Consolidation of
facilities and
reduction in
non-performing
assets (95,756) 1,955,092 (2,453,442) 212,035 (286,315)
Extinguishment of
marketing and
technology related
contracts (375,000) 3,004,773 9,601 (30,000) 2,984,374
-----------------------------------------------------------------------------
$(95,756) $(375,000) $4,959,865 $(2,443,841) $182,035 $2,698,059
==============================================================================
5
The above deductions from reserve primarily represent write-offs
of previously capitalized costs and cash payments. The above adjustments
primarily represent revisions to the Company's original estimates based on
negotiated settlements.
6. SETTLEMENT CHARGE
For the three months ended September 30, 2001, the Company
recognized a settlement charge of $2,535,660 in connection with the
termination of a strategic alliance agreement with Go2Net, Inc., now a
subsidiary of Infospace, Inc. The companies agreed to an early termination
of the agreement, which had obligated the Company to pay to Go2Net a total
of $7.5 million over a three-year period beginning in August 2000, when the
agreement was signed in connection with a $7.5 million investment in the
Company by Go2Net and Vulcan Ventures.
7. DISCONTINUED OPERATIONS
In November 2000, the Company's Board of Directors decided to
discontinue its 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 September 30, 2001, the fair market value of the remaining
assets was $45,943, consisting of a VAT tax refund receivable.
8. NONCASH COMPENSATION EXPENSE
During the three months ended September 30, 2001, the Company
issued 100,000 shares of common stock to James J. Cramer in connection with
a previously announced award of restricted stock in lieu of his salary
under his employment agreement with the Company. The shares were valued at
$287,500 based upon the fair market value at the date of the award and are
recorded as noncash compensation expense in the accompanying Statement of
Operations over the term (1 year).
9. 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 its 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.
6
10. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", as amended.
SFAS No. 133 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.
11. 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 the Company's 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 the Company on the date hereof, and the Company assumes 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.
Overview
TheStreet.com is a leading multimedia provider of original,
timely, insightful and trustworthy financial commentary, analysis and news.
The Company's content is available across diverse product offerings,
including the Internet, print media, books and conferences. The Company was
originally
7
organized as a limited liability company in June 1996. In May
1998, the Company converted to a C corporation, incorporated in Delaware,
and in May 1999, the Company completed its initial public offering.
The Company has developed a loyal audience of investors at various
experience levels who turn to its product offerings for all their financial
and investing information needs. In addition, the Company has important
strategic relationships with leading companies that also help to create
brand awareness and increase subscription and advertising revenues.
Results of Operations
In November 2000, the Company's Board of Directors decided to
discontinue its 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
During the third quarter ended September 30, 2001, the Company
developed and launched the following subscription-based products:
o The Chartman's Top Stocks - This product contains exclusive
stock charting analysis from columnist Gary B. Smith and is
emailed to subscribers every evening.
o TheStreet(TM)Notes - This product is a daily summary of
analyst actions and comments. The Company expects to convert
this product into a premium product after the conclusion of
its introductory free-trial period.
o TheStreet.com's Era of Value - This is a bi-weekly product
which includes analysis of individual value stocks and a
continually updated model portfolio of value investments.
Results Of Operations
Three Months Ended September 30, 2001 And September 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 $913,736 for
the three months ended September 30, 2001, as compared to $2,794,878 for
the three months ended September 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 three months ended September 30, 2001, 35% of the
Company's advertising and e-commerce revenues were derived from sponsorship
contracts, as compared to 66% for the three months ended September 30,
2000. The number of the Company's advertisers for the three months ended
September 30, 2001 was 43, as compared to 85 for the three months ended
September 30, 2000. For the three months ended September 30, 2001, the
Company's top five advertisers accounted for approximately 41% of its total
advertising and e-commerce revenues, as compared to approximately 36% for
the three months ended September 30, 2000.
8
Subscription Revenues. Subscription revenues are derived from
annual, semi-annual, quarterly and monthly subscriptions. Subscription
revenues totaled $2,328,101 for the three months ended September 30, 2001,
as compared to $2,111,364 for the three months ended September 30, 2000.
This increase is primarily the result of the launch of several new
subscription-based products, such as TheStreet(TM)View for Hedge Funds,
Action Alerts PLUS and The Chartman's Top Stocks, as well as subscription
revenue associated with SmartPortfolio.com, which was acquired in December
2000, partially offset by decreased subscription revenue associated with
the Company's RealMoney.com web site. For the three months ended September
30, 2001, approximately 71% of the Company's net subscription revenue was
derived from annual subscriptions, as compared to approximately 80% for the
three months ended September 30, 2000. The Company calculates net
subscription revenues by deducting cancellation chargebacks and refunds
from gross revenues. During the three months ended September 30, 2001,
cancellation chargebacks and refunds approximated 8% of gross subscription
revenues.
