UNITED STATES
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-25779
TheStreet.com, Inc.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1515824
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14 Wall Street
New York, New York 10005
------------------------
(Address of principal executive offices, including zip code)
(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 .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
(Number of Shares Outstanding
(Title of Class) as of November 11, 2002)
---------------- ------------------------
Common Stock, par value $0.01 per share 23,573,527
TheStreet.com, Inc.
Form 10-Q
For the Three Months Ended September 30, 2002
Part I - FINANCIAL INFORMATION (UNAUDITED).........................................................................1
Item 1. Condensed Financial Statements...................................................................1
Condensed Balance Sheets.........................................................................1
Condensed Statements of Operations...............................................................2
Condensed Statements of Cash Flows...............................................................3
Notes to Condensed Financial Statements..........................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................17
Item 4. Controls and Procedures.........................................................................17
PART II - OTHER INFORMATION.......................................................................................27
Item 1. Legal Proceedings...............................................................................27
Item 2. Changes in Securities and Use of Proceeds.......................................................27
Item 3. Defaults Upon Senior Securities.................................................................27
Item 4. Submission of Matters to a Vote of Security Holders.............................................27
Item 5. Other Information...............................................................................27
Item 6. Exhibits and Reports on Form 8-K................................................................28
SIGNATURES........................................................................................................29
CERTIFICATIONS....................................................................................................30
28
Part I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
THESTREET.COM, INC.
CONDENSED BALANCE SHEETS
September 30, 2002 December 31, 2001
-------------------------------------------------------
(unaudited)
(Note 1)
ASSETS
Current Assets:
Cash and cash equivalents $ 23,845,137 $ 24,740,508
Restricted cash 1,295,257 950,000
Short-term investments 2,223,181 5,548,499
Accounts receivable, net of allowance for doubtful
accounts of $348,172 as of September 30, 2002 and
$490,263 as of December 31, 2001 1,152,404 1,003,927
Other receivables 151,318 114,374
Receivable from related parties 104,570 101,994
Prepaid expenses and other current assets 1,063,292 1,085,332
Net current assets of discontinued operations 46,040 45,480
-------------------------------------------------------
Total current assets
29,881,199 33,590,114
Property and equipment, net of accumulated depreciation
and amortization of $9,361,773 as of September 30, 2002
and $6,661,617 as of December 31, 2001 4,179,790 6,480,562
Other assets 793,552 894,352
Goodwill 2,210,652 1,559,426
Intangibles, net 1,330,833 1,863,333
Restricted cash 2,500,000 2,500,000
-------------------------------------------------------
Total assets $ 40,896,026 $ 46,887,787
=======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 570,249 $ 1,104,498
Accrued expenses 4,144,805 3,938,856
Restructuring reserve 58,011 1,366,775
Deferred revenue 5,492,518 3,165,276
Note payable - current portion 82,600 78,510
Other current liabilities 16,508 27,239
-------------------------------------------------------
Total current liabilities 10,364,691 9,681,154
Note payable 332,703 395,174
-------------------------------------------------------
Total liabilities 10,697,394 10,076,328
-------------------------------------------------------
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; 28,975,128 shares issued and 23,569,728
shares outstanding at September 30, 2002, and
28,331,883 shares issued and 23,506,927 shares
outstanding at December 31, 2001 289,747 283,319
Additional paid-in capital 183,905,270 183,022,780
Deferred compensation (417,708) (1,060,315)
Accumulated deficit (146,397,502) (138,868,593)
Treasury stock at cost; 5,405,400 shares at September
30, 2002 and 4,824,956 shares at December 31, 2001 (7,181,175) (6,565,732)
-------------------------------------------------------
Total stockholders' equity 30,198,632 36,811,459
-------------------------------------------------------
Total liabilities and stockholders' equity $ 40,896,026 $ 46,887,787
=======================================================
The accompanying notes to condensed financial statements are an integral
part of these condensed statements
1
THESTREET.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net revenues:
Subscription revenues $ 3,983,517 $ 2,328,101 $10,636,688 $ 6,465,479
Advertising & e-commerce revenues 1,057,959 913,736 3,004,227 3,974,274
Other revenues 292,051 212,083 1,252,694 976,181
-------------------- ------------------------------------ ------------------
Total net revenues 5,333,527 3,453,920 14,893,609 11,415,934
Cost of revenues 1,666,482 1,980,622 5,295,609 7,077,052
-------------------- ------------------------------------ ------------------
Gross profit 3,667,045 1,473,298 9,598,000 4,338,882
-------------------- ------------------------------------ ------------------
Operating expenses:
Product development expenses 1,560,313 2,850,952 5,499,044 8,235,204
Sales and marketing expenses 1,931,174 2,575,220 5,285,045 9,052,201
General and administrative expenses 2,122,899 2,196,924 6,559,541 8,357,737
Noncash compensation expense 236,488 430,768 716,113 878,922
Restructuring expenses - 182,035 18,558 (717,089)
Settlement charge - 2,535,660 - 2,535,660
Severance expense - - - 971,668
-------------------- ------------------------------------ ------------------
Total operating expenses 5,850,874 10,771,559 18,078,301 29,314,303
-------------------- ------------------------------------ ------------------
Loss from continuing operations (2,183,829) (9,298,261) (8,480,301) (24,975,421)
Interest income 146,881 417,526 566,402 1,960,677
Gain on sale of investment 184,667 - 184,667 -
-------------------- ------------------------------------ ------------------
Net loss from continuing operations (1,852,281) (8,880,735) (7,729,232) (23,014,744)
Gain on disposal of discontinued
operations 2,609 - 200,323 -
-------------------- ------------------------------------ ------------------
Net loss $ (1,849,672) $ (8,880,735) $(7,528,909) $ (23,014,744)
==================== ==================================== ==================
Net (loss) income per share - basic and diluted:
Continuing operations $ (0.08) $ (0.35) $ (0.33) $ (0.86)
Discontinued operations - - 0.01 -
-------------------- ------------------------------------ ------------------
Net loss $ (0.08) $ (0.35) $ (0.32) $ (0.86)
==================== ==================================== ==================
Weighted average basic and diluted
shares outstanding 23,553,428 25,191,797 23,554,046 26,873,177
==================== ==================================== ==================
The accompanying notes to condensed financial statements are an
integral part of these condensed statements
2
THESTREET.COM, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
-----------------------------------------------
2002 2001
-----------------------------------------------
(unaudited) (unaudited)
Cash Flows from Operating Activities:
Net loss $ (7,528,909) $ (23,014,744)
Adjustments to reconcile net loss to cash used in
operating activities, net of acquired businesses:
Noncash compensation expense 716,113 878,922
Noncash advertising expense 71,442 -
Gain on sale of investments (184,667) -
