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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _____________________ TO _____________________
COMMISSION FILE NUMBER: 0-26071
EDGAR ONLINE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1447017
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
50 WASHINGTON ST., NORWALK, CT 06854
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 852-5666
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
Number of shares of common stock outstanding at August 14, 2002: 16,983,917
shares
EDGAR ONLINE, INC.
FORM 10-Q
FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001 ..................................... 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 (unaudited) and 2001 (unaudited) ........... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 (unaudited) and 2001 (unaudited) ..................... 5
Notes to Condensed Consolidated Financial Statements ........................................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................................... 20
ITEM 2. Changes in Securities and Use of Proceeds ........................................... 20
ITEM 3. Defaults Upon Senior Securities ..................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders ................................. 20
ITEM 5. Other Information ................................................................... 20
ITEM 6. Exhibits and Reports on Form 8-K .................................................... 20
Signatures .................................................................................. 21
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, 2002
(unaudited) December 31, 2001
-------------- -----------------
ASSETS
Cash and cash equivalents $ 5,279 $ 3,461
Accounts receivable, less allowance of $201 and $298, respectively 1,847 2,026
Other current assets 323 278
-------- --------
Total current assets 7,449 5,765
Property and equipment, net 2,104 2,519
Goodwill 2,189 8,009
Other intangible assets 11,970 16,292
Other assets 853 901
-------- --------
Total assets $ 24,565 $ 33,486
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,008 $ 1,680
Deferred revenues 1,918 1,393
Notes payable and accrued interest 2,251 2,621
Capital lease payable, current portion 16 25
-------- --------
Total current liabilities 5,193 5,719
Notes payable 1,868 3,800
Capital lease payable, long-term - 7
-------- --------
Total liabilities 7,061 9,526
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares authorized, 16,980,917
and 15,421,917 shares issued and outstanding at June 30, 2002
and December 31, 2001, respectively 170 154
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares
issued or outstanding -- --
Additional paid-in capital 58,173 54,741
Accumulated deficit (40,839) (30,935)
-------- --------
Total stockholders' equity 17,504 23,960
-------- --------
Total liabilities and stockholders' equity $ 24,565 $ 33,486
======== ========
See accompanying notes to condensed consolidated financial statements.
3
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Data sales $ 1,360 $ 1,172 $ 2,803 $ 2,440
Technical services 1,102 1,923 2,245 3,843
Seat-based subscriptions 1,255 717 2,363 1,365
Advertising and e-commerce 398 343 790 790
-------- -------- -------- --------
Total revenues 4,115 4,155 8,201 8,438
Cost of revenues 695 1,145 1,388 2,546
-------- -------- -------- --------
Gross profit 3,420 3,010 6,813 5,892
Operating Expenses:
Sales and marketing 644 652 1,237 1,259
Development expenses 588 640 1,076 1,263
General and administrative 1,784 1,927 3,585 4,049
Restructuring charges -- 912 (100) 912
Depreciation and amortization 728 1,191 1,453 2,356
-------- -------- -------- --------
3,744 5,322 7,251 9,839
Loss from operations (324) (2,312) (438) (3,947)
Interest and other income (expense) (55) (378) (149) (449)
-------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle (379) (2,690) (587) (4,396)
Cumulative effect of change in
accounting principle -- -- (9,317) --
-------- -------- -------- --------
Net loss $ (379) $ (2,690) $ (9,904) $ (4,396)
======== ======== ======== ========
Weighted average shares outstanding - basic and
diluted 16,956 14,909 16,872 14,909
Loss before cumulative effect of change in
accounting principle per share - basic and diluted $ (0.02) $ (0.18) $ (0.03) $ (0.29)
Cumulative effect of change in accounting
principle per share - basic and diluted -- -- $ (0.55) --
Net loss per share - basic and diluted $ (0.02) $ (0.18) $ (0.59) $ (0.29)
See accompanying notes to condensed consolidated financial statements.
4
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (9,904) $ (4,396)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 584 654
Amortization of intangibles 869 1,701
Provisions for bad debts 85 90
Stock compensation expense 2 5
Loss on investment -- 275
Amortization of debt expense 5 --
Impairment of goodwill 9,317 --
Changes in assets and liabilities:
Accounts receivable 94 334
Other assets, net (40) (390)
Income tax receivable -- 902
Accounts payable and accrued expenses (671) (536)
Deferred revenues 524 405
Accrued interest (24) --
-------- --------
Total adjustments 10,745 3,440
-------- --------
Net cash provided by/(used in) operating activities 841 (956)
-------- --------
Cash used in investing activities:
Purchases of property and equipment (169) (410)
Sale of available-for-sale investments -- 1,499
-------- --------
Net cash provided by/(used in) investing activities (169) 1,089
-------- --------
Cash flows from financing activities:
Proceeds from issuances of common stock and warrants 3,402 --
Proceeds from exercise of stock options 44 --
Principal payments on notes payable (2,246) (33)
Loan restructuring costs (38) --
Payments on capital lease obligations (16) (53)
-------- --------
Net cash provided by/(used in) financing activities 1,146 (86)
-------- --------
Net change in cash and cash equivalents 1,818 47
Cash and cash equivalents at beginning of period 3,461 2,284
-------- --------
Cash and cash equivalents at end of period $ 5,279 $ 2,331
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 221 $ 235
Equipment acquired under capital leases -- $ 32
See accompanying notes to condensed consolidated financial statements.
5
EDGAR ONLINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
EDGAR Online, Inc. ("the Company"), formerly Cybernet Data Systems, Inc., was
incorporated in the State of Delaware in November 1995 and launched its EDGAR
Online Internet Web site in January 1996. The Company is a provider of financial
information derived from U.S. Securities and Exchange Commission (SEC) data and
developer of financial and business system solutions. The Company sells to the
corporate market and Internet portals as well as running five destination Web
sites. The Company has entered into several arrangements with other Internet
service providers to market financial information services.
The unaudited interim financial statements of the Company as of June 30, 2002
and for the three and six months ended June 30, 2002 and 2001, included herein
have been prepared in accordance with the instructions for Form 10-Q under the
Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X
under the Securities Act of 1934, as amended. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
as of June 30, 2002, and the results of its operations for the three and six
months ended June 30, 2002 and 2001, and its cash flows for the six months ended
June 30, 2002 and 2001. The results for the three and six months ended June 30,
2002 are not necessarily indicative of the expected results for the full fiscal
year or any future period.