The Company's subscriber base has decreased to approximately
76,000 annual and monthly subscribers as of September 30, 2001 (not
including free trials, but including subscribers paid for as part of bulk
subscription contracts), as compared to approximately 93,000 as of
September 30, 2000. This decrease is primarily the result of the increase
in the subscription price of the Company's RealMoney.com web site,
introduced in June 2000. The Company anticipates that the decline in its
subscriber level caused by the increased subscription price will stabilize
in the future, as nearly all of the lower priced annual subscriptions have
now come up for renewal at the higher price.
Other Revenues. Other revenues are primarily derived from
syndication revenues, conference attendees, reprint revenues, and barter
arrangements. Other revenues decreased to $212,083 for the three months
ended September 30, 2001, as compared to $407,653 for the three months
ended September 30, 2000. This decrease is primarily the result of the
absence of revenue associated with barter arrangements with online and
print media companies, as well as reduced conference attendee revenue and
video tape sales, partially offset by increased syndication revenue. 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 $1,980,622 for three
months ended September 30, 2001, as compared to $3,416,081 for the three
months ended September 30, 2000. This decrease is primarily the result of
reductions within the Company's editorial staff to 53 employees as of
September 30, 2001, as compared to 91 as of September 30, 2000, as well as
decreased costs associated with the use of outside contributors.
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 increased to $2,850,952 for the three months
ended September 30, 2001, as compared to $2,761,053 for the three months
ended September 30, 2000. This increase is primarily the result of higher
depreciation and amortization expenses related to equipment purchased to
meet the demands of the increased traffic related to the conversion of the
Company's
9
subscription-based TheStreet.com web site to a completely free,
advertising-supported site, accompanied by RealMoney.com, a new
subscription-based site, and equipment from the Company's acquisition of
SmartPortfolio.com, Inc. in late December 2000. This increase was partially
offset by reductions within the Company's technology and product
development staff to 34 employees as of September 30, 2001, as compared to
48 employees as of September 30, 2000, resulting in reduced compensation
and related expenses, reduced consulting fees that were incurred in 2000 as
a result of the expansion of the Company' capacity to handle the increased
traffic and the creation of the RealMoney.com site, and lower hosting fees
as a result of renegotiated and/or terminated agreements.
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 the Company's direct sales force and customer service department. Sales
and marketing expenses decreased to $2,575,220 for the three months ended
September 30, 2001, as compared to $5,394,951 for the three months ended
September 30, 2000. This decrease is primarily the result of reduced
advertising and promotion expenses resulting from the Company's strategy of
decreasing non-web based advertising, the absence of expense associated
with barter arrangements with online and print media companies, as well as
a reduction in the Company's sales and marketing staff to 36 employees as
of September 30, 2001, as compared to 62 as of September 30, 2000,
partially offset by increased content distribution fees.
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 totaled $2,196,924 for the three
months ended September 30, 2001, as compared to $2,167,155 for the three
months ended September 30, 2000. This change is primarily the result of
increased professional fees, bad debt expense, and insurance costs, as well
as additional goodwill amortization related to the Company's acquisition of
SmartPortfolio.com, Inc. in December 2000, partially offset by lower
occupancy costs and depreciation expense in connection with the Company's
reduction in its lease obligation related to its New York office.
Noncash Compensation Expense
In 1998, and the first three months of 1999, the Company granted
options to purchase shares of its 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. Additionally, during the
three months ended September 30, 2001, the Company issued 100,000 shares of
common stock to James J. Cramer in connection with a previously announced
award of restricted stock in lieu of his salary under his employment
agreement with the Company. This results in additional noncash compensation
expense over the term (1 year). Noncash compensation expense increased to
$430,768 for the three months ended September 30, 2001, as compared to
$276,660 for the three months ended September 30, 2000. This increase was
primarily the result of the additional charge related to the stock issued
in connection with the employment agreement, partially offset by the
resignations of certain individuals from the Company during the past year,
which has the effect of decreasing the noncash compensation expense
incurred in each future quarter. The remaining noncash compensation expense
for 2001 is currently estimated to be approximately $284,916.
10
Restructuring Expenses
During the year ended December 31, 2000, the Company recorded
restructuring expenses to align the 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
$182,035 for the three months ended September 30, 2001 primarily represents
adjustments to the Company's original estimates related to the reduction of
its lease obligation and non-performing assets.
Settlement Charge
For the three months ended September 30, 2001, the Company
recognized a settlement charge of $2,535,660 in connection with the
termination of a strategic alliance agreement with Go2Net, Inc., now a
subsidiary of Infospace, Inc. The companies agreed to an early termination
of the agreement, which had obligated the Company to pay to Go2Net a total
of $7.5 million over a three-year period beginning in August 2000, when the
agreement was signed in connection with a $7.5 million investment in the
Company by Go2Net and Vulcan Ventures.