Gain on sale of fixed assets (375) -
Provision for doubtful accounts 16,444 362,582
Depreciation and amortization 3,243,429 3,839,868
Non-current assets of discontinued operations - 426,218
Net current assets of discontinued operations (560) 1,796,037
Changes in operating assets and liabilities:
Accounts receivable (164,921) 2,369,376
Other receivables (36,944) (124,101)
Receivable from related party (2,576) (151,188)
Prepaid expenses and other current assets 22,040 866,278
Other assets 98,582 33,593
Accounts payable and accrued expenses (328,300) (2,865,273)
Restructuring reserve (1,380,206) (1,657,782)
Deferred revenue 2,327,242 (283,172)
Other current liabilities (10,731) (945,393)
-----------------------------------------------
Net cash used in operating activities (3,142,897) (18,468,779)
-----------------------------------------------
Cash Flows from Investing Activities:
Purchase of short-term investments (6,279,454) (8,744,216)
Sale of short-term investments 9,604,772 28,041,788
Purchase of marketable securities (9,911,651) (6,051,786)
Sale of marketable securities 10,096,318 2,024,400
Loans to Business Net Online Ltd. - (941,854)
Capital expenditures (415,564) (1,154,303)
Sale of fixed assets 8,000 -
Acquisition of business, net of cash acquired - (5,400,000)
-----------------------------------------------
Net cash provided by investing activities 3,102,421 7,774,029
-----------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 164,186 5,262
Note payable (58,381) -
Restricted cash (345,257) -
Purchase of treasury stock (615,443) (6,367,445)
-----------------------------------------------
Net cash used in financing activities (854,895) (6,362,183)
-----------------------------------------------
Net decrease in cash (895,371) (17,056,933)
Cash and cash equivalents, beginning of period 24,740,508 46,339,561
-----------------------------------------------
Cash and cash equivalents, end of period $ 23,845,137 $ 29,282,628
===============================================
Supplemental disclosures of cash flow Information:
During 2002, the Company issued 489,644 shares of common stock in connection
with its purchase of SmartPortfolio.com, Inc. The shares were valued at
$651,226.
During 2001, the Company issued 77,984 shares of common stock in connection with
its purchase of SmartPortfolio.com, Inc. The shares were valued at $155,968.
The accompanying notes to condensed financial statements are an
integral part of these statements
3
TheStreet.com, Inc.
Notes to Condensed 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 proprietary, timely, independent and insightful financial
commentary, analysis, research and news. The Company's content is available
across diverse media platforms, including the internet, print, radio and
conferences. The Company maintains strategic relationships with leading
companies in the media, technology and financial services sectors that help it
create brand awareness and increase its subscription and advertising revenues.
The Company provides its audience of individual investors at various
experience levels with content for their financial and investing information
needs. In the past year, the Company has expanded its audience by creating new
subscription products to meet the specialized needs of different segments of the
broader investing community, including, with the introduction of the Company's
most recent products, the institutional market.
TheStreet.com's editorial staff consists of more than 46 professional
journalists who, together with approximately 60 professional analysts, traders
and money managers who contribute to its products from outside the Company,
produce approximately 57 original commentary, analysis, research and news pieces
(plus numerous market diary entries) each business day for the Company's
internet web sites. The Company also produces several other subscription
products for use by individual investors and market enthusiasts, each designed
to help a specific segment of the investing public make better-informed
investing and trading decisions. In addition the Company has a growing roster of
professional products designed to help brokers, financial planners and money
managers make better decisions for themselves and their clients.
Basis of Presentation
The accompanying unaudited condensed financial statements of TheStreet.com
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Exchange Act Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month and nine month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2001, filed with the Securities and Exchange Commission on April 1,
2002.
Certain prior period amounts have been reclassified to conform to current
period presentation.
4
2. NET LOSS PER SHARE OF COMMON STOCK
The Company computes net loss per share 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 common share ("Basic
EPS") is computed by dividing net loss by the weighted average number of common
shares outstanding. Diluted net loss per common share ("Diluted EPS") is
computed by dividing net loss by the weighted average number of common shares
and dilutive common share equivalents then outstanding. Diluted EPS is identical
to Basic EPS since all outstanding stock options and warrants were excluded from
the calculation, as their effect is antidilutive.
3. 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 purchased 1,500
shares of common stock at an aggregate cost of $3,075 during the three months
ended September 30, 2002. During the nine months ended September 30, 2002, the
Company purchased 580,444 shares of common stock at an aggregate cost of
$615,443. Since the inception of this program, the Company has purchased
5,405,400 shares of common stock at an aggregate cost of $7,181,175 as of
September 30, 2002.
4. 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, or about 40 full-time
employees, throughout the organization.
The following table displays the activity and balances of the restructuring
reserve account from December 31, 2001 to September 30, 2002:
1 Qtr 2002 2 Qtr 2002 3 Qtr 2002
Activity Activity Activity
------------------ ------------------ ------------------
Initial Balance Deduct Adjust Balance Deduct Adjust Balance Deduct Adjust Balance
Charge 12/31/01 -ions -ments 3/31/02 -ions -ments 6/30/02 -ions -ments 9/30/02
-------------------------------------------------------------------------------------------------------------
Headcount
reductions $ 478,278 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Consolidation of
facilities
and reduction in
non-performing
assets 3,695,648 10,000 41,341 (31,442) 19,899 (6,962) 50,000 62,937 (4,926) 0 58,011
Extinguishment of
marketing and
technology
related
contracts 13,401,596 1,356,775 (1,356,775) 0 0 0 0 0 0 0 0
---------- --------- ----------- -------- ------- ------- ------- ------- ------- ------ -------
$17,575,522 $1,366,775 $(1,315,434) $(31,442) $19,899 $(6,962) $50,000 $62,937 $(4,926) $0 $58,011
=========== ========== =========== ======== ======= ======= ======= ======= ======= ====== =======
The above deductions from the reserve primarily represent cash payments.
The above adjustments primarily represent revisions to the Company's original
estimates.
5. DISCONTINUED OPERATIONS
In November 2000, the Company's Board of Directors decided to discontinue
and liquidate the Company's U.K. operations and entered into an agreement with
the other shareholders in TheStreet.com (Europe) Limited pursuant to which the
Company purchased the minority interest for an aggregate consideration of $3
million in cash and 1,250,000 shares of the Company's common stock. In
accordance with British law, the operation went into Members Voluntary
Liquidation in May 2001. On April 30, 2002, the final meeting of the members was
held to bring the liquidation to a close. A final return in the liquidation was
filed on July 25, 2002 in order to formally dissolve the U.K. operations, which
was then effective on October 25, 2002, three months after the submission date.
5
As of September 30, 2002, the fair market value of the remaining assets was
$46,040, consisting of a VAT tax refund receivable.