These financial statements should be read in conjunction with the financial
statements and related footnotes included in the Company's Annual Report on Form
10-K, filed with the SEC in March 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates embedded in the condensed consolidated financial
statements for the periods presented concern the allowance for doubtful
accounts, the fair value of purchased intangible assets, and the estimated
useful lives of certain purchased intangible assets.
(2) RECLASSIFICATIONS
The Company has reclassified revenues into data sales, technical services,
seat-based subscriptions and advertising and e-commerce revenues. Also, in 2002,
the Company reclassified capital based tax payments from the income tax
provision to general and administrative expenses. Prior comparative amounts have
been reclassified to conform to this presentation.
(3) BUSINESS COMBINATIONS
On October 30, 2000, the Company acquired all the outstanding equity of
Financial Insight Systems, Inc. (FIS), pursuant to the terms and conditions of
an agreement and plan of merger dated October 18, 2000 for $28,148,575. The
purchase price included (1) the issuance of 2,450,000 restricted shares of EDGAR
Online common stock valued at $9,579,500, (2) the payment of $17,765,000
consisting of (i) a cash payment of $11,765,000 and (ii) a series of two year
7.5% senior subordinated secured promissory notes in the total principal amount
of $6,000,000 and (3) $804,075 for the payment of fees and acquisition related
expenses. The aggregate purchase price of $28,148,575 was originally allocated
to the purchased assets and liabilities based on their relative fair market
values at the date of acquisition. The excess purchase price over the estimated
fair value of the tangible assets acquired has been allocated as follows: (1)
$9,124,338 to accumulated knowhow with an estimated useful life of 10 years, (2)
$4,044,645 to customer based intangibles with an estimated useful life of 12
years, (3) $4,194,264 to accumulated work force with an estimated useful life of
5 years and (4) $8,796,406 to goodwill with an estimated useful life of 12
years.
On March 21, 2002, the Company concluded negotiations to extend the maturity
date of certain of the FIS Notes. The holders of $5,700,000 in principal amount
of FIS Notes agreed to amend and restate their notes to provide for the
following schedule of principal payments: $1,900,000 on April 1, 2002,
$1,900,000 on April 1, 2003 and $1,900,000 on January 2, 2004. Interest will
remain at 7.5% and will be payable according to the original terms.
As a result of the adoption of SFAS 142, "Goodwill and Other Intangible Assets",
the Company completed its required impairment review and recorded an impairment
charge of $9.3 million. This reflects overall market declines since the merger
was announced in 2000, and is reflected as a cumulative effect of change in
accounting principle in the accompanying condensed consolidated statement of
operations. See note 9 for further discussion.
6
(4) REVENUE RECOGNITION
We derive revenues from four primary sources: contracts with corporate customers
for customized data, sale of our technical services to construct and/or operate
the technical systems our customers use to integrate our data and data from
other sources into their products and services, seat based subscriptions to our
Web site services and advertising and other e-commerce based revenues. Revenue
from data sales is recognized over the term of the contract, which are typically
non-cancelable, one-year contracts with automatic renewal clauses, or, in the
case of certain up-front fees, over the estimated customer relationship period.
Revenue from technical services, consisting primarily of time and materials
based contracts, is recognized in the period services are rendered. Revenue from
seat-based subscriptions is recognized ratably over the subscription period,
which is typically three or twelve months. Advertising and e-commerce revenue is
recognized as the services are provided.
Revenue is recognized provided acceptance, or delivery if applicable, has
occurred, collection of the resulting receivable is probable and no significant
obligations remain. If amounts are received in advance of the services being
performed, the amounts are recorded and presented as deferred revenues.
(5) CONCENTRATION OF RISK AND FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of accounts receivable. The most
significant concentration of credit risk relates to NASDAQ, which comprised 27%
and 17% of the Company's total gross receivable balance at June 30, 2002 and
December 31, 2001, respectively. No other customer accounted for more than 10%
of accounts receivable at June 30, 2002 or December 31, 2001. NASDAQ comprised
34% and 42% of the company's total revenue during the six months ended June 30,
2002 and 2001, respectively. The other customers are geographically dispersed
throughout the United States with no one customer accounting for more than 10%
of revenues during the three months ended June 30, 2002 or 2001. In addition,
the Company has not experienced any significant credit losses to date from any
one customer. The fair value of the Company's cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities at June 30, 2002
and December 31, 2001, approximate their financial statement carrying value
because of the short-term maturity of these instruments. The fair values of the
Company's long-term obligations are based on the amount of future cash flows
associated with the notes, discounted using an appropriate interest rate.
(6) RESTRUCTURING COSTS
In 2001, the Company closed the Kirkland, WA office. The office closing
completed the Company's consolidation of its technical operations. During the
second quarter of 2001, the Company recorded a $912,000 pre-tax charge which is
included in operating expenses in the consolidated statement of operations. In
September 2001, the Company incurred $84,000 of additional severance costs
related to restructuring at FIS. In March 2002, the Company negotiated a
contract termination, thereby eliminating $100,000 of future obligations.
Restructuring costs include the following:
Remaining Remaining
Total Obligation at 2002 Activity Obligation at
Costs December 31, 2001 Cash Non-Cash June 30, 2002
----------------------------------------------------------------------
Write down of fixed assets $ 234 $ -- $ -- $ -- $ --
Non-recoverable lease payments 170 97 (45) (10) 42
Non-cancelable service contracts 188 182 (9) (101) 72
Employment termination payments 319 28 (39) 11 --
Employment termination payments - FIS 84 -- -- -- --
----- ----- ----- ----- -----
Total restructuring costs $ 995 $ 307 $ (93) $(100) $ 114
===== ===== ===== ===== =====
All restructuring obligations are included in accrued expenses at June 30, 2002
and December 31, 2001.
7
(7) LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No. 128,
Earnings Per Share, and the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 98. Under SFAS No. 128, Basic EPS excludes dilution for
common stock equivalents and is computed by dividing income or loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
and resulted in the issuance of common stock. Basic earnings per share are
computed using the weighted average number of common shares outstanding during
the period.
Diluted loss per share has not been presented separately, as the outstanding
stock options and warrants are anti-dilutive for each of the periods presented.
Anti-dilutive securities outstanding were 3,425,822 and 2,477,580 for the three
months ended June 30, 2002 and 2001, respectively.