Interest Income
For the three months ended September 30, 2001, interest income was
$417,526, as compared to $1,400,711 for the three months ended September
30, 2000. This decrease is the result of reduced cash balances and lower
interest rates.
Loss From Discontinued Operations
In November 2000, the Company's Board of Directors decided to
discontinue the Company's 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 September 30, 2001, there was no loss
from discontinued operations, as compared to the net effect of a loss of
$2,329,342 for the three months ended September 30, 2000, while the U.K.
company was in operation. No additional loss amounts were recorded for the
three months ended September 30, 2001 because the Company believes 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 September 30, 2001, the book value of the remaining current
assets of the discontinued operations was $45,943. There were no remaining
non-current assets.
Nine Months Ended September 30, 2001 And September 30, 2000
Net Revenues
Advertising & E-Commerce Revenues. Advertising and e-commerce
revenues decreased to $3,974,274 for the nine
11
months ended September 30,
2001, as compared to $9,324,593 for the nine months ended September 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 nine months ended
September 30, 2001, 33% of the Company's advertising and e-commerce
revenues were derived from sponsorship contracts, as compared to 57% for
the nine months ended September 30, 2000. The number of the Company's
advertisers for the nine months ended September 30, 2001 was 114, as
compared to 190 for the nine months ended September 30, 2000. For the nine
months ended September 30, 2001, the Company's top five advertisers
accounted for approximately 35% of its total advertising and e-commerce
revenues, as compared to approximately 26% for the nine months ended
September 30, 2000.
Subscription Revenues. Subscription revenues increased to
$6,465,479 for the nine months ended September 30, 2001, as compared to
$6,276,261 for the nine months ended September 30, 2000. This increase is
primarily the result of the launch of several new subscription-based
products, such as TheStreet(TM)View for Hedge Funds, Action Alerts PLUS and
The Chartman's Top Stocks, as well as subscription revenue associated with
SmartPortfolio.com, which was acquired in December 2000, partially offset
by decreased subscription revenue associated with the Company's
RealMoney.com web site. For the nine months ended September 30, 2001,
approximately 75% of the Company's net subscription revenue was derived
from annual subscriptions, as compared to approximately 80% for the nine
months ended September 30, 2000. The Company calculates net subscription
revenues by deducting cancellation chargebacks and refunds from gross
revenues. During the nine months ended September 30, 2001, cancellation
chargebacks and refunds approximated 19% of gross subscription revenues.
Other Revenues. Other revenues decreased to $976,181 for the nine
months ended September 30, 2001, as compared to $1,437,433 for the nine
months ended September 30, 2000. This decrease is primarily the result of
fewer barter arrangements with online and print media companies, the
absence of revenues associated with TheStreet.com television show, and
reduced conference attendee revenue and video tape sales, partially offset
by increased syndication revenue, and royalties from the Company's
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 $7,077,052 for nine months ended
September 30, 2001, as compared to $10,242,432 for the nine months ended
September 30, 2000. This decrease is primarily the result of reductions
within the Company's editorial staff to 53 employees of September 30, 2001,
as compared to 91 as of September 30, 2000.
Product Development Expenses
Product development expenses decreased to $8,235,204 for the nine
months ended September 30, 2001, as compared to $10,349,127 for the nine
months ended September 30, 2000. This decrease is primarily the result of
reduced consulting fees that were incurred in 2000 as a result of the
expansion of the Company's capacity to handle the increase in traffic
related to the conversion of its 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 the Company's technology and product development staff to 34
employees as of September 30, 2001, as compared to 48 employees as of
September 30, 2000, resulted in reduced compensation and related expenses.
These savings were partially
12
offset by increased depreciation and
amortization expenses related to equipment purchased to meet the demands of
the increased traffic, as well as equipment from the Company's acquisition
of SmartPortfolio.com, Inc. in late December 2000.
Sales And Marketing Expenses
Sales and marketing expenses decreased to $9,052,201 for the nine
months ended September 30, 2001, as compared to $18,096,005 for the nine
months ended September 30, 2000. This decrease is primarily the result of
reduced advertising and promotion expenses resulting from the Company's
strategy of decreasing non-web based advertising, the absence of expense
associated with barter arrangements with online and print media companies,
as well as a reduction in the Company's sales and marketing staff to 36
employees as of September 30, 2001, as compared to 62 as of September 30,
2000.