6. 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 dates of
grant. This resulted in noncash compensation expense incurred over the period
that these specific options vest. The Company recorded noncash compensation
expense of approximately $210,000 during the three months ended September 30,
2002 and approximately $637,000 during the nine months ended September 30, 2002
for these less than fair market value options.
In January 2002, the Company issued options to purchase a total of 50,000
shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. The options vested immediately and have
an exercise period of the lesser of five years, or 90 days after the termination
of his services. The value of the options was approximately $72,000, which is
being amortized over the two-year period of his service to the Company. The
Company recorded noncash compensation expense of approximately $9,000 during the
three months ended September 30, 2002 and approximately $27,000 during the nine
months ended September 30, 2002 for this option issued to a non-employee in
connection with his outside contributor agreement.
In January 2002, the Company issued options to purchase a total of 100,000
shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. One-half of the options vested
immediately and the other half will vest in January 2003. The options have an
exercise period of the lesser of five years, or 90 days after the termination of
his services. The value of the options was approximately $140,000 at September
30, 2002. The Company recorded noncash compensation expense of approximately
$17,000 during the three months ended September 30, 2002 and approximately
$52,000 during the nine months ended September 30, 2002 for this option issued
to a non-employee in connection with his outside contributor agreement. Due to
the variable accounting methodology, it is difficult to predict the amount of
additional noncash compensation expense the Company will incur in connection
with these options. The Company will continue to remeasure the fair value of
these options on an ongoing basis.
7. ACQUISITION
On December 20, 2000, the Company acquired substantially all the assets and
certain liabilities of SmartPortfolio.com, Inc. The Company paid initial
consideration in January 2001 of $5,400,000 cash and 77,984 shares of the
Company's common stock, having a value on the payment date of approximately
$156,000. In January 2002, in connection with the purchase agreement, the
Company paid additional consideration of 489,644 shares of the Company's common
stock to the former owners of SmartPortfolio.com, Inc., which was valued at
approximately $651,000. This represents the final consideration to be paid in
connection with the acquisition.
8. GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued Statements of Financial Accounting Standards
("Statement") No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment.
6
Upon the adoption of FAS 142 in the first quarter of 2002, the Company
stopped the amortization of goodwill and certain intangible assets with an
indefinite life, and completed the required transitional fair value impairment
test on its goodwill which had no impact on the Company's financial statements.
As of September 30, 2002 and December 31, 2001, the Company's goodwill and
intangible assets and related accumulated amortization consisted of the
following:
September 30, December 31,
2002 2001
------------------- ------------------
Intangible assets subject to amortization:
SmartPortfolio.com, Inc. customer list........................... $1,250,000 $1,250,000
SmartPortfolio.com, Inc. technology.............................. 730,000 730,000
ipoPros.com, Inc. non-compete agreement.......................... 150,000 150,000
------------------- ------------------
2,130,000 2,130,000
Less accumulated amortization...................................... (1,292,500) (760,000)
------------------- ------------------
837,500 1,370,000
------------------- ------------------
Goodwill and intangible assets not subject to amortization:
SmartPortfolio.com, Inc. goodwill................................ 2,210,652 1,559,426
SmartPortfolio.com, Inc. trade name.............................. 493,333 493,333
------------------- ------------------
2,703,985 2,052,759
------------------- ------------------
Total goodwill and intangible assets $3,541,485 $3,422,759
=================== ==================
The Company recorded amortization expense of $177,500 during the three
months ended September 30, 2002, and $532,500 during the nine months ended
September 30, 2002. Based on the current amount of intangible assets subject to
amortization, the remaining value would be expensed as $177,500 during the
remaining three months of 2002, and $660,000 would be expensed in the year 2003.
Should acquisitions or dispositions occur in the future, these amounts may vary.
The 2001 historical results do not reflect the provisions of FAS 142. Had
the Company adopted FAS 142 on January 1, 2001, the historical net loss and
basic and diluted net loss per common share for the three months and nine months
ended September 30, 2001 would have been changed to the adjusted amounts
indicated below:
3 Months ended 9 Months ended
September 30, 2001 September 30, 2001
------------------- --------------------
Net loss as reported - historical basis $(8,880,735) $(23,014,744)
Add: Goodwill amortization 194,929 584,785
Add: Intangible amortization 61,667 185,000
------------------- --------------------
Adjusted net loss $(8,624,139) $(22,244,959)
=================== ====================
Proforma net loss per share $ (0.34) $ (0.83)
=================== ====================
9. LEGAL PROCEEDINGS
On December 5, 2001, a class action complaint alleging violations of the
federal securities laws was filed in the United States District Court for the
Southern District of New York naming as defendants TheStreet.com, certain of its
former officers and directors and a current director, and certain underwriters
of the Company's initial public offering (The Goldman Sachs Group, Inc., Chase
H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and Merrill
Lynch Pierce Fenner & Smith, Inc.). The complaint alleges, among other things,
that the underwriters of TheStreet.com's initial public offering violated the
securities laws by failing to disclose certain alleged compensation arrangements
(such as undisclosed commissions or stock stabilization practices) in the
offering's registration statement. TheStreet.com and certain of its former
7
officers and directors and a current director are named in the complaint
pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) of the
Securities Exchange Act of 1934. The plaintiffs seek damages and statutory
compensation against each defendant in an amount to be determined at trial, plus
pre-judgment interest thereon, together with costs and expenses, including
attorneys' fees. Similar complaints have been filed against over 300 other
issuers that have had initial public offerings since 1998 and all such actions
have been included in a single coordinated proceeding. Pursuant to a Court Order
dated October 9, 2002, each of the individual defendants to the action has been
dismissed without prejudice. TheStreet.com remains a party to the action and
intends to defend itself vigorously. However, due to the inherent uncertainties
of litigation, the Company cannot accurately predict the ultimate outcome of the
litigation. Any unfavorable outcome of this litigation could have an adverse
impact on the Company's business, financial condition and results of operations.
10. SIGNIFICANT CUSTOMERS
For the three months ended September 30, 2002, the Company's top five
advertisers accounted for approximately 60% of its total advertising and
e-commerce revenues, excluding conference sponsorship revenues, as compared to
approximately 41% for the three months ended September 30, 2001. For the nine
months ended September 30, 2002, the Company's top five advertisers accounted
for approximately 48% of its advertising and e-commerce revenues, excluding
conference sponsorship revenues, as compared to approximately 35% for the nine
months ended September 30, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements contained in this quarterly report on Form 10-Q relating to
plans, strategies, objectives, economic performance and trends and other
statements that are not descriptions of historical facts may be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Forward-looking information is
inherently subject to risks and uncertainties, and actual results could differ
materially from those currently anticipated due to a number of factors, which
include, but are not limited to, the factors set forth under the heading "Risk
Factors" and elsewhere in this quarterly report, and in other documents filed by
the Company with the Securities and Exchange Commission from time to time,
including, without limitation, the Company's annual report on Form 10-K for the
year ended December 31, 2001. Forward-looking statements may be identified by
terms such as "may", "will", "should", "could", "expects", "plans", "intends",
"anticipates", "believes", "estimates", "predicts", "forecasts", "potential", or
"continue" or similar terms or the negative of these terms. Although the Company
believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance or achievements. The Company has no obligation to update these
forward-looking statements.
