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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000 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 000-30309
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SCREAMINGMEDIA INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4042678
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 WEST 26TH ST., 13TH FLOOR 10001
NEW YORK, NY (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (212) 691-7900
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $.01 par value
Series A Junior Participating Preferred Stock
(rights to purchase such stock are attached to the common stock)
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the shares of Common Stock held by
non-affiliates was approximately $37,633,710 based on the closing price on the
NASDAQ for such shares on March 26, 2001. The number of the Registrant's shares
of Common Stock, par value $.01 per share, outstanding was 38,089,303 as of
March 26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Definitive Statement for the Annual
Shareholder's Meeting to be held on June 12, 2001 are incorporated by reference
into Part III.
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TABLE OF CONTENTS
ITEM FORM 10-K
NO. REPORT PAGE
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PART I
1. Business.................................................... I-1
2. Properties.................................................. I-22
3. Legal Proceedings........................................... I-22
4. Submission of Matters to a Vote of Security Holders......... I-22
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... II-1
6. Selected Consolidated Financial Data........................ II-1
7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... II-2
7(A). Quantitative and Qualitative Disclosures about Market
Risk...................................................... II-11
8. Financial Statements and Supplementary Data................. II-11
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. II-11
PART III
10. Directors and Executive Officers of the Registrant.......... III-1
11. Executive Compensation...................................... III-1
12. Security Ownership of Certain Beneficial Owners and
Management................................................ III-1
13. Certain Relationships and Related Transactions.............. III-1
PART IV
14. Exhibits, Financial Statements and Schedules, and Reports on
Form 8-K.................................................. IV-1
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PART I
ITEM 1. BUSINESS
The statements contained in this Report on Form 10-K that are not purely
historical statements are forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this filing on Form 10-K to conform
these statements to actual results. See "Risk Factors," and the factors and
risks discussed in our Registration Statement filed on Form S-1 on August 2,
2000 (File No. 333-30548) with the Securities and Exchange Commission.
OVERVIEW
We have developed proprietary technologies that enable Web sites, intranets,
extranets and wireless networks to cost-effectively meet the growing need to
provide targeted, high-quality content to their users. We aggregate licensed
content--including news, features, photos, video, stock quotes, audio, and
weather reports--from more than 3,000 publications, then filter, deliver and
integrate this content into the web and wireless platforms of our customers via
our SiteWare-TM- software suite or through our fully hosted solution. Our
technologies enable us to deliver content to customers who use any of the major
Web site server and database technologies, including those used to support
wireless access devices.
We refer to our network of customers and providers as our "digital content
network". Participation in our digital content network offers Web sites,
intranets, extranets, voice portals, and wireless networks access to timely and
relevant content and offers our content providers an efficient means of
syndicating their content to third parties. In addition to working with most
formats, our platform is designed to enable us to continually add new forms of
content such as flash animation and pdf documents, as well as supporting
multiple languages and character sets. ScreamingMedia also offers technology
based services, which utilize our proprietary infrastructure platform and tools,
to enable enterprises and media companies with their own content relationships
to aggregate, process, deliver and integrate their own content into the web and
wireless networks of their customers and partners.
The primary elements of ScreamingMedia's technology are the Content
Engine-Registered Trademark-, our SiteWare suite of client software, and our
hosting platform. Content from a range of sources is delivered in a variety of
formats to our servers where the Content Engine processes and filters it, copies
the content to customer-specific files, prepares it for delivery in the form the
customer requires, and dispatches it over the Internet by means of a proprietary
communication protocol connecting the Content Engine and SiteWare. SiteWare,
which typically resides on our customers' servers, receives the content over the
Internet and integrates it seamlessly into the customer's Web site. SiteWare
easily integrates into existing business systems including proprietary and third
party applications and databases. Lastly, for customers that choose a hosted
solution, ScreamingMedia stores, serves, authenticates, and tracks usage of
content on its own platform of load balanced Web servers. This platform enables
ScreamingMedia to host and integrate content into customers' Web sites in the
look and feel of their choice.
Our customers include Fortune 500 companies, wireless networks, portals,
vortals, large and mid-sized enterprises, and small businesses with Web sites.
As of December 31, 2000, we had 1,315 customers and obtained content from over
3,000 publications. Customers include AT&T, E*Trade, Bristol Myers-Squibb,
Fidelity, Chevron, Compaq, Hewlett-Packard, Schering Plough, Associated Press,
Nokia, the National Multiple Sclerosis Society, Intelihealth, The New York Times
Syndicate, and MSN Money Central, among others. Our content providers range from
traditional news services to new media sources and include, among others, AP
Online, Deutsche Press-Agentur, EFE, Knight-Ridder Tribune, Bridge News,
Knoxville News-Sentinel, The New York Times Syndicate, Red Herring.com,
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USA Today and RollingStone.com. Furthermore, our growth is facilitated by a
number of strategic partnerships with technology partners, systems integrators,
and wireless application partners like Broadvision, BEA Systems, ATG, IBM,
Interwoven, Plumtree, Allaire, iPlanet, TIBCO, Agency.com, Proxicom,
OracleMobile, Aspiro and Lucent.
We also have a growing international presence, with 185 of our customers and
284 of our publications based outside the United States, serving customers in 27
countries and distributing content in seven different languages. ScreamingMedia
is headquartered in New York City and has offices in San Francisco, Miami,
London, and Paris. We were incorporated in 1993 as The Interactive
Connection, Inc. Until 1997, our primary business focus was Web site design,
development and consulting. By the end of 1997 we had designed and developed our
proprietary software. In late 1998 we shifted our business focus entirely to the
business of aggregating and distributing digital content over the internet.
INDUSTRY BACKGROUND
The Internet and Internet-related technologies are improving the way that
information and content is created, distributed, and used. Traditional
businesses and media companies of all sizes have begun to recognize Internet and
Internet-based technologies as distribution channels, enablers of business
processes, and methods of acquiring critical information.
RAPID GROWTH OF THE INTERNET AS CONSUMER MEDIUM AND SALES AND MARKETING CHANNEL
The Internet has emerged as a global medium for communications and commerce.
The Computer Industry Almanac estimates that the number of worldwide Internet
users could grow from 413 million at year-end 2000 to over 1 billion in 2005.
Jupiter Media Metrix estimates that the number of users in the United States
alone will grow from 122 million in 2000 to 194 million, or 68% of the U.S.
population, by 2005. Morgan Stanley Dean Witter has estimated that 70% of U.S.
businesses (excluding non-employer and individual businesses) will maintain an
active Web presence by 2004. IDC also estimates that revenues generated from
Internet commerce will exceed $1.3 trillion by 2003.
INCREASED ADOPTION OF ENTERPRISE PORTALS AND INTRANETS
Enterprises are increasingly deploying "enterprise portals" or intranets as
a way to provide centralized access to information for their employees.
According to a survey by Giga Information Group, 26% of respondents had already
implemented an enterprise portal, 15% were in the process of implementing one,
and 45% were in the planning or evaluation stages. We believe that current news
and information about the external environment is a critical part of a portal
solution that can help their employees make better decisions and better react to
events in their marketplace.
ADOPTION OF INTERNET TECHNOLOGIES BY TRADITIONAL MEDIA
A recent report by Forrester Research suggests that 74% of media companies
are aggressively pursuing a digital distribution strategy. We believe media
companies will increasingly attempt to capitalize on the low-cost distribution
capabilities of the Internet to distribute content to consumers, licensees, and
other business partners.
GROWING IMPORTANCE OF HIGH-QUALITY CONTENT
The ability of companies to attract, engage, and influence users through
their Web sites and extranets is based in a large part on their ability to
provide users with valuable, relevant content. A Forrester research survey has
indicated that 75% of users return to their favorite Web sites because of
high-quality content. In order to drive users to their sites, provide an
engaging user experience, and
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communicate strategic marketing messages, both consumer and business-focused Web
sites need to obtain high quality content.
As competition becomes increasingly global and knowledge of the external
environment becomes more critical to a broader base of workers, the need for
enterprises to provide accurate, relevant third-party information to their
employees grows.
ENTERPRISES AND CONTENT PROVIDERS FACE CHALLENGES OBTAINING, MANAGING, AND
DISTRIBUTING THEIR CONTENT ASSETS
Companies have traditionally faced two costly and time consuming
alternatives in attempting to obtain and integrate compelling content - either
to produce the content themselves or to license content to multiple third-party
sources. Web sites and enterprises that choose to create their own content face
the high cost of maintaining an editorial staff. Additionally, enterprises that
choose to build their own content distribution infrastructure face the high cost
of employing an information technology staff to build it.
Forrester Research estimates that the median number of online distribution
partnerships per media company will increase by nearly 400% from 2000 to 2003.
Content providers wishing to distribute content to their business partners have
traditionally utilized expensive, proprietary data networks. Some have begun to
employ manual Internet-based methods such as FTP feeds or e-mail. To maximize
the value of their licensee relationships, these companies will need to provide
higher value solutions and reduce costs by outsourcing and automating processes
like affiliate management, format conversion, and categorization, precluding the
necessity to build complex custom solutions.
THE SCREAMINGMEDIA SOLUTION
We provide Web sites, intranets, extranets, portals, and wireless platforms
with a single source for high quality targeted content. Our technologies allow
our customers to obtain custom filtered digital content delivered in real time
and integrated into the look and feel of their Web and wireless platforms.
Additionally, in 2001, ScreamingMedia introduced the !Connect family of
products, targeted to enterprises and media companies with their own content
resources, which provides the technology platform to consolidate content
aggregation, processing, delivery, and integration of that content into their
own web and wireless networks. Accordingly, our content solutions' offering is
divided into the two categories of technology services and content services. In
most cases, ScreamingMedia sells a content solution that bundles components of
content services and technology services.
TECHNOLOGY SERVICES
ScreamingMedia's technology services uses SiteWare and Content Engine to
aggregate, parse, filter, distribute and integrate content into our customers'
Web and wireless platforms. The Content Engine, which resides on our servers,
processes, filters, and distributes incoming content to our customers. SiteWare,
which is typically installed on our customers' servers, receives the content and
integrates it into the customer's platform. Our technology services, which are
most often bundled in a solution with content services, provide solutions and
tools for our clients to extract more value out of our digital content network.
Technology services, represented by license and set-up fees on our statement of
operations, generated $3.4 million, $492,000 and $68,000 in revenue during 2000,
1999, and 1998, respectively. We package our technology services into the
following four services:
SOFTWARE SOLUTIONS: ScreamingMedia's Software Solutions consist of our
SiteWare software suite. SiteWare allows the customer access to our services and
enables communication between the customer's server and the Content Engine.
Depending on the level of control and functionality customers require, SiteWare
3.0 is available in 3 tiers--SiteWare, SiteWare Pro, and SiteWare XE--which is
our most advanced version. The various tools that are offered through SiteWare
are:
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- Editor's Desk-TM---Allows clients to preview filtered content, hand-select
specific stories and photos, change link text, write captions and exercise
complete editorial control, and use the Ad-Hoc Search tool to query
ScreamingMedia's entire database of content from over 3,000 content
publications to find articles that match specific, real-time business
needs;
- Writer's Desk-TM---Allows clients to create and manage their own content,
then integrate their content into Editor's Desk, and publish their work
alongside ScreamingMedia's third-party content. This is available on
SiteWare Pro and XE versions. However, with SiteWare XE, clients also can
manage stories as they progress from draft, to self-edit, to final
approved form;
- Digital Press-TM---Targeted toward enterprise-level businesses, it is a
fully flexible formatting tool that utilizes the latest XSLT technology to
publish content multiple times in multiple formats including NITF (News
Industry Text Format), NewsML, HTML, email, popular database formats, HDML
(Handheld Device Markup Language), and WML (Wireless Markup Language).
CONTENT!CONNECT-TM-
Through Content!Connect, introduced in January 2001, enterprises with their
own content resources use ScreamingMedia's Content Engine to aggregate their own
content feeds, and process and format this content for delivery. The content can
then be integrated directly into the enterprise's Web network via our
"hands-free" hosted solution, or via our client-side SiteWare software suite
which provides full editorial control. This is a complete outsourced solution
that enables enterprises to fulfill their own content exchange deals, while
eliminating the need to make significant capital investments in building this
type of technology infrastructure.
SYNDICATION!CONNECT-TM-
With Syndication!Connect, content creators and media companies utilize
ScreamingMedia's technology platform to aggregate, process, filter and
distribute their content, via our Content Engine, to their licensees, who then
integrate the data into their digital platforms via SiteWare. Introduced in
February 2001, this solution enables media companies to extend their brand
through private syndication, without building a complex infrastructure, and
eliminating the capital investment required of creating and managing additional
technology.
WIRELESS SOLUTIONS-TM-
The same content and technology solutions that power ScreamingMedia's other
technology services are leveraged to enable wireless service providers to
deliver content to cell phones, PDAs and other portable digital devices. Our
technology platform translates content residing on our customers' servers to XML
or WML for wireless distribution. Through partnerships with companies like
OracleMobile, Aspiro, and Lucent, ScreamingMedia helps websites, portals,
vortals, intranets, and extranets extend their brand and develop mobile-friendly
applications.
CONTENT SERVICES
ScreamingMedia's content services offer news, features, photos, video,
audio, stock quotes, weather, and directories from an extensive range of content
providers. Through our digital content network of more than 3,000 publications,
we have created a number of content services. Our customized content services
employ our Content Engine to process, filter and distribute content to our
customers. Our customers can have full editorial control via SiteWare, which is
installed on our customers' servers, or they can opt for our fully hosted
solution. Content services generated $18.5 million, $2.5 million and $499,000 in
revenue during 2000, 1999, and 1998, respectively.
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The key features of our services are:
-- customization--we work with our customers to create a series of custom
filters. Each filter is a file containing search parameters that is built
into the Content Engine and causes it to extract exactly the type of
content the customer desires;
-- real-time delivery--as soon as we receive content, our Content Engine
processes, filters and dispatches it almost instantaneously to our
customers' Web sites, intranets, extranets, and wireless networks;
-- control--customers can use the Editor's Desk feature of SiteWare to
review the content we deliver and choose which items to display on their
sites. Alternatively, customers can choose to have ScreamingMedia publish
content directly to their Web sites via our hosted solution; and
-- integration--once a customer has chosen the desired content, SiteWare
automatically integrates it into the customer's Web site. Customers can
choose to receive content in most commonly used formats, including XML,
HTML, and database-ready formats. Our system enables content to appear on
the customer's site in a manner consistent with the look and feel of the
site.
We package our content services into five product offerings:
CUSTOM!EDITION-TM-: Delivers content, via SiteWare, such as news,
features, photos, video, audio, and more, custom-filtered to match the exact
specified editorial profile of the customer. Through our Editor's Desk
interface, the customer maintains total editorial control.
NEWS!STAND-TM-: Delivers affordable packages of targeted content,
automatically updated for the customer through a "hands-free" hosted
solution. We offer over 225 highly targeted industry categories and expect
to continue to expand this offering in 2001.
CONTENT!TOOLKIT-TM-: Equips websites with utility-driven content
solutions such as Weather and Stock Quotes. All data is updated
automatically, requiring no intervention by the customer. We offer set up
using either JavaScript data delivery method or HTML frames.
CONTENT!DIRECT-TM-: Offers direct feeds from content providers such as
Associated Press Online, Business Week, Red Herring, The Sports Network and
RollingStone.com. Customers may opt to receive automatic updates through our
hosted solution or exercise full editorial control via SiteWare.
AV!DIRECT-TM-: Enables customers to integrate rich audio and video
clips from our providers directly into their Web site, portal or intranet.
AV!Direct is a "hands-free" hosted solution. Javascript delivery ensures
easy set-up and feeds are updated automatically. Audio and video content is
streamed directly into the client's site and displayed through a
ScreamingMedia player, which supports Windows Media, Real and QuickTime
formats.
ScreamingMedia also offers our customers professional services such as
content implementation and normalization, filter building, editorial services,
and adapter design.
BENEFITS TO OUR CUSTOMERS:
Compelling Cost Proposition. We provide our customers with a single-source
solution for their content needs. Our services are both easy to implement--our
software is compatible with the software that is used to support most Web sites,
intranets, extranets and wireless platforms--and easy to use, with very little
ongoing effort required. Customers can opt to maintain full editorial control in
selecting the content they receive from us or they can opt to operate
"hands-free," with content integrated directly into their Web site without any
further editorial effort. By using ScreamingMedia, our customers can avoid the
time and expense associated with maintaining an editorial staff or dealing with
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multiple content providers, enabling them to focus their resources on other
critical aspects of their business.
Seamless Integration into a Customer's Web Site. Our services deliver and
integrate content directly into our customers' Web sites in a manner consistent
with the look and feel of the site, enabling our customers to maintain and
enhance their brand identity. The content we supply is fully integrated so that
users remain on our customers' sites, which is an advantage over other services
that require users to transfer to the content provider's site. This enhances
user loyalty, allows Web sites to control the user's online experience and
expands our customers' revenue opportunities.
Flexible Solutions for a Broad Range of Customers. Our services are scalable
and adaptable to meet customers' changing needs. Our services are equally
suitable for customers requiring a high volume of content across many categories
and those requiring a narrow stream of highly targeted content. Additionally,
our services may be used to supplement a Web site's original content. We can
supply local, national and international content in different languages from a
broad range of sources to Web sites worldwide. In addition, with our packaged
news product, News!Stand, we offer customers a lower-cost, pre-edited hosted
news service. We can deliver content in any commonly used format, including
current standard Internet formats such as the format known as HTML and evolving
standards such as the format known as XML. We can also format content for
insertion into a customer's database.