General And Administrative Expenses
General and administrative expenses decreased to $8,357,737 for the
nine months ended September 30, 2001, as compared to $10,040,296 for the
nine months ended September 30, 2000. This decrease is primarily the result
of reduced occupancy costs in connection with the Company's reduction in
its lease obligation related to its New York office, lower compensation and
related expenses, reduced outside counsel fees that were incurred in 2000
in connection with the cancellation of TheStreet.com television show in May
2000, and lower bad debt expense, partially offset by increased goodwill
amortization related to the Company's acquisition of SmartPortfolio.com,
Inc. in December 2000.
Noncash Compensation Expense
Noncash compensation expense decreased to $878,922 for the nine
months ended September 30, 2001, as compared to $1,103,045 for the nine
months ended September 30, 2000. The Company estimates that this expense
will total approximately $1,200,000 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, the Company recorded
restructuring expenses to align the cost structure with changing market
conditions and decreased dependence on the advertising market to create a
more flexible and efficient organization. For the nine months ended
September 30, 2001, the Company recorded a gain of $717,089 which primarily
represents adjustments to the Company's original estimates related to
negotiated settlements for less than the amounts initially estimated, and
the reduction of its lease obligation and non-performing assets.
Settlement Charge
For the nine months ended September 30, 2001, the Company
recognized a settlement charge of $2,535,660 in connection with the termination
of a strategic alliance agreement with Go2Net, Inc., now a subsidiary
of Infospace, Inc. The companies agreed to an early termination of the
agreement, which had obligated the Company to pay to Go2Net a total of $7.5
million over a three-year period beginning in August 2000, when the
agreement was signed in connection with a $7.5 million investment in the
Company by Go2Net and Vulcan Ventures.
13
Interest Income
For the nine months ended September 30, 2001, interest income was
$1,960,677, as compared to $4,332,004 for the nine months ended September
30, 2000. This decrease is the result of reduced cash balances and lower
interest rates.
Loss From Discontinued Operations
For the nine months ended September 30, 2001, there was no loss
from discontinued operations, as compared to the net effect of a loss of
$8,875,996 for the nine months ended September 30, 2000, while the U.K.
company was in operation. No additional loss amounts were recorded for the
nine months ended September 30, 2001 because the Company believes 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
The Company currently invests 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 September
30, 2001, the Company's cash and cash equivalents, short-term investments
and investment in held-to-maturity securities amounted to $39,833,206,
representing 68% of total assets.
Net cash used in operating activities of $18,688,018 for the nine
months ended September 30, 2001 was primarily due to a net loss of
$23,014,744, offset by noncash charges, decreases in accounts receivable,
prepaid expenses and other current assets, net current assets of
discontinued operations, and non-current assets of discontinued operations,
partially offset by decreases in accounts payable and accrued expenses,
restructuring reserve and other current liabilities.
Net cash provided by investing activities of $7,993,268 for the
nine months ended September 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, net
purchases of investment in held to maturity securities, 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 $6,362,183 for the nine
months ended September 30, 2001 consisted primarily of the purchase of
treasury stock.
The Company believes that its current cash and cash equivalents,
short-term investments and investment in a held-to-maturity security will
be sufficient to meet the Company's anticipated cash needs for at least the
next 12 months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company
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 the Company, or at all. Strategic relationships, if necessary to raise
additional funds, may require the Company to provide rights to certain of
its content. The failure to raise capital when needed could materially
adversely affect the Company's business, results of operations
14
and
financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the Company's then-current
stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to those of the Company's
common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company believes that its market risk exposures are immaterial
as the Company does 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. The Company may also face some non-material risks
which the Company has not discussed in the following description of its
risk factors. If any of the following risks occur, the Company's business,
results of operations or financial condition could be materially adversely
affected.
The Company Has a History of Losses, and Although The Company Has
Diversified Its Sources of Revenue, Potential Fluctuations In The Company's
Quarterly Financial Results Make Financial Forecasting Difficult
As of September 30, 2001, the Company had an accumulated deficit
of $132.7 million. The Company has not achieved profitability and expects
to continue to incur net losses in 2001 and 2002. The Company expects to
continue to incur significant operating expenses and, as a result, will
need to generate significant revenues to achieve profitability, which may
not occur. Even if the Company does achieve profitability, the Company may
be unable to sustain or increase profitability on a quarterly or annual
basis in the future.
The Company has developed a loyal audience of investors at various
experience levels who turn to its product offerings for all their financial
and investing information needs. In addition, the Company has 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. The Company's goal is to
monetize and leverage its financial content across a variety of platforms.
However, the Company cannot assure you that its initiatives will result in
increases in revenues sufficient to enable the Company to achieve
profitability. In such an event, the price of the Company's common stock is
likely to decrease.