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed financial statements and notes thereto.
Overview
TheStreet.com was organized as a limited liability company in June 1996 and
converted to a C corporation, incorporated in Delaware, in May 1998. In May
1999, the Company completed its initial public offering. The Company is a
leading multimedia provider of proprietary, timely, independent and insightful
financial commentary, analysis, research and news. The Company's content is
available across diverse media platforms, including the internet, print, radio
and conferences, giving it more opportunities to generate revenue from the
content it produces. The Company's strategic relationships with leading
companies in the media, technology and financial services sectors help it create
brand awareness and increase subscription and advertising revenues.
The Company provides its audience of individual investors at various
experience levels with content for their financial and investing information
needs. In the past year, the Company has expanded its audience by creating new
subscription products to meet the specialized needs of different segments of the
broader investing community, including, with the introduction of the Company's
most recent products, the institutional market.
8
Recent Developments
On October 8, 2002, the Company announced the launch of The Trading
Reports, a subscription email service that provides daily long and short equity
picks along with entry and protective stop points, written by Jeff Cooper,
RealMoney.com columnist and author of several trading books.
On November 13, 2002, the Company announced the formation of a new entity,
Independent Research Group LLC, that will offer independent stock research to
institutional clients.
Results Of Operations
Three Months Ended September 30, 2002 and September 30, 2001
Net Revenues
Subscription Revenues. Subscription revenues are derived from annual,
semi-annual, quarterly and monthly subscriptions. Subscription revenues totaled
$3,983,517 for the three months ended September 30, 2002, as compared to
$2,328,101 for the three months ended September 30, 2001. This increase is
primarily the result of revenues from several new subscription-based products,
such as RealMoney Pro, The Daily Swing Trade, and The Turnaround Report,
launched subsequent to the quarter ended September 30, 2001, as well as
increased revenue associated with Action Alerts PLUS, The Chartman's Top Stocks,
and TheStreet(TM)View. For the three months ended September 30, 2002,
approximately 57% of the Company's net subscription revenue was derived from
annual subscriptions, as compared to approximately 71% for the three months
ended September 30, 2001. This decrease in the percent of annual subscriptions
is partially due to the Company's need to outsource fulfillment of new email
subscription products initially to a third party and that third party's
technological inability to provide annual subscriptions. The Company now has
internally developed the requisite technological infrastructure for its new
market for subscription products fulfilled via email. The Company migrated these
monthly subscribers to its own commerce system in March 2002, and has
successfully converted many of these monthly subscribers into annual
subscribers.
The Company calculates net subscription revenues by deducting refunds from
gross revenues. Refunds issued during the three months ended September 30, 2002,
totaled approximately 1% of gross subscription revenues for the period.
The Company's subscriber base was approximately 66,000 paid annual and
monthly subscribers as of September 30, 2002 (not including free trials, but
including an estimate of subscribers paid for as part of certain bulk deals), as
compared to approximately 76,000 as of September 30, 2001. This decrease is
primarily the result of the discontinuance of some old contracts for discounted
bulk sales of RealMoney.com, the elimination of two products that were better
suited for previous market conditions, and a decrease in RealMoney.com retail
subscribers, partially offset by the launch of several new subscription-based
products.
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 increased to $1,057,959 for the three months ended
September 30, 2002, as compared to $913,736 for the three months ended September
30, 2001. This increase is primarily due to higher sales of internet sponsorship
arrangements.
Additionally, even though page views declined to 107 million during the
quarter ended September 30, 2002, as compared to 128 million during the quarter
ended September 30, 2001, revenue derived per 1,000 page views, excluding
conference sponsorship revenues, increased to $9.80 from $7.14, respectively.
9
For the three months ended September 30, 2002, 53% of the Company's
advertising and e-commerce revenues, excluding conference sponsorship revenues,
were derived from sponsorship contracts, as compared to 35% for the three months
ended September 30, 2001. As a result of improvements in the Company's
advertising sales infrastructure and selling techniques, the Company has been
able to increase the average revenue it receives per advertiser during the
quarter by 41%, as compared to the same three month period in 2001, excluding
conference sponsorship revenues. The number of the Company's advertisers,
excluding conference sponsorships, for the three months ended September 30, 2002
was 35, as compared to 43 for the three months ended September 30, 2001.
For the three months ended September 30, 2002, the Company's top five
advertisers accounted for approximately 60% of its advertising and e-commerce
revenues, excluding conference sponsorship revenues, as compared to
approximately 41% for the three months ended September 30, 2001.
Other Revenues. Other revenues are derived primarily from revenues received
from conference attendees, James J. Cramer's daily radio program, RealMoney with
Jim Cramer, syndication revenues, royalties earned from the Company's investing
book and reprint revenues. Other revenues increased to $292,051 for the three
months ended September 30, 2002, as compared to $212,083 for the three months
ended September 30, 2001. This increase is primarily the result of revenue from
Mr. Cramer's radio program, as well as royalties earned from the Company's
investing book, partially offset by the absence of conference attendee revenue
during the three months ended September 30, 2002, which, by contrast, totaled
$21,000 during the three months ended September 30, 2001.
Cost Of Revenues
Cost of revenues includes compensation and benefits for editorial and
content support staff, fees paid to outside contributors, content licensing fees
payable to content providers, and direct costs related to conference hosting.
Cost of revenues decreased to $1,666,482 for the three months ended September
30, 2002, as compared to $1,980,622 for the three months ended September 30,
2001. This decrease is primarily the result of reductions within the Company's
editorial and content support staff to 48 employees as of September 30, 2002, as
compared to 53 as of September 30, 2001, as well as decreased costs associated
with content licensing fees, partially offset by higher costs due to an
increased number 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 decreased to $1,560,313 for the three months ended September 30, 2002,
as compared to $2,850,952 for the three months ended September 30, 2001. This
decrease is primarily the result of lower consulting fees in 2002 as compared to
those that had been expended in 2001 as the Company re-developed its commerce
system, reduced hosting fees as a result of renegotiated and/or terminated
hosting agreements, reductions within the Company's technology and product
development staff to 28 employees as of September 30, 2002, as compared to 34
employees as of September 30, 2001, as well as lower maintenance costs,
depreciation on site equipment and internet access fees.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of advertising and
promotion, promotional materials, content distribution fees, and compensation
expenses for the Company's direct sales force and customer service and
conference departments. Sales and marketing expenses decreased to $1,931,174 for
the three months ended September 30, 2002, as compared to $2,575,220 for the
three months ended September 30, 2001. This decrease is primarily the result of
lower distribution and advertisement-serving expenses due to renegotiated and
expired agreements, as well as reduced online advertising and promotion
expenses, partially offset by increased commission expense due to the build-up
of the Company's direct sales force.