Complete Outsourced Platform for Content Providers and Enterprises. Our
technology platform enables media companies with their own content, as well as
enterprises who wish to obtain third party content, to aggregate, process,
deliver, and integrate content into their own network or into the networks of
their subscribers. In addition to offering our !Connect family of products to
content providers and media companies, we also offer them the opportunity to
expand the distribution of their content and extend their reach at little or no
cost by participating as a content provider within our digital content network.
Participation in our digital content network allows content providers to
increase their brand exposure while generating additional revenue opportunities.
For content providers that already syndicate their content, the benefit lies in
accessing additional distribution outlets without having to negotiate specific
arrangements, which translates into increased distribution and revenue potential
at little or no incremental cost. For other publishers, particularly small or
niche content providers, we offer an attractive opportunity to syndicate their
material and reach audiences that they could not otherwise access.
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STRATEGY
Our objective is to establish our technology as the global standard for the
aggregation, processing, distribution, syndication and integration of digital
content. The key elements of our strategy are as follows:
CONTINUE TO PENETRATE THE LARGE AND MID-SIZED ENTERPRISE CUSTOMER BASE. We
have, and intend to continue to, moved aggressively to enhance the quality of
our customer base, focusing on providing a complete outsourced solution suitable
for the large and mid-sized enterprise market. Our sales force actively targets
these higher revenue, large and mid-sized enterprise customers. We will continue
to expand and improve our enterprise level technology and content services to
attract these larger customers. Additionally, we intend to more deeply integrate
our technology into the platforms of large strategic technology partners and
offer professional services to meet the most sophisticated client needs.
EXPAND TECHNOLOGY SERVICES. We intend to increasingly leverage our
technology platform to continue providing our customers with a higher
value-added solution. We will continue to increase the functionality of the
Content Engine and our SiteWare suite of software, enabling us to generate
higher license and upfront revenues. We also believe that the technology
platform we have developed to distribute our own content products offers a
compelling way for licensees of other third-party content to aggregate and
integrate these feeds, as well as a cost-efficient method for content providers
to distribute their products to their direct licensees. We are aggressively
marketing this family of services, called Content!Connect and
Syndication!Connect, to new and current content partners and enterprise
customers.
CONTINUE TO EXPAND OUR ALLIANCE RELATIONSHIPS. We will continue to enter
into relationships with vendors of Internet-related technologies and services to
increase our base of customers. These companies help us acquire customers by
providing sales leads, and in many cases we also build custom adapters that
enable closer integration with their technology platforms. To date, we have
entered into agreements with approximately 80 partners, and expect to continue
to expand our base of partners.
EXTEND OUR LEADERSHIP IN PROVIDING CONTENT PRODUCTS. We believe that we
have an extensive collection of content, as well as a leading selection of
licensed content products. We will continue to actively incorporate new
providers into our network, adding breadth, depth and new types of content. In
addition to offering our customers complete editorial control via SiteWare, we
offer our customers a fully hosted solution called News!Stand. News!Stand has
over 225 highly targeted industry categories, and we plan to add more categories
as we continue to identify customer needs.
EXPAND OUR INTERNATIONAL PRESENCE. There are significant opportunities to
continue to expand our digital content network outside the United States. In
particular, Latin America, Europe and Asia are expected to experience dramatic
growth in Internet use over the next several years. We intend to capitalize on
these opportunities. By moving into these markets early, as the need for Web
content has become more critical, we believe we will be able to obtain a
significant advantage over our competitors. Our content processing technology
allows us to aggregate and manipulate any form of content in any language and
consequently we face few technological barriers to international expansion. In
January 2000 we opened a London office, and in December 2000 we opened our Paris
office. Additionally, we have an exclusive licensing agreement with BecomeMedia,
an Australian company, to provide our full-service content solutions to
enterprises in Australia and New Zealand.
CUSTOMERS
As of December 31, 2000, we had entered into contracts with 1,315 companies,
which is a 212% increase from 422 customers we had entered into contract with as
of December 31, 1999. Our customers represent a broad spectrum of enterprises
within diverse sectors including, among others,
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financial services, technology, health, e-commerce/advertising/portals,
professional services, public sector/associations, media/entertainment,
telecommunications, and industrial/utilities. Representative customers include:
FINANCIAL SERVICES
AIG
Allied Capital
American Express
E*TRADE
Ditech
Fidelity
Fiduciary Trust (Templeton)
Legg Mason
Thomas Weisel Partners
Zurich American Insurance Company
TECHNOLOGY
Audiopoint
Compaq
EMC
Hewlett Packard
NCR Corporation
Open Market
HEALTH
Bristol-Myers Squibb
GlaxoWellcome
Healthsouth
HenrySchein, Inc.
Intelihealth
Pfizer
Schering Plough
E-COMMERCE/ADVERTISING/PORTALS
About.com
DoubleClick
Hotjobs.com
MSN Money Central
Local Media Internet Venture
PROFESSIONAL SERVICES
JD Powers
The NPD Group
Price Waterhouse Coopers
Princeton Review
PUBLIC SECTOR/ASSOCIATIONS
AAA Foundation for Traffic Safety
Association of Trial Lawyers of America
International Foundation of Employee
Benefit Plans
National Library of Medicine
National Multiple Sclerosis Society
UNICEF
MEDIA/ENTERTAINMENT
Associated Press
Cablevision
CNET
Esquire Magazine
ESPN
McGraw Hill
The New York Times Syndicate
Pennwell Corporation
Prentice Hall
Thomson Financial
TELECOMMUNICATIONS/WIRELESS
AT&T
GiantBear
MobileID
Nokia
OmniSky
PSI Net
RCN
Rogers AT&T Wireless
Telefonica
INDUSTRIAL/UTILITIES
Chevron
Shell
Adidas
Schlumberger
Canadian Electric Utilities
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Our revenue is composed of services revenue and license and set-up fees. We
derive our services revenue primarily from distributing digital content directly
to our customers' Web sites. Our contracts typically have an initial term of one
year. We charge our customers recurring monthly content, delivery and processing
fees. In certain cases we require prepayment ranging from one to twelve months.
In addition, we charge certain of our customers an upfront maintenance fee. We
recognize revenue for the contracted services fees ratably over the life of the
contract. We record billed amounts due from clients in excess of revenue
recognized as deferred revenue. We report our revenue net of allowances and
rebates.
We charge license and set-up fees for our proprietary SiteWare software and
building custom filters enabling the customer to receive customized content.
License and set-up fees are charged upfront and vary according to the version
and functionality of SiteWare selected and the number of custom filters created.
License fees are either charged annually, or one time, while set-up fees are
charged one time only. We recognize license and set-up fees ratably over the
life of the contract. We record billed amounts due from clients in excess of
revenue recognized as deferred revenue.
In 2000, no customer accounted for over 10% of revenue and we do not
anticipate that any one customer will account for more than 10% of revenue in
the year ending December 31, 2001. In 2000, approximately $2.5 million dollars
in revenue originated from international customers. As of December 31, 2000, 185
of our customers were based outside the United States, in 27 countries, with no
one country comprising more than 5% of our total revenue during 2000.
CONTENT PROVIDERS
We employ a specialized content acquisition team to build and maintain our
network of content providers. As of December 31, 2000, this team was composed of
14 employees. Members of this department typically specialize in a particular
type of source, such as newspapers, newswires, magazines or Web sites, or on
major geographic or vertical markets.
As of December 31, 2000, we obtained content from over 3,000 publications
ranging from traditional news syndication services to specialized media sources
and including both domestic and international publications. See "Risk
Factors--Losing Major Content Providers May Leave Us With Insufficient Breadth
of Content to Retain and Attract Customers." A representative list of our
content providers is provided below:
GENERAL NEWS SYNDICATION
ABCNews.com
AP Online
Bell & Howell Information & Learning
The Christian Science Monitor
Comtex
Knight-Ridder Tribune
The New York Times Syndicate
Scripps Howard News Service
INTERNATIONAL/FOREIGN LANGUAGE
AFX
Agence-France Presse
Deutsche Presse-Agentur
EFE
Europa Press
Guardian Unlimited
Latin Trade
LIFESTYLES/ENTERTAINMENT/SPORTS
AP Mega Sports
Astrology.com
World Entertainment News Network
Cigar Afficionado
Launch Media
RollingStone.com
Theatre.com
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The Sports Network
Wine Spectator
BUSINESS AND INDUSTRY
Cahners Business Information
Bridge News
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TECHNOLOGY
ScreamingMedia's proprietary software platform is designed for flexibility,
scalability and reliability. The primary elements consist of the Content Engine,
hosted within ScreamingMedia's data centers, our SiteWare client software, which
may either be hosted at ScreamingMedia or installed within each customer's data
center, and our hosting platform, which stores, serves, authenticates, and
tracks usage of content hosted at ScreamingMedia. Key features of the technology
include:
- OBJECT-ORIENTED, MULTI-TIERED ARCHITECTURE. Our software is based on the
distributed object model, which means that it recognizes groups of data as
compiled packages known as objects. This modern, uniform approach to
document handling allows us to bring in new media types and process them
by whatever Content Engine functions are appropriate. The modularity
resulting from our multi-tiered architecture enhances our ability to
modify and upgrade our software and hardware without interruption to our
services. Both of these features contribute to the scalability of our
services.
- ROBUST PROCESSING AND FILTERING TECHNOLOGY. The algorithms employed in
our proprietary technology allow real-time processing and filtering of all
incoming content. Our content aggregation system can access content
through a variety of delivery channels, including satellite, leased lines
and the Internet, and parses and normalizes all incoming content prior to
the filtering stage. Value-adding document analysis software produces a
uniform metadata layer atop all content, regardless of their original
source or format. Our indexing and filtering technology, which also
incorporates software licensed from Verity Inc., Autonomy Corp., and
Oracle Corp., combines search techniques that utilize keywords, contextual
patterns of words, heuristic document modeling, metadata constraints, and
a business rules layer, to enable a high degree of product customization
and control. We receive 60,000 to 80,000 pieces of content each day that
are screened through over 10,000 custom filters that are fashioned to our
customers' needs.
- PLATFORM-INDEPENDENCE. Our SiteWare client software is written entirely
in Java, which allows the software to function on all major operating
systems.
- COMPATIBILITY WITH EVOLVING TECHNOLOGIES. Our technology enables us to
both deliver content to and aggregate content from a variety of Web
platforms and in a variety of standard and legacy data formats. SiteWare
can deliver content to Web sites in any format, including XML, HTML, WML,
and database-ready formats. Our content aggregation system can access
content through a variety of delivery channels, including satellite,
leased lines and the Internet.
CONTENT ENGINE
The Content Engine is composed of a number of elements of proprietary and
licensed third party technologies that retrieve, normalize, filter, serve, and
track content from over 3,000 different publications. The filtering software,
which incorporates the over 10,000 custom filters we have built for
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our customers, matches content to client filters. When content has been
filtered, proprietary programs copy the content to customer specific files,
prepare it for delivery in the form the customer requires, and dispatch it over
the Internet by means of a proprietary communication protocol, named
ServWare-TM-, that connects the Content Engine and SiteWare.
SITEWARE
For those customers who wish to maintain a level of editorial control, we
provide our customers with our proprietary SiteWare software. SiteWare allows
the customer access to our services and enables communication between the
customer's server and the Content Engine. This is a 100% Java application, and
it can be installed within our client's authoring, editing, or content serving
environments. SiteWare's content formatting and delivery engine is integrated
into the client's internal information-processing architecture. Alternatively,
SiteWare can be hosted at ScreamingMedia, offering a fast and complete
outsourced solution. SiteWare integrates into existing business systems. It
comes in three versions, each equipped with tools to provide different levels of
editorial control. The various customization, formatting, and integration tools
offered through SiteWare include Editor's Desk, Writer's Desk and Digital Press.
HOSTING PLATFORM
For customers that choose a hosted solution, ScreamingMedia stores, serves,
authenticates, and tracks usage of content on its own platform of load balanced
Web servers. This platform enables ScreamingMedia to host and integrate content
into customers' Web sites in the look and feel of their choice, for such diverse
products as news, stock quotes, weather, sports scores, horoscopes, audio and
video clips. Every user that accesses our hosted information is authenticated,
and their access is logged, tracked, and can be reported back to our clients. In
order to meet the growing needs of our customers, the entire system has been
designed to be redundant, secure, recoverable, and scalable.
SCALABLE NETWORK INFRASTRUCTURE
Our entire infrastructure, for both the Hosting Platform and our Content
Engine, consists of multiple UNIX servers that communicate internally and
externally using standard Internet protocols. These servers and the applications
that run on them have multi-tiered configurations, which means that the
functions they perform are distributed across multiple machines. If one of these
machines or applications stops functioning, either through failure or for
maintenance or upgrading, we are still able to provide our services. Data
centers hosted by Frontier GlobalCenter and Network Plus provide power, security
and connectivity for our infrastructure, in addition to housing our servers.
RESEARCH AND DEVELOPMENT
Our research and development expenditures consist of both internal
development and the deployment of technology from third parties. Although we
plan to continue to evaluate externally developed technologies for integration
into our product lines, we expect that most enhancements to existing and new
products will be developed internally. As of December 31, 2000 our research and
development staff consisted of 47 employees.
The majority of our research and development activity has been directed
towards feature extensions to our family of products and the addition of new
products. This development consists primarily of adding new competitive product
features and additional tools and products as we expand into new markets and
serve larger, more advanced customers.
Our research and development expenditures, for fiscal 2000, 1999 and 1998
were approximately $6.4 million, $1.0 million, and $0.2 million, respectively.
We expect that we will continue to commit significant resources to research and
development in the future. Most research and development
I-11
expenses have been expensed as incurred. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing customer requirements. The
introduction of products incorporating new technologies and the emergence of new
industry standards could render existing products obsolete and unmarketable. Our
future success will depend in part on our ability to anticipate changes, enhance
our current products, develop and introduce new products that keep pace with
technological advancements and address the increasingly sophisticated needs of
our customers. See "Risk factors--If We Do Not Continue to Develop Our
Technology, Our Services May Quickly Become Obsolete."
SALES AND MARKETING
SALES
We market our services primarily through our direct sales force, and also
indirectly through our business development group which develops relationships
with technology partners, systems integrators, and wireless application
partners. As of December 31, 2000, our direct sales force, including sales
support, was composed of 88 employees. Our sales staff is currently located in
New York, San Francisco, Miami, London and Paris. Our sales force is divided
into 9 teams organized by geographic and/or vertical markets, such as health,
technology, finance and entertainment.
STRATEGIC ALLIANCES PROGRAM
To accelerate the adoption of our products and services by large enterprise
customers and to enter new markets, our Business Development group has created a
variety of partnerships through an alliance program. As of December 31, 2000,
the Business Development group was composed of 14 employees. Under our alliance
program we have entered into contractual relationships with a wide range of
world-class technology partners, systems integrators, and wireless application
partners that offer opportunities to market our products or to distribute our
software, such as Broadvision, BEA Systems, ATG, IBM, Interwoven, Plumtree,
Allaire, iPlanet, TIBCO, Agency.com, Proxicom, OracleMobile, Aspiro, and Lucent.
These companies promote our products and services, where appropriate, as part of
their overall offerings. Under some of these arrangements, we share revenues
from relevant product lines. In other cases we enter into contractual
arrangements under which partners bundle our SiteWare software with their
technology offerings. Bundling our software with complementary products
increases awareness and trial of our services among likely customers, generating
incremental revenues. We have developed adapters to integrate SiteWare into
leading content management systems such as Broadvision, Interwoven, Allaire and
Plumtree. Furthermore, through strategic alliances with partners like
OracleMobile, Aspiro, and Lucent, we have enhanced our ability to provide
content to wireless devices like PDAs, pagers, and phones. We anticipate that
these strategic partnerships will continue to generate a significant percentage
of leads through which we are introduced to potential customers in the future.
MARKETING
Our marketing strategy is to build brand awareness and increase customer
familiarity with ScreamingMedia and our services through traditional media
advertising, public relations efforts, direct marketing, creation of
ScreamingMedia hosted events and a presence at trade shows and other industry
events. In addition, we use online and offline promotions and strategic
marketing partnerships to help generate sales leads. Our Web site is also used
as a marketing and sales tool, providing current and potential customers the
ability to research and sample our services and to contact our sales staff. As
of December 31, 2000, our marketing department consisted of 10 employees. Our
marketing department also produces marketing materials in support of sales to
prospective clients that include product brochures, data sheets, white papers,
presentations and demonstrations.
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CUSTOMER SUPPORT
We believe that a high level of customer support is critical to our success.
We provide our customers and content providers with 24 hours a day, seven days a
week support. As of December 31, 2000, our customer support staff was composed
of 24 employees. We provide full life-cycle support, beginning with assistance
in configuring and installing the software we provide and building the
customized content filters requested by our clients, and extending to ongoing
technical support and account management.
COMPETITION
The market for digital content aggregation and distribution on the Internet
is new and rapidly evolving. We expect competition to increase significantly in
the future as current competitors improve their offerings and as new
participants enter the market.
Our current competitors include:
- other Internet-focused aggregators and distributors of content;
- traditional newswires that have begun offering products for Web sites; and
- providers of alternative forms of content for Web sites, such as
directories, maps, photographs, stock tickers and video clips.