The Company's quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors, many of
which are outside the Company's control. The Company believes 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 the Company's industry. The
Company believes that quarter-to-quarter comparisons of its operating
results may not be a good indication of its future performance, nor would
its operating results for any particular quarter be indicative of future
operating results. In some future quarters the Company's operating results
may be below the expectations of public market analysts and investors. In
such an event, the price of the Company's common stock is likely to
decrease.
15
The Company May Have Difficulty Selling Its Advertising Inventory, A
Significant Portion Of Which Is Concentrated Among The Company's 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 the Company
believes that its network of sites and corresponding demographic profiles
will continue to enable it to maintain its high sell-through, the Company
expects that its overall advertising rates will decrease as a result of
increased inventory and the continued decline in the online advertising
market. Additionally, the Company has entered into headline indexing and
content distribution agreements with a variety of Internet portals and
content providers to distribute its news and headlines to their users, thus
driving potential readers to the Company's web sites. The Company believes
that these arrangements will continue to provide a cost-effective way to
increase its unique visitors and page view inventory. However, the
Company's 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 the Company's partners. If the Company is
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, the Company's business, results
of operations and financial condition could be materially adversely
affected.
In the third quarter of 2001, the Company's top five advertisers
accounted for approximately 41% of its total advertising revenues. The
Company's business, results of operations and financial condition could be
materially adversely affected by the loss of a number of its top
advertisers, and such a loss could be concentrated in a single quarter.
Further, if the Company does not continue to increase its revenue from
financial-services advertisers or attract advertisers from non-financial
industries, its business, results of operations and financial condition
could be materially adversely affected. As is typical in the advertising
industry, the Company's advertising contracts have cancellation provisions.
The Company May Have Difficulty Retaining Current Subscribers
The Company continues to seek to retain its current subscribers
and to attract new subscribers. As of September 30, 2001, the Company had
approximately 76,000 paid subscribers to all of its subscription products,
including both retail and corporate, down from approximately 109,000
subscribers to TheStreet.com prior to its conversion to RealMoney and the
launch of the Company's flagship site. The Company believes it has
significantly enhanced its subscription offerings to differentiate them
from the free financial news web sites that are widely available on the
web, including on the Company's own flagship site. However, given the
availability of such free financial information, the Company may not be
able to retain its current subscribers and attract additional subscribers
in a cost-effective manner. If the Company's subscription base declines
more than anticipated or the cost of subscriber acquisition increases, the
Company's business, results of operations and financial condition could be
materially adversely affected.
16
Difficulties In Developing New And Enhanced Products and Services Could
Harm The Company's Business
The Company intends to introduce additional and enhanced products
and services in order to retain its current readers and attract new
readers. If the Company introduces a product or service that is not
favorably received, its current readers may choose a competitive service
over the Company's. The Company may also experience difficulties that could
delay or prevent it from introducing new products and services, or the new
products or services the Company introduces could contain errors that are
discovered after they are introduced. In some cases, the Company is
dependent on third parties, including software companies, application
service providers and technology consulting firms, to help the Company
develop and implement new products and services. If these third parties are
not able to fulfill their responsibilities to the Company on schedule or if
the technology developed by them for the Company's 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 the Company's business, results of operations and
financial condition.
Unforeseen Development Difficulties May Hinder The Company's Efforts
The Company has significantly enhanced its design and its
technological infrastructure to further improve its sites and to
accommodate the expected increase in traffic, and intend to continue such
development activities. However, unforeseen development difficulties could
prevent the Company from implementing such improvements or cause the costs
to implement such improvements, including design, technology and related
costs, to be higher than anticipated.
In the past, the Company has experienced significant spikes in
traffic on its web sites when there have been important financial news
events. In addition, the number of the Company's readers has continued to
increase over time and the Company expects its reader base to increase over
time since its flagship site has been converted to a totally free site.
Accordingly, the Company's web sites must accommodate a high volume of
traffic, often at unexpected times. Although the Company has upgraded and
continues to upgrade its systems, the Company's 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 the Company's readers to perceive its 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, the Company's
business, results of operations and financial condition could be materially
adversely affected.
The Company Faces A Risk Of System Failure That May Result In Reduced
Traffic, Reduced Revenue And Harm To Its Reputation
The Company's ability to provide timely information and continuous
news updates depends on the efficient and uninterrupted operation of its
computer and communications hardware and software systems. Similarly, the
Company's ability to track, measure and report the delivery of
advertisements on its site depends on the efficient and uninterrupted
operation of a third-party system. In June 2001, the Company's
Internet-hosting agreement with Exodus Communications, Inc. was renewed,
and the Company currently continues to maintain a portion of its production
servers at Exodus's New Jersey data center, with the remainder at the
Company's principal offices in New York City. In September 2001, Exodus
filed for bankruptcy. Exodus has informed us that it will continue to
provide hosting services to the Company as it undergoes reorganization
under Chapter 11. The Company's operations depend on the ability of Exodus
to protect its own systems and the Company's systems in its data center
against damage
18
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 the Company's Internet access will
be uninterrupted, error-free or secure. Any disruption in the Internet
access to the Company's web sites provided by Exodus could materially
adversely affect the Company's business, results of operations and
financial condition. The Company's 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 the Company's service or a decrease in responsiveness of
its web sites could result in reduced traffic, reduced revenue and harm to
the Company's reputation, brand and the Company's relations with its
advertisers and e-commerce partners.