10
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for
general management, finance and administrative personnel, occupancy costs,
professional fees, equipment rental and other office expenses. General and
administrative costs decreased to $2,122,899 for the three months ended
September 30, 2002, as compared to $2,196,924 for the three months ended
September 30, 2001. This decrease is primarily the result of the elimination of
goodwill amortization in accordance with the Company's adoption of the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets", together with reductions in equipment
lease, tax, bad debt, and occupancy expenses, partially offset by increased
compensation and related expenses.
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 dates of
grant. This resulted in noncash compensation expense incurred over the period
that these specific options vest. The Company recorded noncash compensation
expense of approximately $210,000 during the three months ended September 30,
2002 for these less than fair market value options.
In January 2002, the Company issued options to purchase a total of 50,000
shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. The options vested immediately and have
an exercise period of the lesser of five years, or 90 days after the termination
of his services. The value of the options was approximately $72,000, which is
being amortized over the two-year period of his service to the Company. The
Company recorded noncash compensation expense of approximately $9,000 during the
three months ended September 30, 2002 for this option issued to a non-employee
in connection with his outside contributor agreement.
In January 2002, the Company issued options to purchase a total of 100,000
shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. One-half of the options vested
immediately and the other half will vest in January 2003. The options have an
exercise period of the lesser of five years, or 90 days after the termination of
his services. The value of the options was approximately $140,000 at September
30, 2002. The Company recorded noncash compensation expense of approximately
$17,000 during the three months ended September 30, 2002 for this option issued
to a non-employee in connection with his outside contributor agreement. Due to
the variable accounting methodology, it is difficult to predict the amount of
additional noncash compensation expense the Company will incur in connection
with these options. The Company will continue to remeasure the fair value of
these options on an ongoing basis.
Total noncash compensation expense decreased to $236,488 for the three
months ended September 30, 2002, as compared to $430,768 for the three months
ended September 30, 2001. This decrease was primarily the result of the absence
in the three months ended September 30, 2002 of costs incurred in the three
months ended September 30, 2001 related to shares of common stock issued to an
employee in connection with an employment agreement.
Restructuring Expenses
During the year ended December 31, 2000, the Company recorded restructuring
expenses to align its cost structure with changing market conditions and
decreased dependence on the advertising market, to create a more flexible and
efficient organization. No restructuring expenses were recorded for the three
months ended September 30, 2002. For the three months ended September 30, 2001,
the Company recorded $182,035 of restructuring expenses, which primarily
represented adjustments to the Company's original estimates related to the
reductions in our lease obligation and non-performing assets.
11
Settlement Charge
No settlement charge was recorded for the three months ended September 30,
2002. 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, 2002, interest income was
$146,881, as compared to $417,526 for the three months ended September 30, 2001.
This decrease is the result of lower interest rates and reduced cash balances.
Gain on Sale of Investment
For the three months ended September 30, 2002, gain on sale of investment
was $184,667. No gain was recorded for the three months ended September 30,
2001. In mid-July, 2002 the Company sold a U.S. Treasury Note (the "Treasury
Note") that bore interest at the rate of 3% per annum and had a maturity date of
February 29, 2004. Management's original intention was to hold the Treasury Note
until maturity. However, due to changes in market conditions, the Company
revised its plan and sold the Treasury Note, realizing a gain on the sale.
Gain on Disposal of Discontinued Operations
In November 2000, the Company's Board of Directors decided to discontinue
and liquidate the Company's U.K. operations. On April 30, 2002, the final
meeting of the members was held to bring the liquidation to a close. A final
return in the liquidation was filed on July 25, 2002 in order to formally
dissolve the U.K. operations, which was then effective on October 25, 2002,
three months after the submission date.
For the three months ended September 30, 2002, the Company recorded a gain
on disposal of discontinued operations of $2,609. No gain was recorded for the
three months ended September 30, 2001.
As of September 30, 2002, the book value of the remaining current assets of
the discontinued operations was $46,040, consisting of a VAT tax receivable.
There were no remaining non-current assets.
Nine Months Ended September 30, 2002 and September 30, 2001
Net Revenues
Subscription Revenues. Subscription revenues increased to $10,636,688 for
the nine months ended September 30, 2002, as compared to $6,465,479 for the nine
months ended September 30, 2001. This increase is primarily the result of
revenues from several new subscription-based products, such as RealMoney Pro,
The Daily Swing Trade, and The Turnaround Report, launched subsequent to the
nine months ended September 30, 2001, as well as increased revenue associated
with Action Alerts PLUS, The Chartman's Top Stocks, and TheStreet(TM)View, which
had launched during the nine months ended September 30, 2001. For the nine
months ended September 30, 2002, approximately 54% of the Company's net
subscription revenue was derived from annual subscriptions, as compared to
approximately 75% for the nine months ended September 30, 2001. This decrease in
the percent of annual subscriptions is partially due to the Company's need to
outsource fulfillment of new email subscription products initially to a third
party and that third party's technological inability to provide annual
subscriptions. The Company now has internally developed the requisite
technological infrastructure for its new market for subscription products
fulfilled via email. The Company migrated these monthly subscribers to its own
commerce system in March 2002, and has successfully converted many of these
monthly subscribers into annual subscribers.
12
The Company calculates net subscription revenues by deducting refunds from
gross revenues. Refunds issued during the nine months ended September 30, 2002,
totaled approximately 3% of gross subscription revenues for the period.
Advertising & E-Commerce Revenues. Advertising and e-commerce revenues
decreased to $3,004,227 for the nine months ended September 30, 2002, as
compared to $3,974,274 for the nine months ended September 30, 2001. This
decrease is primarily due to the significant slowdown in the overall online
advertising market experienced during the first quarter of 2002, as compared to
the first quarter of 2001, resulting in reduced sales of internet sponsorship,
banner and e-mail advertisements.
Additionally, even though page views declined to 319 million during the
nine months ended September 30, 2002, as compared to 447 million during the nine
months ended September 30, 2001, revenue derived per 1,000 page views, excluding
conference sponsorship revenues, increased to $9.09 from $8.89, respectively.