(8) PRIVATE PLACEMENT OF COMMON STOCK
In December 2001 and January 2002, we consummated a private sale of common stock
and warrants to certain institutional investors. Pursuant to these transactions,
we sold an aggregate of 2,000,000 shares of Common Stock, at a purchase price of
$2.50 per share, along with four-year warrants to purchase an aggregate of
400,000 shares of Common Stock at an exercise price of $2.875 per share
resulting in gross proceeds of $5,000,000. In connection with the transaction,
the Company paid a transaction fee to Atlas Capital Services, LLC equal to
4.625% of the gross proceeds and issued Atlas a four-year warrant to purchase
40,000 shares of Common Stock at an exercise price of $2.50 per share.
(9) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS No. 141 also specifies the criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 141 was effective July 1, 2001,
except with regard to business combinations that were initiated prior to that
date, which the Company accounted for using the purchase method of accounting.
SFAS No. 142, which is effective for fiscal years beginning after December 15,
2001, requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least annually.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS No. 144).
The Company adopted SFAS 142 effective January 1, 2002. The adoption of these
accounting standards required that assembled workforce with a net book value of
$3.4 million as of January 1, 2002 be subsumed into goodwill and also eliminated
the amortization of goodwill commencing January 1, 2002. SFAS No. 142 also
required the Company to perform a transitional assessment by June 30, 2002, to
determine whether there is an impairment of goodwill. To perform this
assessment, the Company compared the fair value of the FIS reporting unit, as
determined by an independent valuation firm, to the carrying amount of the
related net assets. This assessment indicated that goodwill associated with the
FIS acquisition was impaired as of January 1, 2002. Accordingly, the Company
recognized a $9.3 million non-cash charge, recorded as of January 1, 2002, as
the cumulative effect of a change in accounting principle for the write-down of
goodwill to its fair value. The impaired goodwill was not deductable for tax
purposes, and as a result, no tax benefit has been recorded in relation to the
change.
SFAS 142 also requires goodwill to be tested annually and between annual tests
if events occur or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The Company has
elected to perform its annual tests for indications of goodwill impairment as of
December 31 of each year. These reviews may result in future periodic
impairments that could have a material adverse effect on the results of
operations in the period recognized.
8
The following table reflects the reconciliation of reported loss before
cumulative effect of change in accounting principle in total and per share to
amounts adjusted for the exclusion of goodwill amortization for the prior
period:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Reported loss $ (379) $ (2,690) $ (587) $ (4,396)
Goodwill amortization -- 381 -- 735
-------- -------- -------- --------
Adjusted loss $ (379) $ (2,309) $ (587) $ (3,661)
PER SHARE OF COMMON STOCK - BASIC AND DILUTED
Reported loss $ (0.02) $ (0.18) $ (0.03) $ (0.29)
Goodwill amortization -- 0.03 -- 0.05
-------- -------- -------- --------
Adjusted loss $ (0.02) $ (0.15) $ (0.03) $ (0.24)
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. This statement supercedes SFAS No. 121, and
amends APB 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business." SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The adoption of SFAS No. 144 did not have a significant impact on the
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146, which is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
applies to costs associated with an exit activity, including restructurings, or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts and relocating
plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs
are recorded as an operating expense when the liability is incurred and can be
measured at fair value. Commitment to an exit plan or a plan of disposal by
itself will not meet the requirement for recognizing a liability and the related
expense under SFAS No. 146. SFAS No. 146 grandfathers the accounting for
liabilities that were previously recorded under EITF Issue 94-3. Accordingly,
SFAS No. 146 will have no effect on the restructuring costs recorded previously
by the Company.
(10) LOSS ON INVESTMENT
The Company's management performs on-going business reviews and, based on
quantitative and qualitative measures, assesses the need to record impairment
losses on long-lived assets when impairment indicators are present. Where
impairment indicators were identified, management determined the amount of the
impairment charge by comparing the carrying value of long-lived assets to their
fair value.
During the second quarter of 2001, the Company recorded a $275,000 loss on
investment, included in interest and other income (expense), related to an
equity investment made in 2000. This investment was accounted for under the cost
method. The company in which the investment was made had lower than expected
financial results over the previous several quarters as compared to those
forecasted at the time of the investment. As a result, the carrying amount was
reduced to $0.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results and timing of certain events could differ
materially from those anticipated in these forward looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors that May Affect Future Results and Financial Condition" included
elsewhere in this Quarterly Report.
OVERVIEW
We are a provider of financial information derived from U.S. Securities and
Exchange Commission data and a developer of financial and business system
solutions. We sell to the corporate market and Internet portals as well as
running five destination Web sites. We were founded in November 1995 as Cybernet
Data Systems, Inc. In January 1999, we changed our corporate name to EDGAR
Online, Inc.
9
We derive revenues from four primary sources: contracts with corporate customers
for customized data, sale of our technical services to construct and/or operate
the technical systems our customers use to integrate our data and data from
other sources into their products and services, seat-based subscriptions to our
Web site services and advertising and other e-commerce based revenues. Revenue
from data sales is recognized over the term of the contract or, in the case of
certain up-front fees, over the estimated customer relationship period. Revenue
from technical services is recognized in the period services are rendered.
Revenue from seat-based subscriptions is recognized ratably over the
subscription period, which is typically three or twelve months. Advertising and
e-commerce revenue is recognized as the services are provided.
We intend to increase our operating expenses to fund increased sales and
marketing, to enhance our corporate products and Web sites and to continue to
establish relationships critical to our success.
On October 30, 2000, the Company acquired all the outstanding equity of
Financial Insight Systems, Inc. (FIS), pursuant to the terms and conditions of
an agreement and plan of merger dated October 18, 2000 for $28,148,575. The
purchase price included (1) the issuance of 2,450,000 restricted shares of EDGAR
Online common stock valued at $9,579,500, (2) the payment of $17,765,000
consisting of (i) a cash payment of $11,765,000 and (ii) a series of two year
7.5% senior subordinated secured promissory notes in the total principal amount
of $6,000,000 ("FIS Notes") and (3) $804,075 for the payment of fees and
acquisition related expenses. The acquisition was accounted for under the
purchase method of accounting and accordingly the estimated fair value of FIS'
assets and liabilities and the operating results of FIS from the effective date
of the acquisition have been included in the accompanying financial statements.
On March 21, 2002, the Company concluded negotiations to extend the maturity
date of a substantial majority of principal amount of the FIS Notes. The holders
of $5,700,000 in principal amount of FIS Notes agreed to amend and restate their
notes to provide for the following schedule of principal payments: $1,900,000 on
April 1, 2002, $1,900,000 on April 1, 2003 and $1,900,000 on January 2, 2004.