Like most web sites, the Company may be vulnerable to computer
viruses, physical or electronic break-ins and other deliberate attempts to
disrupt its technological operations, which could lead to interruptions,
delays or loss of data. In addition, unauthorized persons may improperly
access the Company's data. The Company's insurance policies may not
adequately compensate the Company for any losses that the Company may incur
because of any failures in its system or interruptions in its delivery of
content. The Company's business, results of operations and financial
condition could be materially adversely affected by any event, damage or
failure that interrupts or delays the Company's operations.
The Company's Future Success Depends On Its Ability To Attract And Retain
Key Personnel
The Company's future success depends upon its ability to attract
and retain key personnel, including executives, editors, writers, and
technology personnel. Only a few of the Company's key employees are bound
by employment or non-competition agreements. The loss of one or more of the
Company's key personnel, or the Company's inability to attract replacements
with appropriate expertise, could materially adversely affect the Company's
business, results of operations and financial condition.
Intense Competition Could Reduce The Company's Market Share And Harm Its
Financial Performance
A number of financial news and information sources compete for
consumers' and advertisers' attention and spending. The Company competes
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 and Dow Jones
Markets;
18
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.
The Company's ability to compete depends on many factors,
including the originality, timeliness, insightfulness and trustworthiness
of its content and that of the Company's competitors, the ease of use of
services developed either by the Company or its competitors and the
effectiveness of the Company's sales and marketing efforts.
Many of the Company's 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 the Company does. This may allow
them to devote greater resources than the Company 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. The Company's competitors may develop content
that is equal or superior to the Company's or that achieves greater market
acceptance than the Company's. It is also possible that new competitors may
emerge and rapidly acquire significant market share. The Company may not be
able to compete successfully for advertisers, readers, staff or outside
contributors, which could materially adversely affect the Company's
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 the Company's
business, results of operations and financial condition.
The Company also competes with other web sites, television, radio
and print media for a share of advertisers' total advertising budgets. If
advertisers perceive the Internet or the Company's 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 the Company's web sites.
A Failure To Establish And Maintain Strategic Relationships With Other
Companies Could Decrease The Company's Subscriber And Reader Base, Which
May Harm The Company's Business
The Company depends on establishing and maintaining content
syndication and headline indexing relationships with high-traffic web sites
for a significant portion of its current subscriber and reader base. There
is intense competition for relationships with these firms and placement on
these sites, and the Company may have to pay significant fees to establish
additional content syndication and headline indexing relationships or
maintain existing relationships in the future. The Company 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 the Company may approach for a strategic
relationship or who already have strategic relationships with the Company
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 the Company. The Company's business, results
of operations and financial condition could be materially adversely
affected if the Company does not establish additional, and maintain
existing, strategic relationships on commercially reasonable terms or if
any of the Company's strategic relationships do not result in an increase
in the number of subscribers or readers of its web sites.
19
The Company May Be Unable To Grow Through Acquisitions And Integrate Future
Acquisitions Into Its Business
The Company intends to pursue a growth strategy that may involve
acquisitions of other companies. However, the Company 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 the Company's senior management,
which will limit the amount of time these individuals will have available
to devote to the Company's existing operations. There can be no assurance
that the Company would be able to successfully integrate these acquisitions
into its business or implement its plans without delay or substantial cost.
In addition, future acquisitions by the Company could result in the
incurrence of debt and contingent liabilities, which could have a material
adverse effect upon the Company's financial condition and results of
operations. Any failure or any inability to effectively manage and
integrate growth may have a material adverse effect on the Company's
financial condition and results of operations.
Any Failure Of The Company's Internal Security Measures Or Breach Of Its
Privacy Protections Could Cause The Company To Lose Users And Subject It To
Liability
Users who subscribe to one of the Company's subscription-based web
sites are required to furnish certain personal information (including name,
email address and credit card information), which the Company uses to
administer its services. Although the Company no longer needs credit-card
information to process subscription payments for its flagship site now that
it has converted to a free site, the Company continues to gather credit
card information for the subscription-based sites in its network.