For the nine months ended September 30, 2002, 57% of the Company's
advertising and e-commerce revenues, excluding conference sponsorship revenues,
were derived from sponsorship contracts, as compared to 33% for the nine months
ended September 30, 2001. As a result of improvements in the Company's
advertising sales infrastructure and selling techniques, the Company has been
able to increase the average revenue it receives per advertiser during the
year-to-date period by 3%, as compared to the same nine month period in 2001,
excluding conference sponsorship revenues. The number of the Company's
advertisers, excluding conference sponsorships, for the nine months ended
September 30, 2002 was 81, as compared to 114 for the nine months ended
September 30, 2001.
For the nine months ended September 30, 2002, the Company's top five
advertisers accounted for approximately 48% of its advertising and e-commerce
revenues, excluding conference sponsorship revenues, as compared to
approximately 35% for the nine months ended September 30, 2001.
Other Revenues. Other revenues increased to $1,252,694 for the nine months
ended September 30, 2002, as compared to $976,181 for the nine months ended
September 30, 2001. This increase is primarily the result of revenue from James
J. Cramer's daily radio program, RealMoney with Jim Cramer, higher conference
attendee revenue, and $150,000 that the Company received from the WTC Recovery
Grant Program as compensation for revenue lost as a result of the September 11th
attacks. Such increase was partially offset by the elimination of revenue
associated with barter advertising arrangements during the nine months ended
September 30, 2002, which, by contrast, totaled $200,000 during the nine months
ended September 30, 2001. Barter advertising transactions in 2001 were
recognized at the fair value as determined by the comparable advertising market
rates at the time of placement. The Company anticipates that it will record no
revenue associated with barter advertising arrangements in 2002.
Cost Of Revenues
Cost of revenues decreased to $5,295,609 for the nine months ended
September 30, 2002, as compared to $7,077,052 for the nine months ended
September 30, 2001. This decrease is primarily the result of reductions within
the Company's editorial and content support staff to 48 employees as of
September 30, 2002, as compared to 53 as of September 30, 2001, as well as
decreased costs associated with content licensing fees.
Product Development Expenses
Product development expenses decreased to $5,499,044 for the nine months
ended September 30, 2002, as compared to $8,235,204 for the nine months ended
September 30, 2001. This decrease is primarily the result of lower consulting
fees in 2002 as compared to those that had been expended in 2001 as the Company
re-developed its commerce system, reduced hosting fees as a result of
renegotiated and/or terminated hosting agreements, reductions within the
Company's technology and product development staff to 28 employees as of
September 30, 2002, as compared to 34 employees as of September 30, 2001, as
well as lower maintenance and internet access fees.
13
Sales and Marketing Expenses
Sales and marketing expenses decreased to $5,285,045 for the nine months
ended September 30, 2002, as compared to $9,052,201 for the nine months ended
September 30, 2001. This decrease is primarily the result of lower distribution
and advertisement-serving expenses due to renegotiated and expired agreements,
reduced advertising and promotion expenses, reduced compensation and related
expenses, as well as the elimination of costs associated with barter advertising
arrangements during the nine months ended September 30, 2002, which, by
contrast, totaled $200,000 during the nine months ended September 30, 2001. Such
decrease was partially offset by increased commission expense due to the build
up of the Company's direct sales force, as well as higher credit card processing
fees.
General and Administrative Expenses
General and administrative costs decreased to $6,559,541 for the nine
months ended September 30, 2002, as compared to $8,357,737 for the nine months
ended September 30, 2001. This decrease is primarily the result of the
elimination of goodwill amortization in accordance with the Company's adoption
of the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets," together with
reductions in equipment lease, occupancy, bad debt, professional, and tax
expenses. Such decrease was partially offset by increased compensation and
related expenses and insurance costs.
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 dates of
grant. This resulted in noncash compensation expense incurred over the period
that these specific options vest. The Company recorded noncash compensation
expense of approximately $637,000 during the nine months ended September 30,
2002 for these less than fair market value options.
In January 2002, the Company issued options to purchase a total of 50,000
shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. The options vested immediately and have
an exercise period of the lesser of five years or 90 days after the termination
of his services. The value of the options was approximately $72,000, which is
being amortized over the two-year period of his service to the Company. The
Company recorded noncash compensation expense of approximately $27,000 during
the nine months ended September 30, 2002 for this option issued to a
non-employee in connection with his outside contributor agreement.
In January 2002, the Company issued options to purchase a total of 100,000
shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. One-half of the options vested
immediately and the other half will vest in January 2003. The options have an
exercise period of the lesser of five years, or 90 days after the termination of
his services. The value of the options was approximately $140,000 at September
30, 2002. The Company recorded noncash compensation expense of approximately
$52,000 during the nine months ended September 30, 2002 for this option issued
to a non-employee in connection with his outside contributor agreement. Due to
the variable accounting methodology, it is difficult to predict the amount of
additional noncash compensation expense the Company will occur in connection
with these options. The Company will continue to remeasure the fair value of
these options on an ongoing basis.
Total noncash compensation expense decreased to $716,113 for the nine
months ended September 30, 2002, as compared to $878,922 for the nine months
ended September 30, 2001. This decrease was primarily the result of the absence
in the nine months ended September 30, 2002 of costs incurred in the nine months
ended September 30, 2001 related to shares of common stock issued to an employee
in connection with an employment agreement, as well as lower noncash
compensation expense due to the departure of certain employees from the Company
during the past year, partially offset by additional charges related to the
stock options issued to a non-employee in January 2002, as discussed in the
prior two paragraphs. As a portion of the options require variable expense
accounting, the associated expense will differ in future periods. The remaining
noncash compensation expense beyond the year 2002 is currently estimated to be
approximately $340,000.
14
Restructuring Expenses
Restructuring expenses of $18,558 for the nine months ended September 30,
2002 primarily represents adjustments to the Company's original estimates
related to the consolidation of facilities and reduction in non-performing
assets. 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
No settlement charge was recorded for the nine months ended September 30,
2002. 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. discussed above.
Interest Income
For the nine months ended September 30, 2002, interest income was $566,402,
as compared to $1,960,677 for the nine months ended September 30, 2001. This
decrease is the result of lower interest rates and reduced cash balances.
Gain on Sale of Investment
For the nine months ended September 30, 2002, gain on sale of investment
was $184,667 due to the sale of the Treasury Note described above. No gain was
recorded for the nine months ended September 30, 2001.
Gain on Disposal of Discontinued Operations
For the nine months ended September 30, 2002, the Company recorded a gain
on disposal of discontinued operations of $200,323. No gain was recorded for the
nine months ended September 30, 2001. The gain primarily represents an
adjustment to the Company's original estimate related to costs to be incurred in
completing the liquidation process.
As of September 30, 2002, the book value of the remaining current assets of
the discontinued operations was $46,040, consisting of a VAT tax receivable.