We believe that the principal competitive factors in our market are
cost-effectiveness, return on investment, completeness of solution, ease of use,
brand recognition, ease of integration, the company's financial strength,
scalability, and breadth, depth and timeliness of content.
We believe that we presently compete favorably with respect to most of these
factors, particularly breadth and depth of content, ease of integration,
cost-effectiveness, and financial strength. However, some of our competitors
offer products with:
- different pricing models, such as flat fees for unlimited access to the
vendor's content, or fees per item;
- different delivery systems, such as systems that provide access to the
content by transferring the user to the content provider's Web site; and
- different types of content, such as maps and directories.
These differences could prove attractive to our existing and potential
customers.
Barriers to entry in our market are relatively low, and we expect to face
new competitors. Competition may come from traditional content providers that
are not currently focused on the Internet and from online providers of other
types of content, as well as from new entrants. We expect our existing
competitors to offer new services and new features on their existing products,
any of which could make their services more attractive to potential customers.
INTELLECTUAL PROPERTY
Our success will depend in part on our ability to protect our intellectual
property and other proprietary rights in our software and other technology. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright, and trade secret laws, confidentiality and license agreements with
our employees, customers, partners, and others, and security features we have
built into our technology. See "Risk factor--Protection of Our Intellectual
Property is Limited and Efforts to Protect Our Intellectual Property May Be
Inadequate, Time-consuming and Expensive."
I-13
We have five pending U.S. patent applications, but presently do not have any
issued patents. Unless and until patents are issued, no patent rights can be
enforced. We have applied for registration in the United States for some of our
trademarks and service marks, including ScreamingMedia(SM), SiteWare, Content
Engine and others, and we intend to pursue registration of some of our marks
internationally.
Despite these protections, others still might be able to use our
intellectual property without our authorization. In addition, the laws of some
foreign countries do not protect proprietary rights to the same extent as do
U.S. laws. Moreover, potential competitors might be able to develop technologies
or services similar to ours without infringing our patents. In addition, if our
agreements with employees, consultants and others who participate in product and
service development activities are breached, we may not have adequate remedies,
and our trade secrets may become known or independently developed by
competitors. If we are unable to protect our intellectual property adequately,
it could materially affect our financial performance.
There can also be no assurance that other parties will not assert claims
that our products or names infringe on their proprietary rights. A third-party
infringement claim could be time-consuming to defend, result in costly
litigation, divert management's attention and resources, cause product and
service delays or require us to enter into royalty or licensing agreements.
EMPLOYEES
As of December 31, 2000, we had 291 full-time employees. Of these, 88 were
employed in sales and sales support, 14 in business development, 24 in customer
support, 10 in marketing, 14 in content acquisition, 47 in research and
development, 25 in professional services (filter building, knowledge and content
engineering, and editorial services), 25 in network operations, MIS, and
infrastructure support, and 44 in general and administrative positions. None of
our employees is represented by a union. We believe that our relations with our
employees are good.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to invest in shares
of our common stock. The trading price of our common stock could decline due to
any of these risks, in which case you could lose all or part of your investment.
In assessing these risks, you should also refer to the other information in this
and our other public filings, including our financial statements and the related
notes.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT WILL BE DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS.
It is difficult to value our business and evaluate our prospects because of
our limited operating history. We began our current line of business at the end
of 1997 and began focusing exclusively on this business in the latter part of
1998. Accordingly, we have limited financial and operating data that is relevant
to our current business. Our business model is unproven, which creates a risk
that our performance will not meet the expectations of investors and that the
value of our common stock will decline.
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
We expect to incur operating losses and experience negative cash flow for
the foreseeable future. We have incurred significant losses since we began our
current line of business in 1997. As of December 31, 2000, we had an accumulated
deficit of $104.6 million. We incurred net losses of
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$40.1 million and $13.2 million for the years ended December 31, 2000 and
December 31, 1999 respectively, not including deemed preferred stock dividends
relating to the sale and conversion of preferred stock. We expect to incur
additional losses as we incur additional costs and expenses related to:
- sales and marketing activities;
- employing additional personnel;
- funding our international operations;
- software and product development;
- establishing strategic relationships; and
- increasing the number of content providers.
We cannot predict when we will operate profitably, if ever. Our ability to
achieve profitability will depend on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. We
cannot be certain that if we were to achieve profitability, we would be able to
sustain or increase profitability.
OUR QUARTERLY FINANCIAL RESULTS MAY BE VOLATILE AND COULD CAUSE OUR STOCK PRICE
TO FLUCTUATE.
Our revenues and operating results may vary significantly from quarter to
quarter. Because of these fluctuations, our results in any quarter may not be
indicative of future performance and it may be difficult for investors to
properly evaluate our results. It is possible that in some future periods our
revenues or earnings may fall below the expectations of investors and result in
the market price of our common stock declining. The factors that may cause our
financial results to vary from quarter to quarter include:
- the demand for our services;
- the value, timing and renewal of contracts with customers and content
providers;
- the amount and timing of operating costs and capital expenditures; and
- the performance of our technology.
These factors, which are largely beyond our control, together with our
limited operating history and unproven business model, make it difficult to
forecast our future revenues or results of operations accurately. We also have
imited meaningful historical financial data upon which to base planned operating
expenses. A substantial portion of our operating expenses is related to
personnel costs, marketing programs and overhead, which cannot be adjusted
quickly. Our operating expense levels reflect, in part, our expectations of
future revenues. If actual revenues on a quarterly basis are below management's
expectations, or if our expenses precede increased revenues, both gross margins
and results of operations would be materially adversely affected.
LOSING MAJOR CONTENT PROVIDERS MAY LEAVE US WITH INSUFFICIENT BREADTH OF CONTENT
TO RETAIN AND ATTRACT CUSTOMERS.
We do not generate original content and are therefore highly dependent upon
third-party content providers. If we were to lose one of our major content
providers and were not able to obtain similar content from another source, our
services would be less attractive to customers. In addition, we cannot be
certain that we will be able to license content from our current or new
providers on favorable terms in the future, if at all. If we are unable to add
content providers to our network, we may not be able to attract new customers in
sufficient numbers to expand our business.
I-15
OUR MANAGEMENT TEAM HAS LIMITED EXPERIENCE WORKING TOGETHER AND IF THEY FAIL TO
FUNCTION EFFECTIVELY AS A UNIT, OUR OPERATING PERFORMANCE MAY BE ADVERSELY
EFFECTED.
Our chief executive officer has only been employed by us since November 1999
and our chief financial officer joined us in March 2000. Our chief operating
officer joined us in February 2000 as president, international and assumed the
role of chief operating officer in June 2000. Additionally, several of our other
senior managers joined us in the last nine months. Therefore, there has been
little opportunity to evaluate the effectiveness of our senior management team
as a unit. The failure of our senior management to function effectively as a
team may have an adverse effect on our ability to maintain a cohesive culture
and compete effectively.
IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PROFESSIONAL STAFF, OUR GROWTH
WILL BE LIMITED.
Our ability to grow, increase our market share and develop our products
depends in large part on our ability to hire, retain and manage highly skilled
employees, including technical, sales, marketing and business development
personnel. Companies in our industry and similar industries compete intensely to
hire and retain qualified personnel, and we cannot assure you that we will be
able to attract the employees we need, or that we will be able to retain the
services of those we have hired. We cannot assure you that we will be able to
prevent the unauthorized use or disclosure of our proprietary knowledge,
practices and procedures if our employees leave us.
IF WE LOSE ANY OF OUR SENIOR MANAGERS OR OTHER KEY PERSONNEL, OUR BUSINESS MAY
BE OPERATED LESS EFFECTIVELY.
We depend on the continued services and performance of our senior management
and other key personnel including technical and sales personnel. If we lose the
services of our senior managers or any of our other executive officers or key
employees, we may not be able to operate our business as effectively as we
anticipate, and our operating results may suffer.
IF WE DO NOT CONTINUE TO DEVELOP OUR TECHNOLOGY, OUR SERVICES MAY QUICKLY BECOME
OBSOLETE.
The market for Internet products and services is characterized by rapidly
changing technology, evolving industry standards and customer demands and
frequent new product introductions and enhancements. To be successful, we will
have to continually improve the performance, features and reliability of our
products and services. We cannot assure you that our technological development
will advance at the pace necessary to sustain our growth. Additionally, new
Internet or telecommunications technologies may require us to alter our
technology and products to avoid them becoming obsolete. Improving our current
products and developing and introducing new products will require significant
research and development.
OUR LIMITED EXPERIENCE SELLING AND MARKETING OUR SERVICES MAY IMPEDE EXPANSION
OF OUR BUSINESS.
We have had relatively little experience marketing our services and may not
be able to successfully implement our sales and marketing initiatives. Marketing
our services in order to expand our customer base is crucial to the success of
our business. The majority of our sales people were hired since the beginning of
1999. We may be unable to hire, retain, integrate and motivate sales and
marketing personnel. New sales and marketing personnel may also require a
substantial period of time to become effective. Unsuccessful sales or marketing
efforts or a material lengthening of our sales cycle could have material adverse
effects on our revenues.
I-16
IF EQUIPMENT FAILURES INTERRUPT THE DISTRIBUTION OF CONTENT TO OUR CUSTOMERS, WE
MAY LOSE CUSTOMERS AND OUR REPUTATION MAY BE ADVERSELY AFFECTED.
Our services will only be attractive to current and prospective customers if
we are able to process and distribute content quickly and reliably. Any failure
of the computer equipment we use or the third-party telecommunications networks
on which we rely for distribution could interrupt or delay our service. This
could lead to customers canceling contracts and could damage our reputation,
which could limit our ability to attract additional customers and lead to a drop
in the value of our common stock.
Substantially all of our own computer and communications hardware is located
in our headquarters and on the premises of our server hosting providers located
in New York City. We also depend on the Internet to distribute our content. All
of these systems are vulnerable to damage or interruption from fire, flood,
power loss, earthquake, malicious damage, including hacking and computer
viruses, telecommunications failure and similar events.
WE MAY BE UNABLE TO EXPAND OUR COMPUTER SYSTEMS QUICKLY ENOUGH TO SUPPORT DEMAND
FOR OUR SERVICES.
Our future success will depend in part on our ability to expand our computer
systems rapidly in order to accommodate significant increases in content
processing volume. We may be unable to expand the capacity of our existing
systems or develop new systems to enable us to process a larger amount of
content, or to provide our services to a larger number of customers. If we are
unable to expand our systems, we may suffer service interruptions that could
make our services less attractive to customers.
Most of our software systems are internally developed, and we rely on our
employees and third-party contractors to develop and maintain these systems. If
any of our software developers or these contractors become unavailable to us, we
may experience difficulty in improving and maintaining our systems. Although we
are continually enhancing and expanding our infrastructure, we have experienced
periodic systems interruptions, which we believe may continue to occur. Failure
to maintain high-capacity data transmission would adversely affect our
reputation and business.
WE FACE INTENSE COMPETITION THAT COULD IMPAIR OUR ABILITY TO GROW AND ACHIEVE
PROFITABILITY.
We face significant competition in the market for digital content. We may
experience greater competition in the future as we address a wider range of
market segments, additional entrants join the market and existing competitors
offer new or upgraded products. Barriers to new entrants are relatively low. If
we fail to compete successfully, we could lose market share, or be forced to
lower our prices or spend more on marketing, which would reduce our margins.
We compete with companies that are focused on aggregating third-party
content and distributing it to online customers. We also compete with
traditional wire services that have adapted their own content for use by Web
sites. We also compete with a wide range of providers of different types of
content that can be used on Web sites, such as directories, maps, photographs,
stock tickers and video clips. Finally, we compete with companies that create
and sell software that enables their customers to aggregate and distribute
digital content and/or to integrate digital content from external sources into
their web platforms. We do not believe that any of these competitors is
currently dominant.
Some of our competitors offer products with different pricing models,
delivery systems and types of content, and these differences could prove
attractive to potential customers. In the future, these competitors or others
might offer products with the features we currently provide, or other features
desired by potential customers.
Many of our current and potential competitors have longer operating
histories, larger customer or user bases, and significantly greater financial,
marketing and other resources than we do. These competitors can devote
substantially more resources than we can to business development and may
I-17
adopt aggressive pricing policies. In addition, larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with our
competitors as the use of the Internet and other online services increases.
Increased competition from these or other competitors could adversely affect our
business.
SOME OF OUR CUSTOMERS ARE RECENTLY ESTABLISHED INTERNET COMPANIES WHO POSE
CREDIT RISKS. THE FAILURE OF THESE CUSTOMERS TO PAY THEIR BILLS HAS LED TO A
LOSS OF REVENUE, A TREND WHICH MAY CONTINUE.
While our strategy is to attract large and mid-sized customers, a number of
our customers are smaller Internet companies. Many of these companies have
limited operating histories, operate at a loss and have limited cash reserves
and limited access to additional capital. With some of these customers, we have
experienced difficulties collecting accounts receivable. As a result, our
allowance for doubtful accounts as of December 31, 2000 was $1.2 million, an
increase of $1.0 million over December 31, 1999. We may continue to encounter
these difficulties in the future. If any significant part of our customer base
continues to experience commercial difficulties or is unable or unwilling to pay
our fees for any reason, our business will suffer.
FAILURE TO RETAIN EXISTING CUSTOMERS AND ATTRACT NEW CUSTOMERS COULD ADVERSELY
AFFECT OUR BUSINESS AND OPERATING RESULTS.
During the fourth quarter of 2000 we added 263 new customers and provided
additional services to 97 of our existing customers. However, we also lost 176
customers during this same period. Many of the customers we lost during this
period were emerging Internet companies with limited operating histories,
limited cash reserves and operating at a loss. While our strategy is to continue
to target large and mid-sized enterprise customers, a significant number of our
customers continue to comprise smaller Internet companies similar to those that
we lost in the fourth quarter of 2000. We cannot assure you that we will be able
to continue to attract new customers at the same rate as we have done in the
past, or that we will be able to retain existing customers.
IF THE CONTENT WE DISTRIBUTE IS UNLAWFUL OR CAUSES INJURY, WE MAY HAVE TO PAY
FINES OR DAMAGES.
The publication or dissemination of content that we have distributed may
give rise to liability for defamation, negligence, breach of copyright, patent,
trade secret or trademark infringement or other claims or charges based on the
nature of the content. As a distributor of this content, we may be directly or
indirectly liable to claims or charges of this nature.
In addition, we could be exposed to liability arising from the activities of
our customers or their users with respect to the unauthorized duplication of, or
insertion of inappropriate material into, the content we supply. Although we
carry general liability insurance, our insurance may not cover claims of these
types or may be inadequate to indemnify us for all liability that may be imposed
on us.
IF WE DISTRIBUTE CONTENT TO UNAUTHORIZED RECIPIENTS, WE MAY HAVE TO PAY DAMAGES
TO OUR CONTENT PROVIDERS.
Our proprietary software technologies enable us to deliver content we
receive from participating content providers only to customers who have been
authorized to access that content. We might inadvertently distribute content to
a customer who is not authorized to receive it, which could subject us to a
claim for damages from the information provider or harm our reputation in the
marketplace.
IF WE ARE UNABLE TO MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION, WE
MAY HAVE DIFFICULTY ATTRACTING NEW BUSINESS AND RETAINING CURRENT CUSTOMERS AND
EMPLOYEES, AND OUR BUSINESS MAY SUFFER.
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and retaining customers and employees. We
also believe that the importance of reputation
I-18
and name recognition is increasing, and will continue to increase, due to the
growing number of providers of Internet services. If our reputation is damaged
or if potential customers are not familiar with us or the services we provide,
we may be unable to attract new, or retain existing, customers and employees.
Promotion and enhancement of our name will depend largely on our success in
continuing to provide effective services. If customers do not perceive our
services to be effective or of high quality, our brand name and reputation will
suffer.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED AND EFFORTS TO PROTECT OUR
INTELLECTUAL PROPERTY MAY BE INADEQUATE, TIME-CONSUMING AND EXPENSIVE.
We regard our trademarks, service marks, copyrights, trade secrets and
similar intellectual property as critical to our success. The unauthorized
reproduction or other misappropriation of our trademarks or other intellectual
property could diminish the value of our proprietary rights or reputation. If
this were to occur, our business could be materially and adversely affected.
We rely upon a combination of trademark and copyright law, patent law, trade
secret protection and confidentiality and license agreements with our employees,
customers and others to protect our proprietary rights. We have received and
have filed a number of trademarks and service marks, and have filed several
patent applications with the United States Patent and Trademark Office. However,
registrations and patents may only be granted in selected cases, and there can
be no assurance that we will be able to secure these or additional registrations
or patents. Furthermore, policing and enforcement against the unauthorized use
of our intellectual property rights could entail significant expenses and could
prove difficult or impossible.
THIRD PARTIES MAY CLAIM THAT WE HAVE BREACHED THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD DIVERT MANAGEMENT'S ATTENTION AND RESULT IN EXPENSE TO
DEFEND OR SETTLE CLAIMS.
Third parties may bring claims of copyright or trademark infringement,
patent violation or misappropriation of creative ideas or formats against us
with respect to content that we distribute or our technology or marketing
techniques and terminology. These claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management attention,
require us to enter into costly royalty or licensing arrangements or limit our
ability to distribute content or prevent us from utilizing important
technologies, ideas or formats.
WE COULD FACE ADDITIONAL RISKS AND CHALLENGES AS WE EXPAND INTERNATIONALLY AND
MAY FACE UNEXPECTED COSTS IN DEVELOPING INTERNATIONAL REVENUES.