Additionally, the Company recently implemented a registration system that
will collect certain information (although not payment information) from
users of its free flagship site who wish to gain access to certain features
of the Company's site. If the security measures that the Company uses to
protect personal information are ineffective, the Company may lose users
and the Company's business may be harmed. Additionally, the Company relies
on security and authentication technology licensed from third parties to
perform real-time credit card authorization and verification. The Company
cannot predict whether technological developments or human error could
allow these security measures to be circumvented. The Company may need to
use significant resources to prevent security breaches or to alleviate
problems caused by any security breaches. If the Company is not able to
prevent all security breaches, its business, results of operations and
financial condition could be materially adversely affected.
The Company's users depend on the Company to keep their personal
information private and to not disclose it to third parties. The Company
therefore maintains a privacy policy, under which, with certain limited
exceptions, it will not disclose to any third parties any personal
information about its subscribers or other users. The Company has retained
the ability to modify the privacy policy at any time. If the Company's
users perceive that the Company is not protecting their privacy, its
business, results of operations and financial condition could be materially
adversely affected.
Difficulties Associated With The Company's Brand Development May Harm Its
Ability To Attract Subscribers And Readers
The Company believes that maintaining and growing awareness about
the TheStreet.com brand is an important aspect of its 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 the Company has introduced,
RealMoney.com, and those that the Company has acquired, do not have
20
widely
recognized brands, and the Company will need to increase awareness of these
brands among potential users. Although the Company's 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 the Company's advertising campaign or other
efforts. Accordingly, the Company cannot assure you that such efforts will
be successful in raising awareness of TheStreet.com brand or in persuading
potential users to visit the Company's sites.
Failure To Maintain The Company's Reputation For Trustworthiness May Reduce
The Number Of Its Readers, Which May Harm Its Business
It is very important that the Company maintains its reputation as
a trustworthy news organization. The occurrence of events, including the
Company's misreporting a news story or the non-disclosure of a stock
ownership position by one or more of the Company's writers in breach of its
compliance policy, could harm the Company's reputation for trustworthiness.
These events could result in a significant reduction in the number of the
Company's readers, which could materially adversely affect its business,
results of operations and financial condition.
Potential Liability For Information Displayed On The Company's Web Sites
May Require It To Defend Against Legal Claims, Which May Cause Significant
Operational Expenditures
The Company may be subject to claims for defamation, libel,
copyright or trademark infringement or based on other theories relating to
the information the Company publishes on its web sites or in other media.
These types of claims have been brought, sometimes successfully, against
online services as well as other print publications in the past. The
Company could also be subject to claims based upon the content that is
accessible from its web sites through links to other web sites. The Company
has stock ticker-based message boards that allow users to post comments
about individual stocks. The Company undertakes no obligation to moderate
these message boards, and potential liability for providers of message
board services has not yet been well established. The Company may choose to
allow its editorial staffers or outside contributors to post on its boards,
thus increasing the Company's potential liability. The Company's insurance
may not adequately protect it against these claims.
Failure To Protect The Company's Intellectual Property Rights Could Harm
Its Brand-Building Efforts And Ability To Compete Effectively
To protect the Company's rights to its intellectual property, the
Company relies on a combination of trademark and copyright law, trade
secret protection, confidentiality agreements and other contractual
arrangements with its employees, affiliates, clients, strategic partners
and others. The protective steps the Company has taken may be inadequate to
deter misappropriation of its proprietary information. The Company may be
unable to detect the unauthorized use of, or take appropriate steps to
enforce, its intellectual property rights. The Company has registered its
trademarks in the United States and also has 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 the
Company offers or intends to offer its services. Failure to adequately
protect the Company's intellectual property could harm its brand, devalue
its proprietary content and affect its ability to compete effectively.
Further, defending the Company's intellectual property rights could result
in the expenditure of significant financial and managerial resources, which
could materially adversely affect the Company's business, results of
operations and financial condition.
21
The Company May Have To Defend Against Intellectual Property Infringement
Claims, Which May Cause Significant Operational Expenditures
Although the Company believes that its proprietary rights do not
infringe on the intellectual property rights of others, other parties may
assert infringement claims against the Company or claims that the Company
has violated a patent or infringed a copyright, trademark or other
proprietary right belonging to them. The Company incorporates licensed
third-party technology in some of its services. In these license
agreements, the licensors have generally agreed to defend, indemnify and
hold the Company harmless with respect to any claim by a third party that
the licensed software infringes any patent or other proprietary right. The
Company cannot assure you that these provisions will be adequate to protect
it from infringement claims. Any infringement claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources on the Company's part, which could materially
adversely affect the Company's business, results of operations and
financial condition.
The Company's Ability To Maintain And Increase Its Readership Depends On
The Continued Growth In Use And Efficient Operation Of The Web
The web-based information market is new and rapidly evolving. The
Company's 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.