Interest will remain at 7.5% per annum and will be payable according to the
original terms. Effective January 1, 2002, the Company recorded a $9.3 million
impairment in FIS goodwill as the result of the implementation of SFAS 142. The
impairment was recorded as the cumulative effect of a change in accounting
principle and the carrying value of goodwill has been reduced on the Company's
balance sheet.
RESULTS OF OPERATIONS
REVENUES
Revenues decreased 1% to $4.1 million for the three months ended June 30, 2002,
from $4.2 million for the three months ended June 30, 2001. The net decrease in
revenues is attributable to a $188,000, or 16%, increase in data sales to $1.4
million in 2002 from $1.2 million in 2001, a $537,000, or 75%, increase in
seat-based subscriptions to $1.3 million in 2002 from $717,000 in 2001, and a
$56,000, or 16%, increase in advertising and e-commerce revenues to $399,000 in
2002 from $342,000 in 2001. These increases were offset by a $821,000, or 43%,
decrease in technical services to $1.1 million in 2002 from $1.9 million in
2001. Revenues decreased 3% to $8.2 million for the six months ended June 30,
2002, from $8.4 million for the six months ended June 30, 2001. The net decrease
in revenues is attributable to a $363,000, or 15%, increase in data sales to
$2.8 million in 2002 from $2.4 million in 2001 and a $997,000, or 73%, increase
in seat-based subscriptions to $2.4 million in 2002 from $1.4 million in 2001
which were offset by a $1.6 million, or 42%, decrease in technical services to
$2.2 million in 2002 from $3.8 million in 2001.
The increase in data sales is due to an increase in the number of corporate
contracts to 205 at June 30, 2002, from 180 at June 30, 2001. The enhancements
to our application programming interfaces and addition of new products, such as
fundamental data and institutional holdings, as well as an increase in the
number of salespeople also contributed to the increase in new corporate
contracts. Data sales represented 33% of revenues for the three months ended
June 30, 2002, compared to 28% of revenues in the same quarter last year and 34%
of revenues for the six months ended June 30, 2002, compared to 29% of revenues
in the same period last year.
The increase in seat-based subscriptions is due to the increase in the number of
seat-based contracts and individual accounts, as well as an increase in the
average price per seat. The number of subscribers increased to approximately
25,100 as of June 30, 2002, from approximately 21,100 as of June 30, 2001. Sales
leads, which were primarily provided by the traffic to our Web sites and our
free to fee initiatives, contributed to the increase in new seats sold.
Seat-based subscriptions represented 30% of revenues for the three months ended
June 30, 2002, compared to 17% of revenues in the same quarter last year and 29%
of revenues for the six months ended June 30, 2002, compared to 16% of revenues
in the same period last year.
The decrease in technical services revenue is primarily due to the
discontinuance of services to non-core consulting clients. In 2002, as part of
completing the integration of the FIS acquisition, we shifted some of the
technology resources formerly devoted to consulting services to support the
growth of our higher margin data and web businesses. Technical services
represented 27% of revenues for the three months ended June 30, 2002, compared
to 46% of revenues in the same quarter last year and 27% of revenues for the six
months ended June 30, 2002, compared to 46% of revenues in the same period last
year.
10
The $56,000 increase in advertising and e-commerce revenues for the three months
ended June 30, 2002 results as the addition of list rentals and sales of third
party data in 2002 offset the decrease in advertising rates and significant
decline in the online and overall advertising industry that has taken place in
the past year. Advertising and e-commerce represented 10% of revenues for the
three months ended June 30, 2002, compared to 8% in the same quarter last year
and 10% of revenues for the six months ended June 30, 2002, compared to 9% of
revenues in the same period last year.
COST OF REVENUES
Cost of revenues consist primarily of fees paid to acquire the Level I EDGAR
database feed from the SEC, Web site maintenance charges, salaries and benefits
of certain employees, and the costs associated with our computer equipment and
communications lines used in conjunction with our Web sites. Total cost of
revenues decreased $449,000, or 39%, to $695,000 for the three months ended June
30, 2002, from $1.1 million for the three months ended June 30, 2001. Total cost
of revenues decreased $1.2 million, or 45%, to $1.4 million for the six months
ended June 30, 2002, from $2.5 million for the six months ended June 30, 2001.
The decrease in cost of revenues is primarily due to a decrease in software and
Web site maintenance, content feeds and communications lines, as well as the
reassignment of certain previously billable employees to the development team.
Gross margins increased to 83% for the three months ended June 30, 2002, from
72% for the three months ended June 30, 2001 and to 83% for the six months ended
June 30,2002, from 70% for the six months ended June 30, 2001.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and benefits, sales commissions, advertising expenses, public relations, and
costs of marketing materials. Sales and marketing expenses decreased $8,000, or
1%, to $644,000 for the three months ended June 30, 2002, from $652,000 for the
three months ended June 30, 2001. As a percentage of revenues, sales and
marketing expenses remained consistent at 16% for both the three months ended
June 30, 2002 and 2001. Sales and marketing expenses decreased $22,000, or 2%,
to $1.2 million for the six months ended June 30, 2002, from $1.3 million for
the six months ended June 30, 2001. As a percentage of revenues, sales and
marketing expenses remained consistent at 15% for both the six months ended June
30, 2002 and 2001. The net decrease in sales and marketing expenses was due to
the addition of salespeople in 2002 offset by a reduction in our advertising
spending and marketing campaign. We expect sales and marketing expenses to
increase as we continue to hire additional sales personnel.
Development. Development expenses decreased $52,000, or 8%, to $588,000 for the
three months ended June 30, 2002 from $640,000 for the three months ended June
30, 2001. As a percentage of revenues, development expenses decreased to 14% for
the three months ended June 30, 2002, from 15% for the three months ended June
30, 2001. Development expenses decreased $187,000, or 15%, to $1.1 million for
the six months ended June 30, 2002 from $1.3 million for the six months ended
June 30, 2001. As a percentage of revenues, development expenses decreased to
13% for the three months ended June 30, 2002, from 15% for the three months
ended June 30, 2001. The decrease in development expenses is due to the closing
of the Kirkland, WA office, as well as internalizing development expenses
previously outsourced.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits, fees for professional services, general
corporate expenses and facility expenses. General and administrative expenses
decreased $143,000, or 7%, to $1.8 million for the three months ended June 30,
2002, from $1.9 million for the three months ended June 30, 2001. As a
percentage of revenues, general and administrative expenses decreased to 43% in
the three months ended June 30, 2002, from 46% for the three months ended June
30, 2001. General and administrative expenses decreased $464,000, or 11%, to
$3.6 million for the six months ended June 30, 2002, from $4.0 million for the
six months ended June 30, 2001. As a percentage of revenues, general and
administrative expenses decreased to 44% in the three months ended June 30,
2002, from 48% for the three months ended June 30, 2001. The decrease in general
and administrative expenses was primarily due to a decrease in personnel,
professional service fees and general corporate expenses. We expect general and
administrative expenses to increase in future periods as we hire additional
personnel and incur additional costs related to the growth of our business.