We have begun to invest financial and managerial resources to expand our
operations in international markets. We opened offices in London, Paris and in
Miami in order to service the European and Latin American markets, respectively.
If our revenues from international operations, and particularly from our
operations in Europe and Latin America, do not exceed the expense of
establishing and maintaining these operations, our business, financial condition
and operating results will suffer. We have only limited experience in
international operations, and we may not be able to capitalize on our investment
in these markets.
POTENTIAL ACQUISITIONS AND STRATEGIC INVESTMENTS MAY RESULT IN INCREASED
EXPENSES, DIFFICULTIES IN INTEGRATING TARGET COMPANIES AND DIVERSION OF
MANAGEMENT'S ATTENTION.
We anticipate that from time to time we may be reviewing one or more
acquisitions or strategic investments or other opportunities to expand our range
of technology and products and to gain access to new markets. Growth through
acquisitions or strategic investments entails many risks, including the
following:
- our management's attention may be diverted during the acquisition and
integration process;
- we may face costs, delays and difficulties of integrating the acquired
company's operations, technologies and personnel into our existing
operations, organization and culture;
I-19
- the adverse impact on earnings of amortizing the acquired company's
intangible assets may be significant;
- we may issue new equity securities to pay for acquisitions, which would
dilute the holdings of existing stockholders;
- the timing of an acquisition or our failure to meet operating expectations
for acquired businesses may impact adversely on our financial condition;
and
- we may be adversely affected by expenses of any undisclosed or potential
legal liabilities of the acquired company, including intellectual
property, employment and warranty and product liability-related problems.
If realized, any of these risks could have a material adverse effect on our
business, financial condition and operating results.
RISKS OF DOING BUSINESS OVER THE INTERNET
IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR COMMERCE, WE WILL NOT
SUCCEED.
Because most of our present and anticipated customers are operators of
commercial Web sites, demand for our services will depend in large part on
continued growth in use of the Internet. There are critical issues concerning
the commercial use of the Internet that remain unresolved. If the Internet
develops more slowly than we expect as a commercial or business medium, demand
for our services will be lower than we expect.
LEGAL UNCERTAINTIES AND GOVERNMENT REGULATION OF THE INTERNET COULD INHIBIT
GROWTH OF THE INTERNET AND E-COMMERCE.
Many legal questions relating to the Internet remain unclear and these areas
of uncertainty may be resolved in ways that damage our business. It may take
years to determine whether and how existing laws governing matters such as
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, new laws and regulations that apply directly to Internet
communications, commerce and advertising are becoming more prevalent. For
example, the U.S. Congress has recently passed Internet-related legislation
concerning copyrights, taxation, and the online privacy of children. As the use
of the Internet and the prevalence of e-commerce grow, there may be calls for
further regulation, such as more stringent consumer protection laws. Finally,
our distribution arrangements and customer contracts could subject us to the
laws of foreign jurisdictions in unpredictable ways.
These possibilities could affect us adversely in a number of ways. New
regulation could make the Internet less attractive to users, resulting in slower
growth in its use and acceptance than we expect. Complying with new regulations
could result in additional cost to us, which could reduce our margins, or it
could leave us at risk of potentially costly legal action. We may be affected
indirectly by legislation that fundamentally alters the practicality or
cost-effectiveness of utilizing the Internet, including the cost of transmitting
over various forms of network architecture, such as telephone networks or cable
systems, or the imposition of various forms of taxation on Internet-related
activities. Regulators continue to evaluate the best telecommunications policy
regarding the transmission of Internet traffic.
RISKS RELATED TO OUR SECURITIES
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.
The stock market in general, and in particular the market for
Internet-related stocks, has recently experienced extreme price fluctuations. At
times, Internet-related stocks have traded at prices and multiples that are
substantially above the historical levels of the stock market in general. Since
estimates of the value of Internet-related companies have little historical
basis and often vary widely,
I-20
fluctuations in our stock price may not be correlated in a predictable way to
our performance or operating results. Our stock price may also fluctuate as a
result of factors that are beyond our control or unrelated to our operating
results. We expect our stock price to fluctuate as a result of factors such as:
- variations in our actual or anticipated quarterly operating results or
those of our competitors;
- announcements by us or our competitors of technological innovations;
- introduction of new products or services by us or our competitors;
- conditions or trends in the Internet industry;
- changes in the market valuations of other Internet companies;
- announcements by us or our competitors of significant acquisitions; and
- our entry into strategic partnerships or joint ventures.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any cash dividends in the foreseeable future.
WE ARE EFFECTIVELY CONTROLLED BY OUR EXECUTIVE OFFICERS AND DIRECTORS AND THE
INTERESTS OF THESE STOCKHOLDERS COULD CONFLICT WITH YOUR INTERESTS.
Our executive officers and directors, in the aggregate, beneficially own
approximately 50.6% of our outstanding common stock on a fully diluted basis. As
a result, these stockholders, if acting together, would be able to exert
considerable influence on any matters requiring approval by our stockholders,
including the election of directors, amendments to our charter and by-laws and
the approval of mergers or other business combination transactions. The
ownership position of these stockholders could delay, deter or prevent a change
in control of ScreamingMedia and could adversely affect the price that investors
might be willing to pay in the future for shares of our common stock.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could have the effect of delaying, deferring, or
preventing a change in control of ScreamingMedia that stockholders may consider
favorable or beneficial. These provisions could discourage proxy contests and
make it more difficult for you and other stockholders to elect directors and
take other corporate actions. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:
- a staggered board of directors, so that it would take three successive
annual meetings to replace all directors;
- prohibition of stockholder action by written consent; and
- advance notice requirements for the submission by stockholders of
nominations for election to the board of directors and for proposing
matters that can be acted upon by stockholders at a meeting.
In addition, we have entered into a stockholder rights agreement that makes it
more difficult for a third party to acquire us without the support of our board
of directors and principal stockholders.
I-21
ITEM 2. PROPERTIES
We are headquartered in New York City, where we lease approximately 47,350
square feet of space. The lease expires in March 2009 in respect of 44,850
square feet and in January 2009 in respect of the remaining 2,500 square feet.
We are in negotiations with our landlord regarding an additional 15,000 square
feet of contiguous space. The landlord failed to deliver this additional space
to us by the scheduled delivery date of September 1, 2000. We also lease office
space in San Francisco, Miami, London, and Paris.
ITEM 3. LEGAL PROCEEDINGS
We are not presently a party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of fiscal year ended December 31, 2000.
I-22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market under the symbol
"SCRM." Public trading of the common stock commenced on August 3, 2000. Prior to
that, there was no public market for the common stock. The following table sets
forth, for the periods indicated, the high and low sale price per share of the
common stock on the NASDAQ National Market:
HIGH LOW
---- --------
YEAR ENDED DECEMBER 31, 2000:
Third Quarter............................................. 15.75 8.25
Fourth Quarter............................................ 9.75 2.06
First Quarter through March 26, 2001...................... 5.22 1.63
As of March 26, 2001, there were approximately 376 holders of record of our
common stock.
From the date of receipt of funds from our initial public offering through
December 31, 2000, the net proceeds of the offering have been used to support
our domestic sales and marketing activities, the expansion of our international
operations, product development and for general corporate purposes. We also may
use a portion of the net proceeds to invest in complementary businesses or
technologies, although we have no present commitments or agreements with respect
to any material acquisition or investment. None of the net proceeds from the
offering was paid directly or indirectly to any director, officer, general
partner or their associates, or to any persons owning 10% or more of any class
of equity securities. Pending application of the net proceeds towards one of the
above uses, the net proceeds have been invested in interest-bearing,
investment-grade securities.
We have never declared or paid any cash dividends on our common or preferred
stock. We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. Any future determination to pay cash dividends
will be at the discretion of the board of directors and will be dependent upon
our financial condition, operating results, capital requirements, general
business conditions, restrictions imposed by financing arrangements, if any,
legal and regulatory restrictions on the payment of dividends and other factors
that our board of directors deems relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, the financial statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The statements of operations data for
each of the three years in the period ended December 31, 2000, and the balance
sheet data at December 31, 1998 and 1999 and 2000 are derived from our financial
statements, which have been audited by Deloitte & Touche LLP, independent
auditors. The statement of operations data for the year ended December 31, 1997,
and the balance sheet data as of December 31, 1997 are derived from our
financial statements, which have been audited by David Tarlow & Co., C.P.A.,
P.C., independent auditors. The financial statements for the year ended
December 31, 1996 have been derived from our unaudited financial statements.
These unaudited financial statements have been prepared on substantially the
same bases as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the financial position and results of operations for this
period.
II-1
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998, 1999, & 2000
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $ 782 $ 574 $ 567 $ 2,985 $ 21,865
Total operating expenses..................... 772 669 1,163 16,479 65,054
Operating income (loss)...................... 10 (95) (596) (13,494) (43,189)
Other income (expense), net.................. -- -- (14) 328 3,045
Net income (loss)............................ $ 10 $ (95) $ (610) $(13,166) $ (40,144)
===== ======== ======== ======== =========
Deemed preferred stock dividends............. (102) (50,523)
Net income (loss) to common Stockholders..... $ 10 (95) (610) (13,268) (90,667)
Income (loss) per share...................... $ .01 $ (0.06) $ (0.35) $ (1.08) $ (4.00)
===== ======== ======== ======== =========
Weighted average number of shares of common
stock outstanding.......................... 1,484 1,585 1,731 12,298 22,680
===== ======== ======== ======== =========
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 13 $ -- $ 120 $ 22,122 $ 58,306
Marketable securities........................ -- -- -- -- 39,820
Working capital.............................. 102 41 24 21,930 93,631
Total assets................................. 240 166 274 32,370 122,267
Capital lease obligations, less current
portion.................................... -- -- -- 647 3,400
Redeemable convertible preferred stock....... -- -- -- 27,434 --
Total stockholders' equity (deficiency)...... 143 64 (190) (549) 109,175
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read together with our consolidated financial statements
and the related notes included elsewhere in this annual report on Form 10-K.
This discussion and analysis contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
indicated in the forward-looking statements as a result of a variety of factors
as discussed in "Risk Factors" and elsewhere in this annual report on Form 10-K.
REVENUE
Our revenue is composed of services revenue and license and set-up fees. We
derive our services revenue primarily from distributing digital content directly
to our customers' Web sites. Our contracts typically have an initial term of one
year. We charge our customers recurring monthly content, delivery and processing
fees. In certain cases we require prepayment ranging from one to twelve months.
In addition, we charge certain of our customers an upfront maintenance fee. We
recognize revenue for the contracted services fees ratably over the life of the
contract. We record billed amounts due from clients in excess of revenue
recognized as deferred revenue. We report our revenue net of allowances and
rebates.
License and set-up fees are charged for our proprietary Siteware software
and building custom filters enabling the customer to receive customized content.
License and set-up fees are charged upfront and vary according to the version
and functionality of SiteWare selected and the number of custom filters created.
License fees are either charged annually, or one time, while set-up fees are
charged one time only. We recognize license and set-up fees ratably over the
life of the contract. We record billed amounts due from clients in excess of
revenue recognized as deferred revenue.
II-2
Our revenues are comprised of:
(1) Services revenues:
(a) Content revenue is derived from distributing targeted licensed
content directly to our customers' Web sites, intranets, extranets
and wireless networks.
(b) Delivery and processing fees are charged, primarily, based on the
amount of data delivered through our digital content network.
(C) We provide our customers technical product support under maintenance
agreements.
(2) License and set-up fees:
(a) Licensing revenue consists of fees for licenses of our proprietary
SiteWare software suite that allows our customers to receive
customized content. Licensing fees vary according to the version and
functionality of SiteWare selected.
(b) Set-up fees include charges for building custom filters which enable
the customer to receive customized content and adapters, which enable
us to integrate Siteware into third party applications of major
content management and personalization software vendors.
COST OF SERVICES
Cost of services consists of content royalty fees, certain payroll and
related expenses, fees paid to network providers for bandwidth, and monthly fees
for housing our servers in third-party network data centers. Content royalty
fees are calculated monthly, based on the volume of a provider's content used by
our customers. Under existing contracts with content providers, we generally pay
royalties on content that is used by our customers. In certain cases, the
content arrangement is based on fixed fees or subject to a minimum charge.
Payroll and related expenses pertain to the staff associated with the
customization and implementation of our SiteWare, filters and adapters, content
engineers, certain network operations and professional services staff.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and related
personnel costs associated with the research, design and development of software
applications and services supporting our business. To date, all research and
development costs have been expensed as incurred.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries of related
personnel, sales commissions, customer support, tradeshows, advertising,
marketing collateral, promotional and public relations expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions including accounting, finance,
human resources, legal and other administrative functions, as well as provisions
for doubtful accounts and bad debt expense.
STOCK-BASED COMPENSATION
We recorded a charge for the amortization of deferred stock-based
compensation of approximately $17.6 million and $6.1 million for the years ended
December 31, 2000 and 1999, respectively. Stock-based compensation is a result
of the issuance of stock options to employees, directors and affiliated parties
with exercise prices per share determined for financial reporting purposes to be
below the fair
II-3
market value per share of our common stock at the date of the applicable grant.
This difference is recorded as a reduction of stockholders' equity and amortized
as non-cash compensation expense on an accelerated basis over the vesting period
of the related options. In connection with the grant of stock options to
employees, we recorded deferred stock compensation of $17.5 million and
$16.4 million for the years ended December 31, 2000 and 1999, respectively.
Deferred stock-based compensation that will be subsequently amortized as expense
for each of the next four fiscal years, including options granted through
December 31, 2000, is estimated to be as follows:
PERIOD AMOUNT
- ------ --------------
(IN THOUSANDS)
Year ending December 31, 2001............................... $ 7,583
Year ending December 31, 2002............................... 2,472
Year ending December 31, 2003............................... 378
Year ending December 31, 2004............................... 23
-------
Total................................................. $10,456
=======
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
revenue for the periods indicated.
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
1998 1999 2000
-------- -------- --------
Revenue:
Services............................................. 88% 84% 85%
License and set-up fees.............................. 12 16 15
Total revenue...................................... 100% 100% 100%
==== ==== ====
Operating expenses:
Cost of services (excluding depreciation of 3%, 4%
and 0% for the years ended December 31, 2000, 1999
and 1998 respectively shown below)................. 25% 34% 27%
Research and development (excluding stock-based
compensation of 9%, 2% and 0% for the years ended
December 31, 2000, 1999, and 1998 respectively,
shown below)....................................... 27 35 29
Sales and marketing (excluding stock-based
compensation of 20%, 61%, and 0% for the years
ended December 31, 2000, 1999 and 1998,
respectively, shown below)......................... 25 135 95
General and administrative (excluding stock-based
compensation of 51%, 140% and 63% for the years
ended December 31, 2000, 1999 and 1998,
respectively, shown below)......................... 62 130 50
Depreciation and amortization........................ 5 15 17
Stock-based compensation............................. 63 203 80
---- ---- ----
Total operating expenses........................... 207 552 298
---- ---- ----
Operating income (loss)................................ (107) (452) (198)
Other income (expense), net............................ -- 11 16
---- ---- ----
Net income (loss).................................. (107)% (441)% (182)%
==== ==== ====
- ------------------------
* Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform with the 2000 presentation--see footnote 2 to the
financial statements included elsewhere herein.
II-4
YEARS ENDED DECEMBER 31, 1999 AND 2000
REVENUE. Total revenue increased to $21.9 million for the year ended
December 31, 2000, from $3.0 million in the previous year. This increase was
mostly due to an increase in our customers to 1,315 at December 31, 2000 from
422 at December 31, 1999. Also contributing to this increase was an 11% increase
in the average monthly services revenue per customer and a 109% increase in
average license and set-up fees for new customers due to the introduction of new
products. The introduction of our new products also resulted in follow-on orders
from existing customers. In 2000, no customer accounted for over 10% of revenue
and we do not anticipate that any one customer will account for more than 10% of
revenue in the year ending December 31, 2001. Although our total revenue has
increased in recent periods, we cannot be certain that total revenue will grow
in future periods or that it will grow at similar rates as in the past.
Services revenue totaled $18.5 million for the year ended December 31, 2000,
an increase of $16.0 million or 640% over services revenues of $2.5 million for
the year ended December 31, 1999. This increase was attributable to the increase
in our customer base, new content services offerings and follow-on orders from
existing customers.
License and set-up fee revenue totaled $3.4 million for the year ended
December 31, 2000, an increase of $2.9 million or 591% over license and set up
fee revenue of $492,000 for the year ended December 31, 1999. This was due to an
increase in the number of customers and the average size of license and set-up
fees.
COST OF SERVICES. Cost of services increased to $5.9 million for the year
ended December 31, 2000, from $1.0 million in the year ended December 31, 1999.
As a percentage of revenue, cost of services decreased to approximately 27% for
the year ended December 31, 2000 from approximately 34% for the year ended
December 31, 1999. The absolute dollar increase was primarily due to increases
in services revenue resulting in higher content royalty fees paid to content
providers, and an increase in the number of employees in the implementation and
content engineering, network operations, and professional services departments.
We anticipate that the cost of services will continue to grow in absolute
dollars as we expand our business.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$6.4 million for the year ended December 31, 2000, from $1.0 million for the
year ended December 31, 1999. As a percentage of revenue, research and
development expenses decreased to approximately 29% for the year ended
December 31, 2000 from approximately 35% for the year ended December 31, 1999.