The Company's readers depend on Internet service providers, online
service providers and other web site operators for access to its 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 the Company's systems. These
occurrences could cause the Company's readers to perceive the web in
general or the Company's web sites in particular as an unreliable medium
and, therefore, cause them to use other media to obtain their financial
news and information. The Company also depends on a number of information
providers to deliver information and data feeds to it on a timely basis.
The Company's 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 the Company's
business, results of operations and financial condition.
A General Decline In Online Advertising Could Harm The Company's Business
The Company's 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 the Company's
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
22
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 the
Company's current and potential web publisher customers have little
experience in generating revenue from the sale of advertising space on
their web sites. The Company 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 the Company expects, then its
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 the Company is unable to meet these standards,
advertisers may not continue advertising on the Company's site.
Furthermore, advertisers that have traditionally relied upon other
advertising media may be reluctant to advertise on the web. The Company's
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 the Company's
future advertising rates and revenues. The Company cannot assure you that
it 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 the Company's
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 the Company's advertising revenues.
The Company also derives advertising revenues from email services,
which exposes it 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 the Company's business, results of operations and
financial condition.
The Company competes 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 the Company's 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 the Company's web sites.
23
Government Regulation And Legal Uncertainties Relating To The Web Could
Increase The Company's Costs Of Transmitting Data And Increase Its Legal
And Regulatory Expenditures And Could Decrease Its 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 the Company's
transmissions or levy sales or other taxes relating to the Company's
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. The Company's 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, the Company's activity is interpreted as
subjecting it to regulation, the Company could be subject to liability, and
its business, results of operations and financial condition could be
materially and adversely affected.
The Company is 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 the Company's compliance with
applicable federal and state laws, regulations and industry guidelines has
not had a material adverse effect on it, 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 the Company's 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. The Company could incur additional expenses if any new regulations
regarding the use of personal information are introduced or if these
agencies chose to investigate the Company's privacy practices. Also, as a
consequence of governmental legislation or regulation or enforcement
efforts or evolving standards of fair information collection practices, the
Company may be required to make changes to its 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 the Company's 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 the Company's web sites or
otherwise materially adversely affect its business.
24
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 The Company's Advertising
Revenues, Decrease Its Reader Base And Increase Its 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 the Company's advertisers
seek to advertise on its web sites to encourage people to use the web to
purchase goods or services, the Company's 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. The Company may also incur significant costs to protect it
against the threat of security breaches or to alleviate problems caused by
these breaches.
Control By Principal Stockholders, Officers And Directors Could Adversely
Affect The Company's Stockholders
The Company's officers, directors and greater-than-five-percent
stockholders (and their affiliates), acting together, have the ability to
control substantially all matters submitted to its stockholders for
approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of the Company's assets)
and to control its management and affairs. Accordingly, this concentration
of ownership may have the effect of delaying, deferring or preventing a
change in control of the Company, impeding a merger, consolidation,
takeover or other business combination involving the Company or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could materially
adversely affect the market price of the common stock.
Volatility Of The Company's Stock Price Could Adversely Affect The
Company's 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 the Company's stock has been and may continue to be
subject to wide fluctuations. From July 1, 2001 through September 30, 2001,
the closing sale price of the Company's common stock on the Nasdaq National
Market ranged from $1.43 to $1.04. As of November 9, 2001, the closing sale
price was $1.22. The Company's 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 the Company or its 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 the Company's markets.
In addition, the stock market in
25
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 the Company's common stock, regardless of its operating
performance.
Anti-Takeover Provisions Could Prevent Or Delay A Change Of Control
Provisions of the Company's 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 the Company, even if doing
so would be beneficial to the Company's stockholders.
The Company Does Not Intend To Pay Dividends
The Company has never declared or paid any cash dividends on its
common stock. The Company currently intends 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 August 14, 2001, AremisSoft Corporation voluntarily dismissed
without prejudice its complaint 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., originally
filed on July 3, 2001 in the U.S. District Court for the Northern District
of California.
Currently, TheStreet.com is not a party to any material legal
proceedings.
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
Information concerning the matters submitted to a vote at the
annual meeting of stockholders of the Company, held on June 26, 2001 is
contained in the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2001 filed with the Securities and Exchange Commission on
August 14, 2001.
Item 5. Other Information.
Not applicable.
26
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
The Company did not file any reports on Form 8-K during
the Quarter Ended September 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).
27
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: November 14, 2001 By: /s/ Thomas J. Clarke, Jr.
-------------------------
Name: Thomas J. Clarke, Jr.
Title: Chief Executive Officer
Date: November 14, 2001 By: /s/ Lisa A. Mogensen
--------------------
Name: Lisa A. Mogensen
Title: Chief Financial Officer
28
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).
29