Depreciation and Amortization. Depreciation and amortization expenses include
the depreciation of property and equipment and the amortization of goodwill and
intangible assets. Depreciation and amortization decreased $463,000, or 39%, to
$728,000 for the three months ended June 30, 2002, from $1.2 million for the
three months ended June 30, 2001. As a percentage of revenues, depreciation and
amortization decreased to 18% for the three months ended June 30, 2002, from 29%
for the three months ended June 30, 2001. Depreciation and amortization
decreased $903,000, or 38%, to $1.5 million for the six months ended June 30,
2002, from $2.4 million for the six months ended June 30, 2001. As a percentage
of revenues, depreciation and amortization decreased to 18% for the three months
ended June 30, 2002, from 28% for the three months ended June 30, 2001. The
decrease in depreciation and amortization is due to the adoption of SFAS 142
which requires that goodwill no longer be amortized, as well as the retirement
of assets associated with the shut down of the Kirkland, WA office. The
elimination of goodwill amortization resulted in a decrease in amortization
expense of $381,000 or $0.03 per share for the three months ended June 30, 2002
and $735,000, or $0.05 per share, for the six months ended June 30, 2002.
Restructuring Costs. During the second quarter of 2001, the Company recorded a
$912,000 pre-tax charge associated with the shut down of the Kirkland, WA
office. These costs include severance payments, non-recoverable lease
liabilities, loss on fixed assets, and the cost of non-cancelable service
contracts for operating expenses such as phone lines and equipment leases. The
Company recorded an additional $84,000 in September 2001 related to severance
expenses for certain FIS employees. In March 2002, the Company negotiated a
11
contract termination, thereby eliminating $100,000 of future obligations.
Cumulative Effect of Change in Accounting Principle. As required by SFAS No.
142, which was adopted by the Company effective January 1, 2002, the Company
performed a transitional assessment to determine whether there is an impairment
of goodwill. Based on this assessment, the Company recognized a $9.3 million
non-cash charge, measured as of January 1, 2002, as the cumulative effect of a
change in accounting principle for the write-down of goodwill to its fair value.
The impaired goodwill was not deductable for tax purposes, and as a result, no
tax benefit has been recorded in relation to the change.
Loss on Investment. In June 2001, the Company recorded a one-time, non-cash
charge associated with the write-off of an equity investment made in 2000 as the
Company determined that the fair value of the investment is $0 due to declines
in the operating results of the company in which the investment was made. This
$275,000 charge is included in interest and other income (expense) on the
condensed consolidated statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $841,000 for the six months ended
June 30, 2002 compared to net cash used by operating activities of $956,000 for
the six months ended June 30, 2001. We have historically financed these
activities through private debt placements and the sale of equity instruments to
investors. As a result of our acquisition of FIS, our continued focus on growing
our corporate customer base, and recent expense reductions, we expect to
increase cash provided by operations and to be cash flow positive for the year
ended 2002, although no assurance can be given in this regard.
Capital expenditures, primarily for computers, office and communications
equipment, totaled $169,000 for the six months ended June 30, 2002 and $410,000
for the six months ended June 30, 2001. The purchases were required to support
our expansion and increased infrastructure.
In December 2001 and January 2002, we consummated a private sale of common stock
and warrants to certain institutional investors. Pursuant to these transactions,
we sold an aggregate of 2,000,000 shares of Common Stock, at a purchase price of
$2.50 per share, along with four-year warrants to purchase an aggregate of
400,000 shares of Common Stock at an exercise price of $2.875 per share
resulting in gross proceeds of $5,000,000.
At June 30, 2002, we had cash and cash equivalents on hand of $5.3 million. We
believe that our existing capital resources and expected cash generated from
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may need to raise additional funds through public or private financings,
strategic relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to us,
or at all. The failure to raise capital when needed could materially adversely
affect our business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders would be reduced.
In connection with our acquisition of FIS, we issued $6,000,000 in promissory
notes to the former owners of FIS ("FIS Notes"). The FIS Notes were originally
scheduled to mature on October 27, 2002. In March 2002, we concluded
negotiations to extend the maturity date of a substantial majority of principal
amount of the FIS Notes. Based on these negotiations, holders of $5,700,000 in
principal amount of FIS Notes agreed to amend and restate their notes to provide
for, among other things, the following schedule of principal payments:
$1,900,000 on April 1, 2002, $1,900,000 on April 1, 2003 and $1,900,000 on
January 2, 2004. If cash generated from operations is insufficient to satisfy
these revised debt repayment terms, we may need to raise additional funds
through public or private financings, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms attractive to us, or at all. The failure to raise
capital when needed could materially adversely effect our business, results of
operations and financial condition. If additional funds are raised through the
issuance of equity securities, the percentage ownership of our then-current
stockholders would be reduced.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The condensed consolidated financial statements and notes thereto included in
this report and the related discussion describe and analyze the Company's
financial performance and condition for the periods indicated. For the most
part, this information is historical. The Company's prior results, however, are
not necessarily indicative of the Company's future performance or financial
condition. The Company therefore has included the following discussion of
certain factors which could affect the Company's future performance or financial
condition. These factors could cause the Company's future performance or
financial condition to differ materially from its prior performance or financial
condition or from management's expectations or estimates of the Company's future
performance or financial condition. These factors, among others, should be
considered in assessing the Company's future prospects and prior to making an
investment decision with respect to the Company's stock.
12
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO INCREASE REVENUES.