The absolute dollar increase was due to direct personnel costs and the
development of our SiteWare software suite, Content Engine, hosting platform and
other products. The decrease in research and development as a percentage of
total revenue resulted primarily because significant revenue growth outpaced
increases in research and development expenditures.
SALES AND MARKETING. Sales and marketing expenses increased to $20.8
million for the year ended December 31, 2000, from $4.0 million for the year
ended December 31, 1999. As a percentage of revenue, sales and marketing
expenses decreased to approximately 95% for the year ended December 31, 2000
from approximately 135% for the year ended December 31, 1999. The increase in
sales and marketing expense in absolute dollars was due to a significant
increase in compensation expense associated with the growth of our sales force,
customer support and marketing programs, the opening of new sales offices in the
United States, and the establishment of offices in Europe. The decrease in sales
and marketing as a percentage of total revenue resulted primarily because
significant revenue growth outpaced increases in sales and marketing
expenditures, and we expect this trend to continue in the foreseeable future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $10.8 million for the year ended December 31, 2000, from $3.9 for the year
ended December 31, 1999. As a percentage of revenue, general and administrative
expenses decreased to approximately 50% for the year ended
II-5
December 31, 2000 from approximately 130% for the year ended December 31, 1999.
The increase in absolute dollars resulted from an increase in personnel, certain
facilities costs, accounting and legal fees, bad debt expense and bad debt
reserves. General and administrative expenses decreased as a percentage of total
revenue primarily because significant revenue growth outpaced increases in
general and administrative expenditures.
STOCK-BASED COMPENSATION. In connection with the grant of stock options to
employees, we have deferred stock compensation of $10.5 million at December 31,
2000. We amortized $17.6 million and $6.1 million of deferred stock compensation
in 2000 and 1999 respectively.
OTHER INCOME, NET. Other income, net includes interest income from cash and
cash equivalents and marketable securities offset by interest on capital leases.
Other income, net, increased to $3.0 million in 2000 from $328,000 in 1999. The
significant increase from 1999 to 2000 was due to interest income earned on
higher cash balances, cash equivalents and investments in marketable securities
resulting from a private placement in July 2000 and our initial public offering
in August 2000.
YEARS ENDED DECEMBER 31, 1998 AND 1999 (Certain reclassifications have been
made to the 1999 and 1998 financial statements to conform with the 2000
presentation- see footnote 2 to the financial statements included elsewhere
herein.)
REVENUE. Total revenue increased to $3.0 million for the year ended
December 31, 1999, from $567,000 in the previous year. This increase was mostly
due to an increase in our customers to 422 at December 31, 1999 from 30 at
December 31, 1998. In 1999, About.com accounted for approximately 12% of
revenue.
Services and other revenue totaled $2.5 million for the year ended
December 31, 1999, an increase of $2.0 million or 399% over services revenues of
$499,000 for the year ended December 31, 1998. This increase was attributable to
the increase in our client base and follow-on orders from existing clients.
License and set-up fee revenue totaled $492,000 for the year ended
December 31, 1999, an increase of $425,000 or 629% over License and set up fee
revenue of $68,000 for the year ended December 31, 1998. This increase was due
to increases in the number of clients and the average size of license and setup
fees from growing market acceptance of our product lines and increased follow-on
orders from existing clients.
COST OF SERVICES. Cost of services increased to $1.0 million for the year
ended December 31, 1999, from $142,000 in the year ended December 31, 1998. As a
percentage of revenue, cost of services increased to approximately 34% for the
year ended December 31, 1999 from approximately 25% for the year ended December
31, 1998. The absolute dollar increase was primarily due to increases in
services revenue resulting in content royalty fees paid to content providers
growing by approximately 1,005%.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$1.0 million for the year ended December 31, 1999, from $152,000 for the year
ended December 31, 1998. As a percentage of revenue, research and development
expenses decreased to approximately 35% for the year ended December 31, 1999
from approximately 27% for the year ended December 31, 1998. The absolute dollar
increase was due to direct personnel costs and the further development of our
content filtering, aggregation and distribution software and the further
development of new products.
SALES AND MARKETING. Sales and marketing expenses increased to $4.0 million
for the year ended December 31, 1999, from $139,000 for the year ended
December 31, 1998. As a percentage of revenue, sales and marketing expenses
increased to approximately 135% for the year ended December 31, 1999 from
approximately 25% for the year ended December 31, 1998. The increase in sales
and marketing expense in absolute dollars was due to a significant increase in
compensation expense associated with the growth of our sales, content
acquisition, customer support and marketing departments, commission expense
associated with higher revenue and additional marketing programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $3.9 million for the year ended December 31, 1999, from $352,000 for the year
ended December 31, 1998. As a percentage
II-6
of revenue, general and administrative expenses increased to approximately 130%
for the year ended December 31, 1999 from approximately 62% for the year ended
December 31, 1998. The increase in absolute dollars resulted from an increase in
personnel, certain facilities costs, accounting and legal fees, bad debt expense
and bad debt reserves.
STOCK-BASED COMPENSATION. In connection with the grant of stock options to
employees during 1999, we recorded deferred stock compensation of
$10.4 million. We amortized $6.1 million and $350,000 of this deferred stock
compensation in 1999 and 1998 respectively.
OTHER INCOME, NET. Other income, net includes interest income from cash and
cash equivalents and marketable securities offset by interest on capital leases.
Other income, net, increased to $328,000 in 1999 from $(14,000) in 1998. The
significant increase from 1998 to 1999 was due to interest income earned on
higher cash balances, cash equivalents and short-term investments resulting from
private placements completed in March, April and October 1999.
The following table sets forth our unaudited quarterly operating results for
the years ended December 31, 2000 and 1999. This information has been derived
from our unaudited interim financial statements. In our opinion, this unaudited
information has been prepared on a basis consistent with our audited financial
statements elsewhere contained herein and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented. Historical results for any quarter are
not necessarily indicative of the results to be expected for any future period.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30 SEPTEMBER 30, DECEMBER 31, MARCH 31 JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- ------------- ------------ -------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenue:
Services................ $ 242 $ 324 $ 683 $ 1,244 $ 2,307 $ 4,038 $ 5,525 $ 6,622
License and set-up
fees.................. 25 69 135 263 412 667 1,059 1,234
------- -------- -------- -------- -------- -------- -------- --------
Total revenue......... 267 393 818 1,507 2,719 4,705 6,584 7,856
Operating expenses:
Cost of services
(excluding
depreciation of $0,
$2, $31, $86, $126,
$123, $256, and $151
in the first quarter
of 1999 through the
fourth quarter of
2000, respectively, as
shown below).......... 60 102 301 554 947 1,427 1,985 1,543
Research and development
(excluding stock-based
compensation of $0,
$0, $0, $64, $493,
$657, $439 and $431 in
the first quarter of
1999 through the
fourth quarter of
2000, respectively, as
shown below).......... 161 209 244 435 1,206 1,354 1,835 1,960
Sales and marketing
(excludes stock-based
compensation of $0,
$12, $700, $1,110,
$1,162, $1,374, $1,171
and $812 in the first
quarter of 1999
through the fourth
quarter of 2000,
respectively, as shown
below)................ 89 470 1,483 1,986 4,195 4,528 6,156 5,884
General and
administrative
(excludes stock-based
compensation of $0,
$122, $987, 3,067,
$2,946, $3,219,
$2,499, and $2,372 in
the first quarter of
1999 through the
fourth quarter of
2000, respectively, as
shown below).......... 232 491 876 2,272 2,378 2,176 2,199 4,071
Depreciation and
amortization............ 12 35 125 279 549 732 936 1,417
Stock-based
compensation.......... -- 134 1,687 4,241 4,602 5,249 4,109 3,616
------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ 554 1,441 4,716 9,768 13,877 15,466 17,220 18,491
------- -------- -------- -------- -------- -------- -------- --------
II-7
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30 SEPTEMBER 30, DECEMBER 31, MARCH 31 JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- ------------- ------------ -------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Operating loss............ (287) (1,048) (3,898) (8,261) (11,158) (10,761) (10,636) (10,635)
------- -------- -------- -------- -------- -------- -------- --------
Other income (expenses)... -- 31 24 273 250 113 1,161 1,522
------- -------- -------- -------- -------- -------- -------- --------
Net loss.................. (287) (1,017) (3,874) (7,988) (10,908) (10,648) (9,475) (9,113)
======= ======== ======== ======== ======== ======== ======== ========
Deemed preferred stock
dividends............... -- -- -- (102) (154) (155) (50,215) --
------- -------- -------- -------- -------- -------- -------- --------
Loss attributable to
common stockholders..... $ (287) $ (1,017) $ (3,874) $ (8,090) $(11,062) $(10,803) $(59,690) (9,113)
======= ======== ======== ======== ======== ======== ======== ========
Basic net loss per common
share................... (0.02) (0.08) (0.31) (0.65) (0.88) (0.85) (2.16) (.24)
Weighted-average number of
shares used in
computation of basic and
diluted net loss per
share................... 11,927 12,302 12,474 12,476 12,526 12,773 27,594 37,932
PRO-FORMA BASIC NET LOSS
PER COMMON SHARE
Loss attributable to
common stockholders..... (287) (1,017) (3,874) (8,090) (11,062) (10,803) (59,690) (9,112)
Add amortization of
deferred stock
compensation............ -- 134 1,687 4,241 4,601 5,249 4,109 3,616
Add deemed preferred stock
dividends............... -- -- -- 102 154 155 50,215 --
Net loss in computing pro
forma basic net loss per
common share............ (287) (883) (2,187) (3,747) (6,307) (5,399) (5,366) (5,496)
Shares used in computation
of basic net loss per
common share............ 11,927 12,302 12,474 12,476 12,526 12,773 27,594 37,932
Add pro forma adjustment
to reflect weighted
average effect of the
assumed conversion of
convertible preferred
stock................... 432 4,046 4,121 10,877 11,349 11,349 6,958 --
Shares used in computing
pro forma basic net loss
per common share........ 12,359 16,348 16,595 23,353 23,875 24,122 34,552 37,932
Pro forma basic net loss
per common share........ $ (0.02) $ (0.05) $ (0.13) $ (0.16) $ (0.26) $ (0.22) $ (0.16) $ (0.14)
======= ======== ======== ======== ======== ======== ======== ========
*Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation- see footnote 2 to the financial
statements included elsewhere herein.
NET LOSS PER COMMON SHARE
Basic net loss per common share was computed using the weighted average
number of common shares outstanding. Options, warrants, restricted stock and
preferred stock were not included in the computation of diluted net loss per
share because the effect would be anti-dilutive.
Pro forma basic net loss excludes the amortization of deferred stock
compensation and deemed preferred stock dividends of $0, $134, $1,687, $4,343,
$4,755, $5,404, $54,324 and $3,616 for the three months ending March 31,
June 30, September 30 and December 31, 1999 and 2000, (in thousands)
respectively.
Pro forma basic net loss per common share has been computed as described
above and also gives effect, even if anti-dilutive, to common equivalent shares
from preferred stock as if such conversion had occurred at the beginning of the
period or at the date of original issuance, if later.
II-8
The following table presents the computation of basic and pro forma basic
net loss per common share (in thousands, except per share data):
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2000 1999
---- ----
(IN THOUSANDS EXCEPT PER
SHARE DATA)
Net loss.................................................... $(90,667) $(13,267)
======== ========
Weighted-average number of shares used in computation of
basic net loss per common share........................... 22,680 12,298
======== ========
Basic net loss per common share............................. $ (4.00) $ (1.08)
======== ========
Net loss.................................................... $(90,667) $(13,267)
Add amortization of deferred stock compensation............. 17,576 6,062
Add deemed preferred stock dividends........................ 50,523 102
-------- --------
Net loss used in computing pro forma basic net loss per
common share.............................................. $(22,568) $ (7,103)
Shares used in computation of basic net loss per common
share..................................................... 22,680 12,298
Add pro forma adjustment to reflect weighted-average effect
of the assumed conversion of convertible preferred
stock..................................................... 7,416 4,740
-------- --------
Shares used in computing pro forma basic net loss per common
share..................................................... 30,096 17,038
======== ========
Pro forma basic net loss per common share................... $ (0.75) $ (0.42)
======== ========
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through private sales of equity and debt
securities and through our initial public offering. Sales of equity securities
include $57.9 million of net proceeds from our August 2000 initial public
offering of common stock and $46.2 million of net proceeds received from the
July 2000 private placement of convertible preferred stock, which converted into
common stock upon the completion of our initial public offering. As of
December 31, 2000 we had cash and cash equivalents and marketable securities of
approximately $98.1 million.
As of December 31, 2000, our principal commitments consisted of obligations
outstanding under a series of capital leases of computer and networking
equipment and our facilities leases. We entered into capital lease arrangements
for computer, network and telephony equipment. Additionally, we entered into
other capital leases for the design and implementation of our new financial
systems. A leasing company is the beneficiary of a $3.6 million standby letter
of credit with a bank securing our lease arrangement with them. At the end of
each lease term, we have the option to purchase the equipment, typically at the
lesser of fair market value or 10% of gross asset value. We presently intend to
exercise the purchase option for the majority of the leases.
We operate from leased premises in New York, San Francisco, Miami and
London. Our current aggregate annual rental obligations under these leases are
approximately $1.3 million for 2000 and $1.5 million for 2001. Our capital
expenditures were $7.9 million and $3.4 million, for the years ended
December 31, 2000 and 1999, respectively, consisting principally of computers,
hardware, software and professional services to design our new financial
systems, networking equipment and the build-out of our headquarters.
For the years ended December 31, 2000 and 1999, respectively, net cash used
in operating activities was approximately $17.7 million and $7.8 million,
respectively. The net cash used in operating activities for the year ended
December 31, 2000 resulted primarily from net losses of $40.1 million and
II-9
an increase in trade accounts receivable of $3.6 million. This was offset by
$22.2 million in non-cash charges, of which stock-based compensation accounted
for $17.4 million, an increase of $1.0 million in accounts payable and accrued
expenses, a $1.8 million increase in deferred revenue and a $967,000 increase in
prepaid expenses and other assets. The net cash used in operating activities for
the year ended December 31, 1999 resulted primarily from net losses of
$13.2 million, an increase in prepaid expenses and other assets of $3.9 million
and an increase in trade accounts receivable of $1.4 million offset by a
$6.1 million non-cash charge for stock-based compensation.
For the years ended December 31, 2000 and 1999, net cash used in investing
activities was $47.7 million and $3.8 million, respectively. The net cash used
in investing activities for the year ended December 31, 2000 was principally for
the purchase of marketable securities, equipment, leasehold improvements and the
rollout of our new financial system. The net cash used in investing activities
for the year ended December 31, 1999 was principally for the purchase of
equipment and leasehold improvements.
For the years ended December 31, 2000 and 1999 net cash provided by
financing activities was $101.6 million and $33.5 million. Net cash provided by
financing activities for the year ended December 31, 2000 was primarily the
result of net proceeds from the sale of convertible preferred stock of
$46.2 million and the net proceeds from the sale of common stock upon completion
of our initial public offering of $57.9 million. This was offset by repayments
of our capital lease obligations of $2.2 million and payment for the repurchase
of treasury stock for $1.0 million, offset by proceeds from the exercise of a
warrant and stock options of $765,000. Net cash provided by financing activities
for the year ended December 31, 1999 was provided substantially by net proceeds
generated from private placements of equity securities, which totaled
$33.5 million.
We believe that the net proceeds from our initial public offering, together
with the net proceeds from the Series C preferred stock offering and our current
cash and cash equivalents, and marketable securities will be sufficient to meet
our operating expenses, for at least the next eighteen months. We believe that
changes in the market environment over the past year have increased the value of
corporate cash reserves as well as the relative importance of bringing expenses
more in line with revenues over time and reducing our reliance on external
sources of capital. Management is extremely focused on monitoring costs and has
implemented company wide cost-saving incentive programs. In addition, if we
undertake significant acquisitions or make significant strategic investments, we
may need to raise additional funds within that time. We may also need to raise
additional funds if competitive pressures force us to make unforeseen
expenditures, such as to acquire or develop new technology. If we need to raise
additional funds, we will likely do so through the issuance and sale of equity
securities. If this were to occur, the percentage ownership of our stockholders
could be reduced, our stockholders may experience additional dilution and these
securities may have rights, preferences or privileges senior to those of our
stockholders. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our expansion, take
advantage of unanticipated opportunities, develop or enhance services or
products or otherwise respond to competitive pressures would be significantly
limited. Our business, results of operations and financial condition could be
materially adversely affected by these limitations.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was
previously amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the effective date of SFAS No. 133 to fiscal years commencing
after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, and for hedging activities be
II-10
recorded in the balance sheet as either an asset or liability measured at its
fair value. ScreamingMedia believes the adoption of SFAS No. 133, as amended by
SFAS No. 138 will not have a material impact on the financial position or
results of operations. ScreamingMedia does not currently engage or plan to
engage in any derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Staff
Accounting Bulletin No. 101 summarizes certain areas of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In management's opinion our current revenue recognition
principles comply with Staff Accounting Bulletin No. 101.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. We do not enter into financial instrument
transactions for trading purposes. Some of our investments may be subject to
market risk which means that a change in prevailing interest rates may cause the
principal amount of the investment to fluctuate.