There were no remaining non-current assets.
Treasury Stock
As discussed in Note 3 to the condensed financial statements, in December
2000 the Company's Board of Directors authorized the repurchase of up to $10
million worth of the Company's common stock. To date, the Company has purchased
5,405,400 shares of common stock at an aggregate cost of $7,181,175. The Company
may from time to time engage in repurchases of common stock under the
program depending upon prevailing market conditions.
15
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, 2002, the Company's cash
and cash equivalents, current and noncurrent restricted cash and short-term
investments amounted to $29,863,575, representing 73% of total assets.
Net cash used in operating activities of $3,142,897 for the nine months
ended September 30, 2002 was primarily due to a net loss of $7,528,909,
decreases in both restructuring reserve and accounts payable and accrued
expenses, a gain on sale of investments and an increase in accounts receivable.
This was partially offset by noncash charges, an increase in deferred revenue
and a decrease in other assets.
Net cash provided by investing activities of $3,102,421 for the nine months
ended September 30, 2002 consisted of net sales of both short and long-term
investments, partially offset by capital expenditures. Capital expenditures
generally consisted of purchases of computer software and hardware.
Net cash used in financing activities of $854,895 for the nine months ended
September 30, 2002 consisted primarily of the purchase of treasury stock and an
increase in restricted cash, partially offset by the proceeds from the exercise
of stock options.
The Company has a total of $3,795,257 of cash that is invested in
certificates of deposit and money market investments that serve as collateral
for outstanding letters of credit, and is therefore restricted. The letters of
credit serve as security deposits for operating leases and insurance premiums.
Of this total, the Company anticipates that $1,295,257 will become unrestricted
within the next 12 months, and is therefore classified as a current asset on the
Condensed Balance Sheet. The Company anticipates that the remaining $2,500,000
of restricted cash will become unrestricted at various times through the year
2009.
The Company believes that its current cash and cash equivalents and
short-term investments 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 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.
Commitments and Contingencies
The Company is committed under operating leases, principally for office
space, furniture and fixtures, and equipment. Certain leases are subject to rent
reviews and require payment of expenses under escalation clauses. Rent and
equipment rental expenses were $326,710 and $670,929 for the three months ended
September 30, 2002 and 2001, respectively. Rent and equipment rental expenses
were $1,177,366 and $2,465,144 for the nine months ended September 30, 2002 and
2001, respectively. Minimum payments have not been reduced by minimum sublease
rentals of $32,300 due in the future under non-cancelable subleases.
Additionally, the Company has employment agreements with certain of its
employees and outside contributors. Future minimum payments under these
obligations are as follows:
16
Payments Due by Period
-----------------------------------------------------------------------------
Less than After
Contractual obligations: Total 1 year 1 - 3 years 4 - 5 years 5 years
-----------------------------------------------------------------------------
Operating leases $ 8,860,022 $1,445,681 $2,813,379 $2,614,273 $1,986,689
Employment agreements 1,314,242 1,075,409 238,833 - -
Outside contributor agreements 520,409 437,492 82,917 - -
-----------------------------------------------------------------------------
Total contractual cash obligations $10,694,673 $2,958,582 $3,135,129 $2,614,273 $1,986,689
=============================================================================
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.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, the Company
carried out, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures are effective. No
significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Risk Factors
You should carefully consider the following material risks facing
TheStreet.com. If any of the following risks occur, the Company's business,
results of operations or financial condition could be materially adversely
affected. The Company may also face other risks which are not discussed in the
following description of its risk factors either because it is unaware of such
risks or because it presently believes that such risks are immaterial. The
Company cannot assure you that any of these other risks, if they were to occur,
would not materially adversely affect the Company's business, results of
operations or financial condition.
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, 2002, the Company had an accumulated deficit of $146.4
million. The Company has not achieved profitability and expects to continue to
incur net losses in 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.
TheStreet.com has an audience of individual investors at various experience
levels to whom it provides content for their financial and investing information
needs. The Company also has a growing audience of professional investors who use
its products in an effort to help them make better investing and trading
decisions for their clients. In addition, the Company has important strategic
relationships with leading companies in the media, technology and financial
services sectors that also help it 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.
17
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 have developed 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.
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 not recovered from its severe
decline. Many traditional and new media advertisers have scaled back their
online media budgets. In addition, the prolonged stock market slump has
negatively affected readership of financial market content, such as that
produced by the Company. As a result, many advertising supported web sites,
particularly those in the financial sector, continue to experience difficulty
selling their available inventories and maintaining their rate structures.
Although the Company believes that its demographic profiles will continue to
enable it to maintain its high sell-through, its ability to increase its
advertising revenues depends on its ability to use cost effective headline
indexing and content distribution deals with internet portals and content
providers to increase its unique visitors and page view inventory. However, the
Company's actual traffic is subject to a variety of factors, including general
market conditions, 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.
For the nine months ended September 30, 2002, the Company's top five
advertisers accounted for approximately 48% of its total advertising and
e-commerce revenues, excluding conference sponsorship revenues, as compared to
approximately 35% for the nine months ended September 30, 2001. 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 providing for short notice.
The Company May Have Difficulty Adding Subscribers and Retaining Current
Subscribers
The Company continues to seek to retain its current subscribers and to
attract new subscribers. As of September 30, 2002, the Company had approximately
66,000 paid annual and monthly subscribers (not including free trials, but
including an estimate of subscribers paid for as part of certain bulk deals) to
14 subscription products, as compared to approximately 76,000 such subscribers
to seven subscription products as of September 30, 2001. The Company believes it
has significantly enhanced its subscription offerings to differentiate them from
the free financial and investing information that is widely available on the
web, including on TheStreet.com 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.
18
Difficulties In Developing New And Enhanced Products and Services Could Harm The
Company's Business
The Company has introduced additional and enhanced products and services in
the first nine months of 2002 in order to retain its current subscribers and
attract new subscribers, and intends to introduce still more in the remaining
three months of 2002. 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 increased
traffic, and intends 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. 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 improve 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
February 2002, in connection with the acquisition of the assets of Exodus
Communications, Inc. by Cable & Wireless plc, a global telecommunications
company headquartered in Great Britain, the Company's June 2001 internet-hosting
agreement with Exodus was assumed by Cable & Wireless. The Company's operations
depend on the ability of Cable & Wireless to protect its own systems and the
Company's systems in its data center against damage from fire, power loss, water
damage, telecommunications failure, acts of terrorism, vandalism and similar
unexpected adverse events. Although Cable & Wireless provides comprehensive
facilities management services, including human and technical monitoring of all
production servers 24 hours per day, seven days per week, Cable & Wireless 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 Cable & Wireless 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 Cable & Wireless, may
be subject to damage or interruption from human error, natural disasters, fire,
water damage, power loss, telecommunication failures, acts of terrorism,
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.