As a company in the rapidly evolving market for the delivery of financial and
business information over the Internet, we face numerous risks and uncertainties
in achieving increased revenues. We were incorporated in November 1995 and
launched our EDGAR Online Web site in January 1996. During this period, we have
invested heavily in our proprietary technologies to enable us to carry out our
business plan. These expenditures, in advance of revenues, have resulted in
operating losses in each of the last three years. In order to be successful, we
must increase our revenues from the sale of our services to corporate customers,
seat-based subscription fees and advertising and e-commerce sales. In order to
increase our revenues, we must successfully:
- - implement our marketing plan to (1) increase corporate sales, (2) attract more
individual online users to our services and (3) convert visitors to paying
subscribers;
- - continue to improve our market position as a commercial provider of
information services based on EDGAR filings;
- - maintain our current, and develop new, content distribution relationships with
popular Web sites and providers of business and financial information;
- - maintain our current, and increase, advertising and e-commerce revenues by
increasing traffic to our Web sites and by increasing the number of
advertisers;
- - respond effectively to competitive pressures from other Internet providers of
EDGAR content;
- - continue to develop and upgrade our technology; and
- - attract, retain and motivate qualified personnel with Internet experience to
serve in various capacities, including IT services, sales and marketing
positions.
If we are not successful in addressing these uncertainties through the execution
of our business strategy, our business, results of operations and financial
condition will be materially adversely affected.
WE HAVE A HISTORY OF LOSSES AND CANNOT ASSURE THAT WE WILL ATTAIN PROFITABILITY.
As of June 30, 2002, we had an accumulated deficit of $40,839,000. We incurred
net losses of $2,221,000 for the year ended December 31, 1998, $4,163,000 for
the year ended December 31, 1999, $15,237,000 for the year ended December 31,
2000, $6,788,000 for the year ended December 31, 2001, and $9,904,000 for the
six months ended June 30, 2002. In addition, we expect to continue to incur
significant operating costs and capital expenditures. As a result, we will need
to generate significant additional revenues to achieve and maintain
profitability. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or annual basis in the
future. In addition, if revenues grow slower than we anticipate, or if operating
expenses exceed our expectations or cannot be adjusted accordingly, our
business, results of operations and financial condition will be materially
adversely affected. As a result of these and other costs, we may incur operating
losses in the future, and we cannot assure you that we will attain
profitability.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING.
We currently anticipate that our available cash resources combined with cash
generated from operations will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least the next 12 months. We
may need to raise additional funds, however, to fund potential acquisitions,
more rapid expansion, to develop new or enhance existing services, to fund
payments due to note holders in connection with our acquisition of Financial
Insight Systems, Inc. (FIS) or to respond to competitive pressures. We cannot
assure you that additional financing will be available on terms favorable to us,
or at all. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of
unanticipated opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited. Our
business, results of operations and financial condition could be materially
adversely affected by these financing limitations.
FUTURE ENHANCEMENTS TO THE SEC'S EDGAR SYSTEM MAY ERODE DEMAND FOR OUR SERVICES.
Our future success will depend on our ability to continue to provide value-added
services that distinguish our Web sites from the type of EDGAR-information
available from the SEC on its Web site. The SEC has recently updated its Web
site to provide free access to raw EDGAR filings on a real-time basis. If the
SEC were to make other changes to its Web site such as providing value-added
services comparable to those provided on our Web sites, our business, results of
operations and financial condition would be materially adversely affected.
While the SEC continues to maintain a non-exclusive pilot program to link its
sec.gov Web site to our Web site in order to provide users of the SEC Web site
access to real time filings contained on our Web site, there can be no assurance
that the SEC will continue this program (which is at the SEC's sole discretion)
or the SEC will not initiate similar programs with other commercial providers of
EDGAR information.
13
WE FACE INTENSE COMPETITION FROM OTHER PROVIDERS OF BUSINESS AND FINANCIAL
INFORMATION.
We compete with many providers of business and financial information, including
other Internet companies, for consumers' and advertisers' attention and
spending. Because our market poses no substantial barriers to entry, we expect
this competition to continue to intensify. The types of companies with which we
compete for users and advertisers include:
- - traditional vendors of financial information, such as Disclosure;
- - proprietary information services and Web sites targeted to business, finance
and investing needs, including those providing EDGAR content, such as
Bloomberg, and LIVEDGAR; and
- - Web-based providers of free EDGAR information.
Our future success will depend on our ability to maintain and enhance our market
position by: (1) using technology to add value to raw EDGAR information, (2)
keeping our pricing models below those of our competitors, (3) maintaining a
strong corporate sales presence in the marketplace and (4) signing high-traffic
Web sites to distribution contracts.
Our potential commercial competitors include entities that currently license our
content, but which may elect to purchase a real-time EDGAR database feed (called
a Level I EDGAR feed) directly from the SEC and use it to create value-added
services, similar to services provided by us, for their own use or for sale to
others. The cost of the Level 1 Edgar feed has been significantly reduced since
the introduction of the EDGAR system and is currently approximately $45,000 per
year. Further reductions of the cost of the Level 1 EDGAR feed could lead to
additional competitors entering our market, as well as current and potential
EDGAR online clients buying the SEC feed directly as opposed to utilizing our
services. Either of these developments could adversely affect our business,
results of operations and financial condition.
Many of our existing competitors, as well as a number of potential competitors,
have longer operating histories, greater name recognition, larger customer bases
and significantly greater financial, technical and marketing resources than we
do. This may enable them to respond more quickly to new or emerging technologies
and changes in the types of services sought by users of EDGAR-based information,
or to devote greater resources to the development, promotion and sale of their
services than we can. These competitors and potential competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to potential employees, subscribers and
content distribution partners. Our competitors may also develop services that
are equal or superior to the services offered by us or that achieve greater
market acceptance than our services. In addition, current and prospective
competitors may establish cooperative relationships among themselves or with
third parties to improve their ability to address the needs of our existing and
prospective customers. If these events occur, they could have a materially
adverse effect on our revenue. Increased competition could also result in price
reductions, reduced margins or loss of market share, any of which would
adversely affect our business, results of operations and financial condition.
OUR CONTRACTS WITH NASDAQ ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR NET
REVENUES.
For the six months ended June 30, 2002, our contracts with Nasdaq accounted for
34% of our net revenues. We expect that Nasdaq will continue to be a significant
client, but that sales to Nasdaq as a percentage of total revenues will decline
in future fiscal periods. Although we enjoy a satisfactory relationship with
Nasdaq, the loss of this client would have a material adverse affect on our
business, results of operations and financial conditions.
WE RISK BEING DELISTED FROM NASDAQ WHICH COULD REDUCE OUR ABILITY TO RAISE
FUNDS.