Exchange Rate Sensitivity. We consider our exposure to foreign currency
exchange rate fluctuations to be minimal as we currently do not have significant
amount of revenue and assets denominated in a foreign currency and have minimal
expenses paid in a foreign currency. Currently, the exposure is primarily
related to revenue and operating expenses in U.K. We anticipate that in the
future, the proportion of our operating expenses paid in foreign currencies will
increase and that the number of foreign currencies in which we earn our revenue
will also increase. Accordingly, we may be subject to exposure from adverse
movements in foreign currency exchange rates in relation to these revenues and
expenses. We do not currently use derivative financial instruments. As of
December 31, 2000 the effect of foreign exchange rate fluctuations was not
material.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 16, 1999, Deloitte & Touche LLP was engaged commencing with
the fiscal years December 31, 1998 and December 31, 1999 as our independent
auditors, replacing David Tarlow & Co., C.P.A., P.C., who had previously served
as our independent auditors. The decision to dismiss David Tarlow & Co., C.P.A.,
P.C. and to engage Deloitte & Touche LLP was approved by our board of directors.
In the period from January 1, 1997 to June 16, 1999, David Tarlow & Co., C.P.A.,
P.C. issued no audit report that was qualified or modified as to uncertainty,
audit scope or accounting principles, no adverse opinions or disclaimers of
opinion on any of our financial statements, and there were no disagreements with
David Tarlow & Co., C.P.A., P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures.
Prior to June 16, 1999, we had not consulted with Deloitte & Touche LLP on items
which involved our accounting principles or the form of audit opinion to be
issued on our financial statements.
II-11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors is incorporated herein by reference from
the section entitled "Proposal No. 1--Election of Directors" of the Registrant's
definitive Proxy Statement (the "Proxy Statement") to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, for the
Registrant's Annual Meeting of Stockholders to be held on Tuesday, June 12,
2001. The Proxy Statement will be filed within 120 days after the end of the
registrant's fiscal year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
III-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: The following financial statements are filed:
Report of Independent Auditors, Consolidated Balance Sheet, Consolidated
Statement of Operations, Consolidated Statements of Stockholders' Equity,
Consolidated Statements of Cash flow, and Notes to Consolidated Financial
Statements.
(a)(2) Financial Statement Schedules: All applicable financial statement
schedules have been omitted because the required information is included in the
Consolidated Financial Statements included in Item 14(a)(1).
(b) Reports on Form 8-K: no reports on form 8K were filed by the Registrant
during the fourth quarter of the fiscal year ending December 31, 2000.
(c) Exhibits
The following exhibits, which are furnished with this annual report or
incorporated herein by reference, are filed as part of this annual report.
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
3.1 Amendment and Restated Certificate of Incorporation of the
Registrant.*
3.1.1 Certificate of Amendment.*
3.2 Form of Amended and Restated By-laws of the Registrant.*
4.1 Form of ScreamingMedia's stock certificate.*
4.2 Form of ScreamingMedia's Rights Plan.*
10.1 Master Lease Agreement No. 13330 dated July 16, 1999 by and
among the Registrant and Data General Corporation.*
10.2 Master Agreement No. 2430 dated December 9, 1999 by and
among the Registrant and Cisco Systems Capital Corp.*
10.3 Master Lease Agreement No. 7345913 dated May 25, 1999 by and
among the Registrant and Dell Financial Services, L.P.*
10.4.1 Agreement of Lease dated March 31, 1999 by and among the
Registrant and 601 West Associates LLC.*
10.4.2 First Lease Modification Agreement dated June 18 1999 by and
among the Registrant and 601 West Associates LLC.*
10.5 Sublease Agreement dated February 4, 2000 by and among the
Registrant and Tomar Studios, Inc.*
10.6 Warrant Agreement dated June 7, 1999 by and among the
Registrant and Deutsche Bank Securities Inc.*
10.7 Warrant Agreement dated June 10, 1999 by and among the
Registrant and Carter, Ledyard, Milburn, LLP.*
10.8 Warrant Agreement dated February 4, 2000 by and among the
Registrant and Tomar Studios, Inc.*
10.9 Letter Employment Agreement dated June 7, 1999 between the
Registrant and Marianne Howatson.*
10.10 Employment Agreement dated November 8, 1999, between the
Registrant and Kevin C. Clark.*
10.11 Series A Preferred Stock Purchase Agreement dated as of June
8, 1999 by and among the Registrant, the investors named
therein and I-Recall, Inc.*
IV-1
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.12 Preferred Stock Purchase Agreement of Series A Preferred
Stock dated as of May 14, 1999 by and among the Registrant
and SoftCom, Inc.*
10.13 1999 Stock Option Plan.*
10.14 Form of 2000 Equity Incentive Plan.*
10.15 Form of ScreamingMedia Management Incentive Plan.*
10.16 Agreement dated April 1999 by and among the Registrant and
Robinson, Lerer & Montgomery.*
10.17 Warrant Agreement dated June 15, 1999 by and among the
Registrant and Hut Sachs Studio.*
10.18 Form of Employee Stock Purchase Plan.*
10.19 Common Stock Purchase Agreement dated April 6, 2000 between
the Registrant and Spyglass, Inc.*
10.20.1 Agreement dated January 29, 2000 by and among the
Registrant, Tomar Studios, Inc. and Jay Chiat.*
10.20.2 Amendment No. 1 to Agreement by and among the Registrant,
Tomar Studios, Inc. and Jay Chiat dated February 4, 2000.*
10.20.3 Guaranty of Jay Chiat dated February 4, 2000.*
10.21 Master Lease Agreement dated March 2, 2000 between the
Registrant and Jacom Computer Services, Inc.*
10.22 Lease Agreement dated February 17, 2000 between the
Registrant and Working Capital Technologies of America.*
10.23 Lease Agreement dated June 13, 2000 between the Registrant
and Northbridge House Limited. *
10.24 Warrant Agreement dated August 16, 2000 between the
Registrant and Mad Dogs and Englishmen.*
10.25 Employment Agreement dated March 8, 2000 between the
Registrant and David Obstler.*
10.26 Employment Agreement dated May 26, 2000 between the
Registrant and J. Terrence Waters.*
10.27 Investor Rights Agreement dated October 6, 1999 between the
Registrant and the holders of Series B Convertible Preferred
Stock.*
10.28 Form of Investor Rights Agreement dated July 17, 2000
between the Registrant and the holders of Series C
Convertible Preferred Stock.*
10.29 Lease Modification and Expansion Agreement dated July 14,
2000 between the Registrant and 601 West Associates, LLC.*
10.30 Common Stock Purchase Warrant dated July 14, 2000 between
the Registrant and 601 West Associates, LLC.*
16 Letter regarding change in certifying accountant.*
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included in Part IV of this Form 10-K).
- ------------------------
* Previously filed as an exhibit to Registration Statement No. 333-30548 on
Form S-1 and incorporated herein by reference.
IV-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on March 29, 2001.
SCREAMINGMEDIA INC.
By: ________/s/ KEVIN C. CLARK________
Kevin C. Clark
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of ScreamingMedia Inc., hereby severally constitute Alan S. Ellman,
Kevin C. Clark, and David M. Obstler, and each of them singly, our true and
lawful attorneys with full power to them, and each of them singly, to sign for
us and in our names in the capacities indicated below, the Form 10-K filed
herewith and any and all amendments to said Form 10-K, and generally to do all
such things in our names and in our capacities as officers and directors to
enable ScreamingMedia Inc. to comply with the provisions of the Securities
Exchange Act of 1934, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Form 10-K and any and all
amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 2001.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JAY CHIAT Chairman of the Board March 29, 2001
- ------------------------------------
Jay Chiat
/s/ ALAN S. ELLMAN President and Director Alan S. Ellman March 29, 2001
- ------------------------------------
/s/ KEVIN C. CLARK Chief Executive Officer and Director March 29, 2001
- ------------------------------------
Kevin C. Clark
/s/ DAVID M. OBSTLER Chief Financial Officer March 29, 2001
- ------------------------------------
David M. Obstler
/s/ ROBERT B. PECK Principal Accounting Officer March 29, 2001
- ------------------------------------
Robert B. Peck
IV-3
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ WILLIAM P. KELLY Director March 29, 2001
- ------------------------------------
William P. Kelly
/s/ JAMES D. ROBINSON Director March 29, 2001
- ------------------------------------
James D. Robinson III
Director March , 2001
- ------------------------------------
Kevin O'Connor
/s/ MICHAEL H. JORDAN Director March 29, 2001
- ------------------------------------
Michael H. Jordan
/s/ PATRICK J. MCNEELA Director March 29, 2001
- ------------------------------------
Patrick J. McNeela
Director March , 2001
- ------------------------------------
David C. Hodgson
IV-4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
ScreamingMedia, Inc.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and F-3
December 31, 1999.........................................
Consolidated Statements of Operations for the Years Ended F-4
December 31, 2000, 1999, and 1998.........................
Consolidated Statements of Changes in Stockholders' Equity F-5
(Deficiency)
for the Years Ended December 31, 2000, 1999, and 1998.....
Consolidated Statements of Cash Flows for the Years Ended F-6
December 31, 2000, 1999, and 1998.........................
Notes to Consolidated Financial Statements.................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ScreamingMedia Inc.
We have audited the accompanying consolidated balance sheets of
ScreamingMedia Inc. (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
February 8, 2001
F-2
SCREAMINGMEDIA INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 58,305,096 $ 22,121,667
Marketable securities..................................... 39,819,978 --
Accounts receivable, net of allowance for doubtful
accounts of $1,150,000 and $138,802 as of December 31,
2000 and 1999, respectively............................. 3,968,123 1,398,980
Prepaid expenses.......................................... 1,229,680 3,248,295
------------- ------------
Total current assets.................................... 103,322,877 26,768,942
PROPERTY AND EQUIPMENT--Net of accumulated depreciation..... 16,230,591 4,552,495
OTHER ASSETS................................................ 2,713,059 1,048,738
------------- ------------
TOTAL ASSETS............................................ $ 122,266,527 $ 32,370,175
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 4,281,053 $ 3,273,527
Deferred revenue.......................................... 2,684,026 873,360
Current portion of capital lease obligations.............. 2,726,639 691,643
------------- ------------
Total current liabilities............................... 9,691,718 4,838,530
------------- ------------
NONCURRENT LIABILITIES:
Capital lease obligations, less current portion........... 3,399,617 646,586
------------- ------------
Total liabilities....................................... 13,091,335 5,485,116
------------- ------------
COMMITMENTS
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series B convertible preferred stock, $0.01 par value, no
shares authorized, issued and outstanding at December
31, 2000, and 2,678,572 shares authorized, issued, and
outstanding at December 31, 1999........................ -- 27,433,838
------------- ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series A convertible preferred stock, $0.01 par value, no
shares authorized, issued and outstanding at December
31, 2000, and 1,527,085 shares authorized, issued, and
outstanding at December 31, 1999........................ -- 15,271
Common stock, $0.01 par value, 100,000,000 shares
authorized and 39,539,351 and 14,040,600 issued and
37,937,812 and 12,475,521 outstanding at December 31,
2000 and December 31, 1999.............................. 395,394 140,406
Additional paid-in capital................................ 223,798,675 22,820,644
Warrants.................................................. 1,008,925 787,000
Deferred compensation..................................... (10,456,432) (10,379,049)
Treasury stock............................................ (999,956) (19,311)
Accumulated deficit....................................... (104,581,127) (13,913,740)
Accumulated other comprehensive income.................... 9,713 --
------------- ------------
Total stockholders' equity (deficiency)................. 109,175,192 (548,779)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)..... $ 122,266,527 $ 32,370,175
============= ============
See accompanying notes to consolidated financial statements.
F-3
SCREAMINGMEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
------------ ------------ ----------
REVENUE:
Services............................................ $ 18,492,279 $ 2,492,830 $ 499,225
License and set-up fees............................. 3,372,471 492,360 67,582
------------ ------------ ----------
Total revenue..................................... 21,864,750 2,985,190 566,807
------------ ------------ ----------
OPERATING EXPENSES:
Cost of services (excluding depreciation of
$656,282, $118,702, and $0, for the years ended
December 31, 2000, 1999 and 1998, respectively,
shown below)...................................... 5,901,953 1,017,043 142,477
Research and development (excluding stock-based
compensation of $1,967,477, $63,943, and $0, for
the years ended December 31, 2000, 1999 and 1998,
respectively, shown below)........................ 6,354,821 1,048,651 152,094
Sales and marketing (excluding stock-based
compensation of $4,379,818, $1,821,708, and $0 for
the years ended December 31, 2000, 1999 and 1998,
respectively shown below.......................... 20,763,115 4,027,682 139,449
General and administrative (excluding stock-based
compensation of $11,228,342, $4,176,647, and
$350,000 for the years ended December 31, 2000,
1999 and 1998, respectively, shown below)......... 10,824,356 3,872,217 352,342
Depreciation and amortization....................... 3,633,805 451,309 26,119
Stock-based compensation............................ 17,575,637 6,062,298 350,000
------------ ------------ ----------
Total operating expenses.......................... 65,053,687 16,479,200 1,162,481
------------ ------------ ----------
OPERATING LOSS........................................ (43,188,937) (13,494,010) (595,674)
------------ ------------ ----------
OTHER INCOME (EXPENSE):
Interest income..................................... 3,446,425 381,373 --
Interest expense.................................... (377,683) (53,102) (10,993)
Foreign currency translation........................ (23,971) -- --
Other expense....................................... -- -- (3,160)
------------ ------------ ----------
Total other income (expense).......................... 3,044,771 328,271 (14,153)
------------ ------------ ----------
NET LOSS.............................................. (40,144,166) (13,165,739) (609,827)
Deemed preferred stock dividends...................... (50,523,221) (102,024) --
------------ ------------ ----------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.............. (90,667,387) (13,267,763) (609,827)
============ ============ ==========
Basic net loss per common share....................... $ (4.00) $ (1.08) $ (.35)
============ ============ ==========
Weighted-average number of shares of common stock
outstanding......................................... 22,679,745 12,298,091 1,730,681
============ ============ ==========
See accompanying notes to consolidated financial statements.
F-4
SCREAMINGMEDIA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONVERTIBLE
PREFERRED STOCK
PREFERRED STOCK SERIES A COMMON STOCK COMMON STOCK
--------------------- --------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- ---------- -------- ---------- --------
Balance, January 1,
1998................. 4,000,000 $ 400 $ 3,400,000 $ 340 $
Issuance of shares from
treasury for
directors' fees......
Interest expense on
convertible note.....
Net loss for the year
ended December 31,
1998.................
Comprehensive loss.....
---------- ----- ---------- -------- ---------- ----- ---------- --------
Balance, December 31,
1998................. 4,000,000 400 3,400,000 340
Reincorporation........ (4,000,000) (400) (3,400,000) (340) 13,492,064 134,921
Stock grants........... 105,238 1,052
Issuance of Series A
preferred stock...... 1,527,085 15,271
Warrants granted to
investment bankers...
Warrants granted for
legal services.......
Warrants granted for
architectural
services.............
Conversion of notes
into common stock.... 443,298 4,433
Interest expense on
convertible note.....
Issuance of stock
options to
employees............
Amortization of
deferred
compensation.........
Preferred stock
dividends............
Net loss...............
Comprehensive loss.....
---------- ----- ---------- -------- ---------- ----- ---------- --------
Balance, December 31,
1999................. 1,527,085 15,271 14,040,600 140,406
Issuance of stock
options to
employees............
Warrant granted to
sublessor............
Exercise of warrant
granted to
sublessor............ 67,460 675
Exercise of stock
options by
employees............ 346,819 3,468
Warrant granted to
advertising firm.....
Amortization of
deferred
compensation.........
Conversion of preferred
stock -Series A, B,
C.................... (1,527,085) (15,271) 19,602,772 196,028
Preferred stock
dividends............
Initial public
offering............. 5,481,700 54,817
Warrant granted to
landlord.............
Issuance of stock from
treasury stock.......
Comprehensive Loss:
Net loss...............
Unrealized gain on
securities...........
Unrealized loss on
foreign currency
translation
Comprehensive loss.....
---------- ----- ---------- -------- ---------- ----- ---------- --------
Balance, December 31,
2000................. -- $ -- -- $ -- -- $ -- 39,539,351 $395,394
========== ===== ========== ======== ========== ===== ========== ========
TREASURY STOCK
----------------------------------------------
ADDITIONAL COMMON STOCK PREFERRED STOCK
PAID-IN DEFERRED ------------------------ ------------------- ACCUMULATED
CAPITAL WARRANTS COMPENSATION SHARES AMOUNT SHARES AMOUNT DEFICIT
------------ ---------- ------------- ---------- ----------- -------- -------- -------------
Balance, January 1,
1998................. $ 125,260 $ $ (1,079,365) $ (13,318) (380,000) $(12,652) $ (36,150)
Issuance of shares from
treasury for
directors' fees...... 343,341 539,683 6,659
Interest expense on
convertible note..... 6,273
Net loss for the year
ended December 31,
1998................. (609,827)
Comprehensive loss.....
------------ ---------- ------------ ---------- ----------- -------- -------- -------------
Balance, December 31,
1998................. 474,874 (539,682) (6,659) (380,000) (12,652) (645,977)
Reincorporation........ (134,181) (1,025,397) (12,652) 380,000 12,652
Stock grants........... 76,723
Issuance of Series A
preferred stock...... 5,381,176
Warrants granted to
investment bankers... 687,000
Warrants granted for
legal services....... 50,000
Warrants granted for
architectural
services............. 50,000
Conversion of notes
into common stock.... 545,567
Interest expense on
convertible note..... 35,138
Issuance of stock
options to
employees............ 16,441,347 (16,441,347)
Amortization of
deferred
compensation......... 6,062,298
Preferred stock
dividends............ (102,024)
Net loss............... (13,165,739)
Comprehensive loss.....