19
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.
Certain 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:
- 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;
- publishers and distributors of traditional media, including
print, radio and television, such as The Wall Street Journal,
Fortune, Bloomberg Business Radio and CNBC;
- providers of terminal-based financial news and data, such as
Bloomberg Business News, Reuters News Service and Dow Jones
Markets;
- web "portal" companies, such as Yahoo! and America Online; and
- 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.
20
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.
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 business, 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
business, 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 products are
required to furnish certain personal information (including name, mailing
address, phone number, email address and credit card information), which the
Company uses to administer its services. Additionally, the Company has
implemented a registration system that collects 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.
21
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 and RealMoney brands is an important aspect of its efforts to
continue to attract users. The Company's new products do not have 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 or RealMoney brands or in persuading
potential users to subscribe to the Company's products or 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 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, or other breach of the Company's
compliance policies, 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'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, customers, 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 several trademarks in the United States and also has
pending U.S. applications for other trademarks. 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.
22
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:
- inadequate network infrastructure;
- security and privacy concerns;
- inconsistent quality of service; and
- 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 companies providing such services have filed for bankruptcy. Many 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 in part on the use of the
internet as an advertising medium. The internet advertising industry is still
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 has slowed significantly. Many
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 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.
23
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, by so-called "opt-in"
requirements that permit the sharing of personal information only if consumers
have actively agreed to it, 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 advertising and
other 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.
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.
24
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 information 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. As the
Company's activities have evolved to include the offering of stand-alone
products providing stock recommendations and analysis to subscribers, in
contrast to stock recommendations and commentary that are part of a larger
online financial publication of more general and regular circulation, the risk
that regulators could interpret the Company's activity as subjecting it to
regulation increased. As a result, the Company determined that it was in its
best interests to register with the Securities and Exchange Commission as an
investment advisor under the Investment Advisers Act of 1940 (the "Investment
Advisers Act"). If the Company were found to have violated the Investment
Advisers Act or any other securities laws, it 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 that
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,
affecting the Company and its customers. 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 including, for
example, a prohibition on the sharing of personal information absent explicit
consumer agreement, or "opt-in". The European Union has enacted its own privacy
regulations that has resulted in limits on the collection and use of certain
information from users in Europe. Other jurisdictions may follow. The Company
could incur additional expenses if any new regulations regarding the use of
personal information are introduced or if the Company were required to defend
its privacy practices against agency investigations. 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 and results of operations. Any new laws or regulations
relating to the delivery of the Company's products and services, or certain
application or interpretation of existing laws, could decrease the growth in the
use of the internet, decrease the demand for the Company's products and
services, or otherwise materially adversely affect its business.
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,
internet publishing and internet advertising.
25
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 through September 30, 2002, the closing sale price of the Company's
common stock on the Nasdaq National Market ranged from $2.92 to $2.06. As of
November 11, 2002, the closing sale price was $2.88. 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 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, does not expect to pay any dividends in the foreseeable
future.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 5, 2001, a class action complaint alleging violations of the
federal securities laws was filed in the United States District Court for the
Southern District of New York naming as defendants TheStreet.com, Inc., certain
of its former officers and directors and a current director, and certain
underwriters of the company's initial public offering (The Goldman Sachs Group,
Inc., Chase H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and
Merrill Lynch Pierce Fenner & Smith, Inc.). The complaint alleges, among other
things, that the underwriters of TheStreet.com's initial public offering
violated the securities laws by failing to disclose certain alleged compensation
arrangements (such as undisclosed commissions or stock stabilization practices)
in the offering's registration statement. TheStreet.com and certain of its
former officers and directors and a current director are named in the complaint
pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) of the
Securities Exchange Act of 1934. The plaintiffs seek damages and statutory
compensation against each defendant in an amount to be determined at trial, plus
pre-judgment interest thereon, together with costs and expenses, including
attorneys' fees. Similar complaints have been filed against over 300 other
issuers that have had initial public offerings since 1998 and all such actions
have been included in a single coordinated proceeding. Pursuant to a Court Order
dated October 9, 2002, each of the individual defendants to the action has been
dismissed without prejudice. TheStreet.com remains a party to the action and
intends to defend itself vigorously. However, due to the inherent uncertainties
of litigation, the Company cannot accurately predict the ultimate outcome of the
litigation. Any unfavorable outcome of this litigation could have an adverse
impact on the Company's business, financial condition and results of operations.
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 May 29, 2002 is contained in the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed
with the Securities and Exchange Commission on August 14, 2002.
Item 5. Other Information.
Not applicable.
27
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 TheStreet.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, dated as of May
29, 2002
99.1 Certification of CEO
99.2 Certification of CFO
* Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1 dated February 23, 1999 (File No. 333-72799).
** Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K dated March 30, 2000.
+ Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K dated April 2, 2001.
++ Incorporated by reference to Exhibits to the Company's Quarterly Report on
Form 10-Q dated August 14, 2002.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2002.
28
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, 2002 By: /s/ Thomas J. Clarke, Jr.
-------------------------------
Thomas J. Clarke, Jr.
Chairman of the Board and Chief
Executive Officer
Date: November 14, 2002 By: /s/ Lisa A. Mogensen
-------------------------------
Lisa A. Mogensen
Chief Financial Officer
29
CERTIFICATIONS
I, Thomas J. Clarke, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TheStreet.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 14, 2002 By:/s/Thomas J. Clarke, Jr.
------------------------
Thomas J. Clarke, Jr.
Chairman of the Board and
Chief Executive Officer
30
CERTIFICATIONS
I, Lisa A. Mogensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TheStreet.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 14, 2002 By:/s/ Lisa A. Mogensen
--------------------------
Lisa A. Mogensen
Chief Financial Officer
31
EXHIBIT INDEX
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 TheStreet.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, dated as of
May 29, 2002
99.1 Certification of CEO
99.2 Certification of CFO
* Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1 dated February 23, 1999 (File No. 333-72799).
** Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K dated March 30, 2000.
+ Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-K dated April 2, 2001.
++ Incorporated by reference to Exhibits to the Company's Quarterly Report on
Form 10-Q dated August 14, 2002.
32
Exhibit 99.1
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of TheStreet.com, Inc. (the
"Company") for the quarterly period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Thomas J.
Clarke, Jr., as Chief Executive Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Thomas J. Clarke, Jr.
- -------------------------
Thomas J. Clarke, Jr.
Chief Executive Officer
November 14, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 99.2
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of TheStreet.com, Inc. (the
"Company") for the quarterly period ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Lisa A.
Mogensen, as Chief Financial Officer of the Company, hereby certifies, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to her knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Lisa A. Mogensen
- --------------------
Lisa A. Mogensen
Chief Financial Officer
November 14, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.