If our stock price were to drop below $1.00 per share and remain below $1.00
share for an extended period of time, we would be in violation the continued
listing requirements of The Nasdaq Stock Market (Nasdaq) and we risk the
delisting of our shares from Nasdaq. Delisting from Nasdaq and inclusion of our
common stock on the OTC Bulletin Board or similar quotation system could
adversely affect the liquidity and price of our common stock and make it more
difficult for us to raise additional capital on favorable terms, if at all.
Even if the minimum per share bid price of our common stock is maintained, the
Company must also satisfy other listing requirements of the Nasdaq National
Market (NNM), such as maintaining equity of at least $10 million. Failure to
satisfy any of the maintenance requirements could result in our common stock
being delisted from the NNM. Although in that event we could apply to list our
shares with the Nasdaq SmallCap Market, its delisting from the NNM could
adversely affect the liquidity of our common stock. In addition, delisting from
the NNM might negatively impact the Company's reputation and, as a consequence,
its business.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE.
The market price of our common stock has been, and is likely to continue to be,
volatile, experiencing wide fluctuations. In recent years, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies.
Some of these fluctuations appear to be unrelated or disproportionate to the
operating performance of such companies. Future market movements may materially
and adversely affect the market price of our common stock.
14
WE MAY NOT BE SUCCESSFUL IN INCREASING BRAND AWARENESS.
Our future success will depend, in part, on our ability to increase the brand
awareness of our Web-based customized corporate services. If our marketing
efforts are unsuccessful or if we cannot increase our brand awareness, our
business, financial condition and results of operations would be materially
adversely affected. In order to build our brand awareness, we must succeed in
our marketing efforts, provide high quality services and increase the number of
people who are aware of the services we offer. We have devoted significant funds
to expand our sales and marketing efforts as part of our brand-building efforts.
These efforts may not be successful.
WE MAY NOT BE SUCCESSFUL IN DEVELOPING NEW AND ENHANCED SERVICES AND FEATURES
FOR OUR WEB SITES.
Our market is characterized by rapidly changing technologies, evolving industry
standards, frequent new product and service introductions and changing customer
demands. To be successful, we must adapt to our rapidly changing market by
continually enhancing our existing services and adding new services to address
our customers' changing demands. We could incur substantial costs if we need to
modify our services or infrastructure to adapt to these changes. Our business
could be adversely affected if we were to incur significant costs without
generating related revenues or if we cannot adapt rapidly to these changes.
Our business could also be adversely affected if we experience difficulties in
introducing new or enhanced services or if these services are not favorably
received by users. We may experience technical or other difficulties that could
delay or prevent us from introducing new or enhanced services. Furthermore,
after these services are introduced, we may discover errors in these services
which may require us to significantly modify our software or hardware
infrastructure to correct these errors.
WE ARE DEPENDENT ON THE CONTINUED GROWTH OF THE EMERGING MARKET FOR ONLINE
BUSINESS AND FINANCIAL INFORMATION.
The success of our business will depend on the growing use of the Internet for
the dissemination of business and financial information. The number of
individuals and institutions that use the Internet as a primary source of
business and financial information may not continue to grow. The market for the
distribution of business and financial information, including EDGAR-based
content, over the Internet is rapidly evolving and is characterized by an
increasing number of market entrants who have introduced or developed electronic
distribution services over the Internet and private networks. As is typical of a
rapidly evolving industry, demand and market acceptance for new services are
subject to a high level of uncertainty.
Because the market for our products and services is rapidly evolving, it is
difficult to predict with any certainty what the growth rate, if any, and the
ultimate size of this market will be. We cannot be certain that the market for
our services will continue to develop or that our services will ever achieve a
significant level of market acceptance. If the market fails to continue to
develop, develops more slowly than expected or becomes saturated with
competitors, or if our services do not achieve significant market acceptance, or
if pricing becomes subject to considerable competitive pressures, our business,
results of operations and financial condition would be materially adversely
affected.
MAINTAINING EXISTING AND ESTABLISHING NEW CONTENT DISTRIBUTION RELATIONSHIPS
WITH HIGH-TRAFFIC WEB SITES IS CRUCIAL TO OUR FUTURE SUCCESS.
Because our revenues depend to some extent on the traffic to our
Web sites, our business could be adversely affected if we do not maintain our
current, and establish additional, content distribution relationships on
commercially reasonable terms or if a significant number of our content
distribution relationships do not result in increased use of our Web sites. We
rely on establishing and maintaining content distribution relationships with
high-traffic Web sites for a significant portion of the traffic on our Web
sites. There is intense competition for exposure on high-traffic Web sites,
and we may not be able to maintain our present contractual relationships or
enter into any additional relationships on commercially reasonable terms, if at
all. Even if we maintain our existing relationships or enter into new content
distribution relationships with other Web sites, they themselves may not
continue to attract significant numbers of users. Therefore, our Web sites may
not continue to receive significant traffic or receive additional new users from
these relationships.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE CURRENT (OR ANY FUTURE) DOWNTURN
IN THE FINANCIAL SERVICES INDUSTRY AND/OR THE BUSINESS ECONOMY IN GENERAL.
We are dependent upon the continued demand for the distribution of business and
financial information over the Internet, making our business susceptible to
downturns in the financial services industry and the business economy in
general. In addition, the broad effects of the terrorist attacks of September
11, 2001 compounded the effects of an already slow global economy. Our current
results of operations reflect, in part, the effects of the current slowdown in
our markets. For example, we believe that decreases in the expenditures that
corporations and individuals are willing to make to purchase the types of
information we provide has resulted in a slower growth in the number of
customers purchasing our information services, especially in the areas of data
sales and seat based subscriptions. These effects may continue and may worsen if
our customers do not recover or if additional events adverse to the global
economy or the financial services industry occur.
15
SOME OF OUR CLIENTS MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NEEDED TO RETAIN
OUR SERVICE OR PAY US FOR SERVICES PERFORMED.
Some of our current and potential clients need to raise additional funds in
order to continue their business and operations as planned. We cannot be certain
that these companies will be able to obtain additional financing on favorable
terms or at all. As a result of their inability to raise additional financing,
some clients may be unable to pay us for services we have already provided them
or they may terminate our services earlier than planned, either of which could
have a material adverse effect on our business, financial condition and
operating results.
WE DEPEND ON MAX WORLDWIDE, INC. FOR ADVERTISING REVENUES.