------------ ---------- ------------ ---------- ----------- -------- -------- -------------
Balance, December 31,
1999................. 22,820,644 787,000 (10,379,049) 1,565,079 (19,311) (13,913,740)
Issuance of stock
options to
employees............ 17,479,520 (17,479,520)
Warrant granted to
sublessor............ 740,000
Exercise of warrant
granted to
sublessor............ 1,019,325 (740,000) 67,460 (1,000,000)
Exercise of stock
options by
employees............ 481,538
Warrant granted to
advertising firm..... 102
Amortization of
deferred
compensation......... 17,402,137
Conversion of preferred
stock -Series A, B,
C.................... 73,436,129
Preferred stock
dividends............ 50,523,221 (50,523,221)
Initial public
offering............. 57,884,153
Warrant granted to
landlord............. 221,823
Issuance of stock from
treasury stock....... 154,145 (31,000) 19,355
Comprehensive Loss:
Net loss............... (40,144,166)
Unrealized gain on
securities...........
Unrealized loss on
foreign currency
translation
Comprehensive loss.....
------------ ---------- ------------ ---------- ----------- -------- -------- -------------
Balance, December 31,
2000................. $223,798,675 $1,008,925 $(10,456,432) $1,601,539) $ (999,956) -- $ -- $(104,581,127)
============ ========== ============ ========== =========== ======== ======== =============
ACCUMULATED TOTAL
OTHER STOCKHOLDER'S
COMPREHENSIVE COMPREHENSIVE EQUITY
INCOME LOSS (DEFICIENCY)
-------------- -------------- --------------
Balance, January 1,
1998................. $ $ 63,880
Issuance of shares from
treasury for
directors' fees...... 350,000
Interest expense on
convertible note..... 6,273
Net loss for the year
ended December 31,
1998................. $ (609,827) (609,827)
------------
Comprehensive loss..... $ (609,827)
------------ ============ ------------
Balance, December 31,
1998................. (189,674)
Reincorporation........ --
Stock grants........... 77,775
Issuance of Series A
preferred stock...... 5,396,447
Warrants granted to
investment bankers... 687,000
Warrants granted for
legal services....... 50,000
Warrants granted for
architectural
services............. 50,000
Conversion of notes
into common stock.... 550,000
Interest expense on
convertible note..... 35,138
Issuance of stock
options to
employees............
Amortization of
deferred
compensation......... 6,062,298
Preferred stock
dividends............ (102,024)
Net loss............... $(13,165,739) (13,165,739)
------------
Comprehensive loss..... $(13,165,739)
------------ ============ ------------
Balance, December 31,
1999................. (548,779)
Issuance of stock
options to
employees............ --
Warrant granted to
sublessor............ 740,000
Exercise of warrant
granted to
sublessor............ (720,000)
Exercise of stock
options by
employees............ 485,006
Warrant granted to
advertising firm..... 102
Amortization of
deferred
compensation......... 17,402,137
Conversion of preferred
stock -Series A, B,
C.................... 73,616,886
Preferred stock
dividends............ --
Initial public
offering............. 57,938,970
Warrant granted to
landlord............. 221,823
Issuance of stock from
treasury stock....... 173,500
Comprehensive Loss:
Net loss............... $(40,144,166) (40,144,166)
Unrealized gain on
securities........... 30,184 30,184 30,184
Unrealized loss on
foreign currency
translation (20,471) (20,471) (20,471)
------------
Comprehensive loss..... $(40,134,453)
------------ ============ ------------
Balance, December 31,
2000................. $ 9,713 $109,175,192
============ ============
See accompanying notes to consolidated financial statements.
F-5
SCREAMINGMEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
------------ ------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(40,144,166) $(13,165,739) $(609,827)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 3,633,805 451,309 26,119
Provision for doubtful accounts receivable......... 1,011,198 128,802 10,000
Stock-based compensation........................... 17,402,137 6,062,298 --
Stock warrants issued for services................. 173,500 105,400 350,000
Interest from beneficial conversion................ -- 35,138 6,273
Changes in operating assets and liabilities:
(Increase) in account receivable................... (3,580,341) (1,435,670) (15,898)
Decrease (increase) in prepaid expenses and other
assets........................................... 967,262 (3,926,813) (1,000)
Increase in accounts payable and accrued
expenses......................................... 1,007,526 3,149,277 79,210
Increase in deferred revenue....................... 1,810,666 828,252 45,108
------------ ------------ ---------
Net cash used in operating activities............ (17,718,413) (7,767,746) (110,015)
------------ ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (7,886,702) (3,415,656) (6,675)
Purchase of investments and marketable securities.... (39,839,794) (349,987) --
------------ ------------ ---------
Net cash used in investing activities............ (47,726,496) (3,765,643) (6,675)
------------ ------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of convertible preferred
stock................................................ -- 28,018,814 --
Borrowings from directors and officers................. -- 275,000 252,114
Repayments of loans to stockholders.................... -- (19,350) (15,067)
Repayment of capital lease obligation.................. (2,238,215) (208,587) --
Payments for the repurchase of treasury stock.......... (1,000,000) -- --
Proceeds from the issuance of Series C Preferred Stock,
net.................................................. 46,183,048 -- --
Proceeds from the issuance of common stock upon
completion of IPO.................................... 57,938,970 -- --
Proceeds from the issuance of Series A Preferred
Stock................................................ -- 5,468,822 --
Proceeds from exercise of warrants and stock options... 765,006 -- --
------------ ------------ ---------
Net cash provided by financing activities........ 101,648,809 33,534,699 237,047
------------ ------------ ---------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (20,471) -- --
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 36,183,429 22,001,310 120,357
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR............ 22,121,667 22,001,310 --
------------ ------------ ---------
CASH AND CASH EQUIVALENTS END OF YEAR.................. $ 58,305,096 $ 22,121,667 $ 120,357
============ ============ =========
See accompanying notes to consolidated financial statements.
F-6
SCREAMINGMEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
------------ ------------ ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ 377,682 $ 22,648 $ 35
============ ============ =========
Cash paid for income taxes........................... $ -- $ 1,171 $ 1,018
============ ============ =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Fixed assets acquired under capital leases........... $ 7,026,242 $ 1,531,418 $ --
============ ============ =========
Conversion of promissory notes into common stock..... $ -- $ 550,000 $ --
============ ============ =========
Warrant issued for common stock to sublessor in
connection with new lease.......................... $ 740,000 $ -- $ --
============ ============ =========
Warrant issued to lessor in connection with lease.... $ 221,823 $ -- $ --
============ ============ =========
Warrant granted for legal services................... $ -- $ 50,000 $ --
============ ============ =========
Warrant granted for architectural services........... $ -- $ 50,000 $ --
============ ============ =========
Common stock grant issued to board member............ $ 168,750 $ -- $ --
============ ============ =========
Common stock donated to University................... $ 4,750 $ -- $ --
============ ============ =========
See accompanying notes to consolidated financial statements.
F-7
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS
ScreamingMedia Inc. was incorporated in the state of Delaware on
January 22, 1999, for the purpose of reincorporating The Interactive
Connection, Inc. ("Interactive"), a corporation incorporated in the state of New
York on August 16, 1993. On January 28, 1999, a merger took place between these
two companies (under common control) with ScreamingMedia Inc. being the
surviving corporation. The merger was treated as if it were a pooling of
interests.
ScreamingMedia Inc. is in the business of aggregating, processing, filtering
and delivering content to its customers. The Company receives the data from
various content providers, processes and filters it using customized software to
meet individual customers' needs, and then distributes the content almost
instantaneously to such customers.
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--The consolidated
financial statements include the accounts of ScreamingMedia Inc. (collectively,
the "Company") and its wholly owned subsidiary, ScreamingMedia (UK) Ltd. All
significant inter-company balances and transactions have been eliminated in
consolidation. The financial statements of the Company have been prepared on the
accrual basis of accounting. A summary of the major accounting policies followed
in the preparation of the accompanying financial statements, which conform to
generally accepted accounting principles, is presented below.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. At December 31, 2000 the Company had cash and cash equivalents
of $58.3 million.
MARKETABLE SECURITIES--Marketable securities consist of corporate notes and
bonds with a maturity date greater than three months when purchased. Management
has classified ScreamingMedia's marketable securities as available-for-sale
securities in the accompanying consolidated financial statements.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity. Realized
gains and losses on available-for-sale securities are included in other income.
Gains and losses, both realized and unrealized, are measured using the specific
identification method. Market value is determined by the most recently traded
price of the security at the balance sheet date. At December 31, 2000, the
Company had marketable securities of $39.8 million.
PROPERTY AND EQUIPMENT AND RELATED DEPRECIATION AND AMORTIZATION--Property
and equipment are stated at cost, and in the case of equipment under capital
leases, the present value of the future minimum lease payments, less accumulated
depreciation and amortization. Depreciation and amortization is calculated using
the straight-line method over the estimated useful lives of the depreciable
assets, which range from three to nine years, or, if shorter, the lease term.
Improvements are capitalized, while repair and maintenance costs are charged to
operations as incurred.
F-8
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
IMPAIRMENT OF LONG LIVED ASSETS--The Company's long-lived assets and
identifiable intangibles are reviewed for impairment whenever events or changes
in circumstances indicate that the net carrying amount may not be recoverable.
When such events occur, the Company measures impairment by comparing the
carrying value of the long-lived asset to the estimated undiscounted future cash
flows expected to result from use of the assets and their eventual disposition.
If the sum of the expected undiscounted future cash flows is less than the
carrying amount of the assets, the Company would recognize an impairment loss.
The Company determined that, as of December 31, 2000 and 1999, there had been no
impairment in the carrying value of long-lived assets.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE--As of
January 1, 1999, costs of computer software developed or obtained for internal
use are capitalized while in the application development stage and are expensed
while in the preliminary stage and post-implementation stage. The Company
amortizes these capitalized costs over the life of the systems, which is
estimated to be two years. As of December 31, 2000, the Company capitalized
approximately $2,227,000 of internal development and software purchase costs
relating to its internal use software incurred during the application
development stage. Prior to January 1, 1999, the Company had no significant
costs related to software development, normal maintenance of internal use
software is expensed as incurred.
DEFERRED REVENUES--Deferred revenues represents amounts billed in excess of
revenues recognized. Such deferred revenues relate to certain content,
maintenance and license and set-up fees. (See revenue recognition below.)
Included in accounts receivable are amounts due (under contract) relating to
deferred revenues.
REVENUE RECOGNITION--The Company's income is derived primarily from its
services and related license and set-up fees. Typically, the Company enters into
multiple element arrangements whereby it earns revenue from a combination of
services (including content revenue, maintenance, and processing and delivery
fees) and license and setup fees. Revenue from each element is recorded when the
following conditions exist: (1) the product or service provided represents a
separate earnings process; (2) revenue is allocated among the elements based on
the fair value of the elements and; (3) the undelivered elements are not
essential to the functionality of a delivered element. If the conditions for
each element described above do not exist, revenue is recognized as earned using
revenue recognition principles applicable to those elements as if it were one
arrangement, generally on a straight-line basis. The Securities and Exchange
Commission ("SEC") has recognized the diversity in practice in accounting for
multiple element arrangements and the complexity of these arrangements. The
staff of the SEC has asked the Emerging Issues Task Force ("EITF") to provide
additional accounting guidance on those transactions. The EITF has added issue
No. 00-21, ACCOUNTING FOR MULTIPLE ELEMENT REVENUE ARRANGEMENTS, to its agenda
to address the accounting issues related to the recognition of revenue.
ADVERTISING COSTS--The costs of advertising are expensed as incurred.
INCOME TAXES--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates currently in effect. State
and local taxes are based on factors other than income.
F-9
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
RECLASSIFICATIONS--During fiscal year 2000 certain sales and marketing and
research and development expenses were classified to cost of sales. In addition,
certain general and administrative expenses were classified to research and
development and sales and marketing. These new classifications resulted in a
better reporting of expenses and had no impact on reported net earnings,
earnings per share or stockholders' equity.
The presentation of certain prior year information has been reclassified to
conform with the current year presentation.
FOREIGN CURRENCY TRANSLATION--The functional currency of the Company's
wholly owned subsidiary in the UK is the local currency. Accordingly, all assets
and liabilities of the foreign subsidiary are translated into U.S. dollars at
period-end exchange rates. Revenues and expenses are translated using the
average rates during the period. The effects of foreign currency translation
adjustments have been recorded as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in consolidated net
loss.
OTHER COMPREHENSIVE INCOME (LOSS)--The Company reports other comprehensive
income (loss) in accordance with Statement of Financial Accounting Standards
("SFAS") No. 130, which requires the disclosure of comprehensive income (loss).
SFAS No. 130 requires that in addition to net income (loss), a Company should
report other comprehensive income (loss) consisting of gains and losses which
bypass the traditional income statement and are recorded directly into
stockholders' equity (deficiency) on the balance sheet. The components of other
comprehensive income for the Company consist of unrealized gains and losses
relating to the translation of foreign currency and unrealized gains and losses
relating to the Company's investments in marketable securities. Comprehensive
loss was $40.1 million, $13.2 million, and $610,000 for the years ended
December 31, 2000 and 1999 and 1998, respectively.
SEGMENTS--The Company operates in one principal business segment,
aggregating, processing, filtering and delivering content. Substantially all of
the Company's material operating results and identifiable assets are in the
United States. In 1999, one customer accounted for approximately 12% of net
revenue. In 2000 and 1998, no customer accounted for more than 10% of net
revenue.
NET LOSS PER COMMON SHARE--Basic net loss per share was computed by dividing
net loss attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted net loss per share has not been presented
since the impact of options, warrants and the conversion of preferred shares
would have been antidilutive (see notes 8, 9, 10).
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and
notes payable, are carried at cost, which approximates their fair value because
of the short-term maturity of these instruments and the relatively stable
interest rate environment. Marketable securities are recorded at market value.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was
previously amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
F-10
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
which deferred the effective date of SFAS No. 133 to fiscal years commencing
after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, and for hedging activities be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The Company believes the adoption of SFAS No. 133, as amended by SFAS No. 138
will not have a material impact on the financial position or results of
operations. The Company does not currently engage or plan to engage in any
derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Staff
Accounting Bulletin No. 101 summarizes certain areas of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In management's opinion the Company's current revenue
recognition principles comply with Staff Accounting Bulletin No. 101.
3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, short-term investments and
accounts receivable. Cash and cash equivalents are deposited with major
financial institutions; at times, such balances with any one financial
institution may be in excess of FDIC insurance limits. The Company has both
short-term and long term investments in various corporate bonds and commercial
paper.
The Company extends credit based upon an evaluation of the customer's
financial condition and generally collateral is not required on accounts
receivable. The Company maintains an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and other
information.; to date such losses have been within management's expectations.
4. MARKETABLE SECURITIES
Marketable securities investments as of December 31, 2000 consist of the
following:
UNREALIZED
HOLDING FAIR
COST GAINS VALUE
----------- ----------- -----------
Corporate Notes and Bonds............. $39,789,794 $ 30,184 $39,819,978
=========== =========== ===========
FAIR
COST VALUE
----------- -----------
Due within one year................................ $35,598,579 $35,788,379
Due after one year through five years.............. $ 4,191,215 $ 4,031,599
----------- -----------
Total marketable securities........................ $39,789,794 $39,819,978
=========== ===========
Available-for-sale securities are carried at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity as of
December 31, 2000. The Company does not hold these securities for speculative or
trading purposes. The Company did not have marketable securities as of
December 31, 1999.
F-11
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
5. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are as follows:
DECEMBER 31,
------------------------
2000 1999
----------- ----------
Software and computer equipment, including assets
under capital leases.............................. $15,266,490 $3,359,869
Construction in process............................. -- 103,240
Leasehold improvements.............................. 2,850,810 1,117,907
Office furniture and equipment...................... 1,942,330 565,670
----------- ----------
20,059,630 5,146,686
Less: accumulated depreciation and amortization..... (3,829,039) (594,191)
----------- ----------
Property and equipment, net......................... $16,230,591 $4,552,495
=========== ==========
Depreciation expense (including assets under capital leases) amounted to
approximately $3.6 million, $451,000, and $26,000 for the years ended December
31, 2000, 1999, and 1998, respectively.
6. INCOME TAXES
No provision for income taxes has been made because the Company has
sustained cumulative losses since the commencement of operations. At December
31, 2000, the Company had net operating loss carryforwards ("NOLs") of
approximately $28,309,000, which will be available to reduce future taxable
income. There may be some limitation on the use of these NOLs under the internal
revenue code section 382 ownership change rules. The NOLs are expected to expire
in the following years (in thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2008........................................................ $ 13
2010........................................................ 51
2012........................................................ 112
2013........................................................ 54
2014........................................................ 7,558
2020........................................................ 20,521
-------
$28,309
=======
F-12
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
6. INCOME TAXES (CONTINUED)
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as follows:
DECEMBER 31,
---------------------------
2000 1999
------------- -----------
Deferred tax assets.............................. $ (25,011,000) $(6,549,864)
Less valuation allowance......................... (25,011,000) (6,549,864)
------------- -----------
Net deferred taxes............................... $ -- $ --
============= ===========
The Company's NOLs primarily generated the deferred tax assets. At December
31, 2000 and 1999, a valuation allowance was provided as the realization of the
deferred tax benefits is not likely.
The effective tax rate varies from the U.S. Federal statutory tax rate for
the years ended December 31, principally due to the following:
2000 1999 1998
-------- -------- --------
U.S. Federal statutory tax................................ 35% 35% 35%
State and local taxes..................................... 12 12 12
Valuation allowance....................................... (47) (47) (47)
---- ---- ---
Effective tax rate........................................ --% --% --%
==== ==== ===
7. COMMITMENTS
OFFICE LEASES--The Company leases office space in New York, Miami, San
Francisco, and London under non-cancelable operating leases expiring on various
dates through March 31, 2009. These leases contain provisions for escalations
due to increases in real estate taxes and operating costs.
The following schedule reflects future required minimum lease payments at
December 31, 2000.
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $ 1,518,478
2002........................................................ 1,565,136
2003........................................................ 1,585,903
2004........................................................ 1,593,881
2005........................................................ 1,343,273
Thereafter.................................................. 3,967,517
-----------
Total....................................................... $11,574,188
===========
Rent expense under these leases was $1,329,029, $295,672, and $70,260 for
the years ended December 31, 2000, 1999, and 1998, respectively.
EQUIPMENT LEASES--Fixed assets included assets acquired under capital leases
of $7,026,242 and $1,531,418 at December 31, 2000 and 1999 respectively. The
related accumulated amortization was $1,358,344 and $141,371 as of December 31,
2000 and 1999, respectively.
F-13
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
7. COMMITMENTS (CONTINUED)
The Company is a lessee under several capital lease agreements expiring
through 2004 with third parties for certain equipment. Future minimum lease
payments under non cancelable capital leases, together with the present value of
the net minimum payments as of December 31, 2000, are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ -----------
2001........................................................ $ 3,235,718
2002........................................................ 1,993,619
2003........................................................ 917,767
2004........................................................ 708,837
-----------
Total minimum lease payments................................ 6,855,941
Less: amount representing interest.......................... (729,685)
-----------
Present value of minimum capital lease payments............. 6,126,256
Less: current portion....................................... (2,726,639)
-----------
Long-term capitalized lease obligations $ 3,399,617
===========
The assets and liabilities under capital leases are recorded at the present
value of the minimum lease payments using effective interest rates ranging from
2.85% to 12.74% per annum as of December 31, 2000.
A major financial institution has extended a $3.6 million irrevocable
standby letter of credit to the Company as collateral in a leasing arrangement.
Commitment fees of one quarter of one percent per annum are paid on the amounts
of standby letter of credit used.
F-14
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In October 1999, the Company issued 2,678,572 shares of Series B Convertible
Preferred Stock ("Series B Preferred Stock") through a private placement for
$30,000,000 resulting in net proceeds to the Company of $28,018,814. The
outstanding shares of our Series B Convertible Preferred Stock automatically
converted into 7,227,872 shares of common stock, upon completion of our initial
public offering on August 2, 2000.
In July 2000, the Company issued 8,254,227 shares of Series C Convertible
Redeemable Preferred Stock ("Series C Preferred Stock") at a price of $5.81 per
share to a group of institutional accredited investors, exempt from the
registration requirements of the Securities Act pursuant to Section 4(2). This
private placement resulted in net proceeds of $46,183,048. The Series C
Preferred Stock was recorded at $46,183,048, which reflects the face amount of
the preferred stock reduced by all issuance costs, resulting in a discount of
$1,776,800. The outstanding shares of our Series C Convertible Preferred Stock
automatically converted into 8,254,227 shares of common stock, upon completion
of our initial public offering on August 2, 2000.
9. STOCKHOLDERS' EQUITY (DEFICIENCY)
In January 1999, the Company was reincorporated in the state of Delaware.
Pursuant to that reorganization, common stockholders of Interactive received one
share of common stock of the Company with a par value of $0.01 per share in
exchange for each common share of Interactive with a par value of $0.0001 per
share. In addition, each preferred stockholder of Interactive received 2.6984
shares of the Company's common stock in exchange for each share of Interactive
preferred stock owned. Shares of common treasury stock and shares of preferred
treasury stock of Interactive were replaced by shares of common treasury stock
of the Company at exchange rates of one for one and 2.6984 for one,
respectively.
STOCK SPLITS--On July 17, 2000, the Board of Directors of the Company and
the Company's stockholders approved a one for 1.26 reverse stock split. On
December 22, 1999, the Board of Directors of the Company approved a 100% stock
dividend (two for one stock split). Additionally, on April 11, 2000, the Company
effected a 1.7 for one stock split. As a result of such stock splits, one share
of Series A Preferred Stock or Series B Preferred Stock became convertible into
2.6984 shares of common stock. The Company's financial statements have been
retroactively adjusted to show the effect of these stock splits for all periods
presented.
COMMON STOCK--On August 2, 2000, we completed an initial public offering
that, after inclusion of the exercise of the 481,700 share underwriter's
over-allotment, resulted in the issuance of 5,481,700 shares of common stock.
Simultaneously with the consummation of the initial public offering, each
outstanding share of our Series A, Series B and Series C Convertible Preferred
Stock automatically converted into common stock, resulting in an additional
19,602,785 shares of common stock.
PREFERRED STOCK--The Company is authorized to issue up to 20,000,000 shares
of preferred stock.
In March and April 1999, the Company issued 1,527,085 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") through a private
placement, in consideration of gross proceeds to the Company of $5,500,000. The
outstanding shares of our Series A Convertible Preferred Stock automatically
converted into 4,120,686 shares of common stock, upon completion of our initial
public offering on August 2, 2000.
F-15
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
9. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
At the time of its initial public offering, the Company recorded an
approximate $50.2 million preferred stock dividend comprising of
(a) approximately $4.0 million representing the issuance costs of the Series B
and Series C preferred stock that remained unaccreted as of August 2, 2000 and
(b) approximately $46.2 million representing the unamortized portion of the
amount by which the value of the common stock issued on conversion of the
Series C preferred stock exceeded the proceeds the Company received on its
issuance.
TREASURY STOCK--At December 31, 1998 and 1999, common treasury stock was
comprised of 539,682 and 1,565,079 shares of common stock with a cost basis of
$6,659 and $19,311, respectively. At December 31, 1998 preferred treasury stock
consisted of 380,000 shares of preferred stock with a cost basis of $12,652. In
January 1999, pursuant to the reorganization of the Company, all of the shares
of preferred stock held in treasury were converted to 1,025,397 shares of common
stock held in treasury. There are no preferred shares of treasury stock at
December 31, 1999. During October 1998, the Company issued 539,683 shares of
common stock from shares held in treasury stock to two directors and recorded
compensation expense of $350,000 in connection with such grants. Such
compensation expense equaled the fair value of the stock at the time of grant.
During the fiscal year 2000, the Company issued 30,000 shares of common
stock from shares held in treasury stock to a board member and recorded
compensation expense of $168,750 in connection with such grants. Such
compensation expense equaled the fair value of the stock at the time of
issuance. In addition, during fiscal year 2000 the Company donated 1,000 shares
of common stock to an educational institution, which was value at $4,750, the
fair value of the stock at the time of issuance.
WARRANTS--In June 1999, in connection with legal services provided, the
Company issued a warrant to purchase up to 19,275 shares of Common Stock at an
exercise price of $2.60 per share. The warrant was valued at $50,000, using the
Black-Scholes options pricing model with the following assumptions: no dividend
yield, a volatility factor of 50%, risk free interest rate of 6.0%, and an
expected life of 5 years. The warrant may be exercised at any time prior to June
10, 2004. The exercise price and the number and type of securities for which the
warrant is exercisable are subject to adjustment in the event the Company issues
any stock dividends, combines or splits its Common Stock or issues rights to
acquire Common Stock under certain circumstances.
In June 1999, in connection with architectural services provided, the
Company issued a warrant to purchase up to 19,275 shares of Common Stock at an
exercise price of $2.60 per share. The warrant was valued at $50,000, which was
the invoiced amount of the services provided. The warrant may be exercised at
any time prior to June 15, 2004. The exercise price and the number and type of
securities for which the warrant is exercisable are subject to adjustment in the
event the Company issues any stock dividends, combines or splits its Common
Stock or issues rights to acquire Common Stock under certain circumstances.
On February 4, 2000, the Company entered into an agreement with another
tenant with contiguous space in the building to sublease the space with consent
of the landlord. The lease expires on January 31, 2009, and results in
additional straight line rent expense of $513,000 per year. The Company issued a
warrant to the tenant allowing the tenant the right to purchase 67,460 shares of
the Company's common stock at an exercise price of $4.15 per share. In addition,
the tenant received the right to require the Company to buy back the warrant, or
stock if the warrant was exercised, at $10.67
F-16
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
9. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
per share. The fair value of the common stock at the issuance date of the
warrant was $14.82 per share. The value of the warrant was determined to be
$740,000; such value was derived by using the Black-Scholes option model. The
value of the warrant will be amortized ratably over the life of the additional
space.
On March 9, 2000, the tenant exercised the warrant and received 67,460
shares of common stock for which the Company received $280,000. On June 22,
2000, the Company repurchased the 67,460 shares of common stock from the holder
for $1,000,000 in accordance with the terms of the warrant agreement. These
repurchased shares have been recorded as Treasury Stock in the Company's
financial statements.
On July 14, 2000, the Company entered into a lease modification agreement
whereby it leased additional space from its primary landlord through
March 2009. In connection with such lease, the Company granted the landlord a
warrant to purchase 79,365 shares of Common Stock at an exercise price of $12.60
per share. The warrant may be exercised at any time prior to July 14, 2003. The
exercise price and the number and type of securities for which the warrant is
exercisable are subject to adjustment in the event the Company issues any stock
dividends, combines or splits its Common Stock or issues rights to acquire
Common Stock under certain circumstances. The fair value at the time of issuance
was $12.00 per share. The value of the warrant has been determined to be
$221,823. Such value was derived by using the Black-Scholes option pricing model
with the following assumptions: no dividend yield, a volatility factor of 80%, a
risk free interest rate of 5.32% and an expected life of seven months. The value
of the warrant will be amortized ratably over the life of the additional space.
10. STOCK OPTION PLAN
The Company has established the 1999 Stock Option Plan (the "Plan") to
provide for the granting of nonqualified stock options and incentive stock
options to employees, directors and advisors to reward them for service to the
Company and to provide incentives for future service and enhancement of
shareholder value. As amended in April 1999, the Plan authorized the issuance of
stock options covering up to 6,746,032 shares of Common Stock. The options vest
in accordance with the terms of the agreements entered into by the Company and
the grantee of the options which range from immediate vesting to vesting ratably
over a four year period. A total of 6,623,894 options have been granted under
this plan at December 31, 2000.
In the first quarter of 2000, the Company established the 2000 Equity
Incentive Plan (the "Plan") to provide for the granting of options (including
Incentive Stock Options), Restricted Stock, Phantom Stock, Stock Bonuses and
other stock-based Awards to promote the long-term growth and profitability of
the Company. The Plan is intended to provide key people with incentives to
improve stockholder value and to contribute to the growth and financial success
of the Company and attract, retain and reward employees. The maximum number of
shares of the Common Stock reserved for issuance under the Plan is 3,174,603
shares. As of December 31, 2000 no shares have been issued under the Plan.
For the year ended December 31, 2000 and 1999, options to purchase 3,108,549
and 5,155,776 shares of common stock were granted. The weighted-average grant
date fair values were $9.75 and $3.58 per share, respectively.
F-17
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
10. STOCK OPTION PLAN (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options.
Transactions involving the Company's stock options granted are summarized as
follows:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN SHARES) PRICE
----------- --------
Outstanding, January 1, 1999........................... -- $ --
Granted................................................ 5,155,776 $ 1.63
Exercised.............................................. -- --
Forfeited.............................................. (247,865) $ 0.62
---------- ------
Outstanding, December 31, 1999......................... 4,907,911 $ 1.68
Granted................................................ 3,108,549 $ 5.90
Exercised.............................................. (346,819) $ 1.40
Forfeited.............................................. (1,373,683) $ 1.71
---------- ------
Outstanding, December 31, 2000......................... 6,295,958 $ 3.34
========== ======
There were 1,177,900 and 2,230,493 options exercisable at December 31, 1999,
and December 31, 2000, respectively.
The following information is as of December 31, 2000:
WEIGHTED
AVERAGE
REMAINING WEIGHTED
NUMBER CONTRACTUAL WEIGHTED NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE (IN SHARES) (IN YEARS) PRICE (IN SHARES) PRICE
- -------------- ----------- ----------- -------- ----------- --------
$0.37.................................... 136,269 8.37 $ 0.37 115,132 $0.37
$1.33.................................... 1,560,570 8.45 $ 1.33 974,642 $1.33
$2.41-$2.88.............................. 2,841,714 8.98 $ 2.54 1,105,763 $2.48
$4.00-$4.69.............................. 298,005 9.69 $ 4.54 10,793 $4.15
$5.74-$5.75.............................. 678,581 9.41 $ 5.75 24,163 $5.75
$9.06-$12.13............................. 780,819 9.57 11.53 -- --
SFAS No. 123, "Accounting for Stock-Based Compensation," provides for a fair
value based method of accounting for employee options and options granted to
non-employees and measures compensation expense using an option valuation model
that takes into account, as of the grant date, the exercise price and expected
life of the option, the current price of the underlying stock and its expected
volatility, expected dividends on the stock, and the risk-free interest rate for
the expected term of the options.
F-18
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
10. STOCK OPTION PLAN (CONTINUED)
In connection with the issuance of options to certain employees and
directors at prices below fair market value, the Company had recorded deferred
compensation of $10,456,432 and $10,379,049 as of December 31, 2000 and 1999
respectively, net of recognized compensation expense of $17,575,637 and
$6,062,298, for the years ended December 31, 2000 and 1999 respectively,
representing the unamortized difference between the exercise price and the
estimated fair market value of the Company's common stock at such date. Such
amount is included as a reduction of stockholders' equity (deficiency) and is
being amortized by charges to operations over the vesting period.
Pro forma disclosure as if the Company had adopted the expense recognition
requirement under SFAS 123 is presented below for the year ended December 31,
2000 and 1999, respectively.
DECEMBER 21, 2000 DECEMBER 31, 1999
----------------- -----------------
Net loss attributable to common stockholders--as reported... $(90,667,387) $(13,267,763)
Net loss attributable to common stockholders--pro forma..... $(96,025,070) $(14,011,909)
Net loss per common share--as reported...................... $ (4.00) $ (1.08)
Net loss per common share--pro forma........................ $ (4.23) $ (1.14)
The fair value of options granted under the Plan for the years ended
December 31, 2000 and 1999 in complying with SFAS No. 123, was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used: no dividend yield, a volatility factor of
50%-80%, risk-free interest rate of 6.0% and expected lives of 3 to 5 years.
11. RETIREMENT PLAN
Effective December 1, 2000, the Company implemented the ScreamingMedia
401(k) Plan (the "2000 Savings Plan") under Section 401(k) of the Internal
Revenue Code. Under the 2000 Savings Plan, eligible employees may defer a
portion of their pre-tax earnings, up to 15% of their pre-tax earnings not to
exceed the Internal Revenue Service annual limit. Currently, there is no
eligibility service requirement. The Company is not required to, but may match
employee contributions. In addition, the Company may make a discretionary
contribution to the Plan. The Company did not make any contributions to the Plan
for the year ended December 31, 2000.
12. EMPLOYEE STOCK PURCHASE PLAN
During the first quarter of 2000, the Company established the Employee Stock
Purchase Plan (the "Plan") for the benefit of employees of the Company. The Plan
is intended to provide the employees an opportunity to purchase common shares,
par value $.01 per share. Employees may authorize a payroll deduction of any
whole percentage from 1 percent to 15 percent each pay period. The option price
per share subject to an offering shall be 85% of the fair market value of a
share on the offering date or the exercise date, whichever is lower. The maximum
number of shares reserved under the Plan is 357,143 shares, plus an annual
increase to be added on the first day of the Company's fiscal year beginning in
2001 equal to the lesser of (i) 158,730 shares, (ii) 0.5% of the shares
outstanding on such date or (iii) a lesser amount determined by the Plan
committee. As of December 31, 2000 no shares have been issued under the Plan.
F-19
SCREAMINGMEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly results of operations for
1999 and 2000. This unaudited information has been prepared on the same basis as
the audited consolidated financial statements. In the opinion of management,
this table includes all adjustments, consisting only of normal recurring
adjustments, that are considered necessary for a fair presentation of the
Company's financial position and results of operations for the quarters
presented.
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- ------------- ------------ --------- --------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Total revenue........ 267 393 818 1,507 2,719 4,705 6,584 7,856
===== ======= ======= ======= ======== ========= ========= =========
Net loss............. (287) (1,017) (3,874) (7,988) (10,908) (10,648) (9,475) (9,113)
===== ======= ======= ======= ======== ========= ========= =========
Deemed preferred
stock dividends.... -- -- -- (102) (154) (155) (50,215) --
----- ------- ------- ------- -------- --------- --------- ---------
Loss attributable to
common
stockholders....... $(287) $(1,017) $(3,874) $(8,090) $(11,062) $ (10,803) $ (59,690) $ (9,113)
===== ======= ======= ======= ======== ========= ========= =========
Basic and diluted net
loss per share..... (0.02) (0.08) (0.31) (0.65) (0.88) (0.85) (2.16) (.24)
F-20