We anticipate that our advertising revenues in any given period will continue to
depend to a significant extent upon our relationship with Max Worldwide, Inc.,
formerly known as DoubleClick, Inc., which has provided us with a full range of
advertising services for the last three years. Max Worldwide's failure to enter
into a sufficient number of advertising contracts during a particular period
could have a material adverse effect on our business, financial condition and
results of operations. Historically, a limited number of customers, all
represented by Max Worldwide, have accounted for a significant percentage of our
paid advertising revenues. For the six months ended June 30, 2002, our Max
Worldwide-related paid advertising revenue was 2% of our total net revenues.
Our existing agreement with Max Worldwide can be canceled by either party on 90
days notice. In addition, this agreement does not prohibit Max Worldwide from
selling the same type of service that we currently receive from them to Web
sites that compete with our Web sites. If Max Worldwide is unable or unwilling
to provide these advertising services to us in the future, we would be required
to obtain them from another provider or perform them ourselves. We would likely
lose significant advertising revenues while we are in the process of replacing
Max Worldwide's services.
WE FACE INTENSE COMPETITION FOR ADVERTISING REVENUES AND THE VIABILITY OF THE
INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN.
We compete with both traditional advertising media, such as print, radio and
television, and other Web sites for a share of advertisers' total advertising
budgets. Advertising and e-commerce revenues represented 10% of our total
revenues for the six months ended June 30, 2002 and 9% for the six months ended
June 30, 2001, respectively. If advertisers do not perceive the Internet to be
an effective advertising medium, companies like ours will be unable to compete
successfully with traditional media for advertising revenues. In addition, if we
are unable to generate sufficient traffic on our Web sites, we could potentially
lose advertising revenues to other Web sites that generate higher user traffic.
If advertising on the Web shrinks due to a general business downturn, this could
also cause us to lose advertising revenue. Because advertising sales make up a
significant component of our revenues, any of these developments could have a
significant adverse impact on our business, results of operations or financial
condition.
WE MAY NOT BE ABLE TO CREATE AND DEVELOP AN EFFECTIVE DIRECT SALES FORCE.
Because a significant component of our growth strategy relates to increasing our
revenues from sales of our corporate services, our business would be adversely
affected if we were unable to develop and maintain an effective sales force to
market our services to this customer group. Until mid-1999, we had not employed
any sales executives to sell our corporate services. Our sales force now
consists of 14 people. Ten of our sales people have been hired from outside the
company, six of these within the last twelve months. Our efforts to build an
effective sales force may not be successful.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH.
We have experienced, and with respect to certain segments of our business are
currently experiencing, a period of significant growth. If we are unable to
manage our growth effectively, our business will be adversely affected. This
growth has placed, and our anticipated future growth will continue to place, a
significant strain on our technical, financial and managerial resources. As part
of this growth, we may have to implement new operational and financial systems
and procedures and controls to expand, train and manage our employees,
especially in the areas of sales and product development.
WE FACE RISKS IN CONNECTION WITH OUR PRIOR ACQUISITIONS AND BUSINESS
COMBINATIONS THAT WE MAY CONSUMMATE.
We plan to continue to expand our operations and market presence by making
acquisitions, and entering into business combinations, investments, joint
ventures or other strategic alliances with other companies. These transactions
create risks such as:
- - difficulty assimilating the operations, technology and personnel of the
combined companies;
- - disruption of our ongoing business;
- - problems retaining key technical and managerial personnel;
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- - expenses associated with amortization or impairment of goodwill and other
purchased intangible assets;
- - additional operating losses and expenses of acquired businesses; and
- - impairment of relationships with existing employees, customers and business
partners.
We may not succeed in addressing these risks. In addition, some of the
businesses we have acquired, and in the future may acquire, may continue to
incur operating losses.
WE DEPEND ON KEY PERSONNEL.
Our future success will depend to a significant extent on the continued services
of our senior management and other key personnel, particularly Susan Strausberg,
Chief Executive Officer, Marc Strausberg, Chairman, Tom Vos, President and Chief
Operating Officer, Greg Adams, Chief Financial Officer, Paul Sappington, Chief
Software Officer and Vice President and Jay Sears, Senior Vice President,
Strategy and Business Development, each of whom are parties to written
employment agreements. The loss of the services of these, or certain other key
employees, would likely have a material adverse effect on our business. We do
not maintain key person life insurance for any of our personnel. Our future
success will also depend on our continuing to attract, retain and motivate other
highly skilled employees. Competition for personnel in our industry is intense.
We may not be able to retain our key employees or attract, assimilate or retain
other highly qualified employees in the future. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be adversely affected. In addition, the employment agreements with
our key employees contain restrictive covenants that restrict their ability to
compete against us or solicit our customers. These restrictive covenants, or
some portion of these restrictive covenants, may be deemed to be against public
policy and may not be fully enforceable. If these provisions are not
enforceable, these employees may be in a position to leave us and work for our
competitors or start their own competing businesses.
WE DEPEND ON THIRD PARTIES FOR IMPORTANT ASPECTS OF OUR BUSINESS OPERATIONS.
We have a hosting contract with Globix Corporation, a provider of Internet
services, pursuant to which Globix operates and maintains the Web servers owned
by us in their New York City data center. Our hosting contract with Globix
expires in July 2003. In March 2002, Globix announced that it had filed for
bankruptcy protection as part of its efforts to restructure its debt. To date,
Globix provision of services under our contract has not been affected, but this
could change unexpectedly in the future. If Globix were unable or unwilling to
provide these services, we would have to find a suitable replacement. Our
operations could be disrupted while we were in the process of finding a
replacement for Globix and the failure to find a suitable replacement or to
reach an agreement with an alternate provider on terms acceptable to us could
materially adversely affect our business, results of operations and financial
condition.
WE FACE A RISK OF SYSTEM FAILURE.
Our ability to provide EDGAR content on a real-time basis and technology-based
solutions to our corporate clients depends on the efficient and uninterrupted
operation of our computer and communications hardware and software systems.
Similarly, our ability to track, measure and report the delivery of
advertisements on our site depends on the efficient and uninterrupted operation
of a third-party system provided by DoubleClick. These systems and operations
are vulnerable to damage or interruption from human error, natural disasters,
terrorist attacks, telecommunication failures, break-ins, sabotage, computer
viruses, intentional acts of vandalism and similar unexpected adverse events.
Any system failure, including network, software or hardware failure, that causes
an interruption in our service or a decrease in responsiveness of our Web sites
could result in reduced traffic, reduced revenue and harm to our reputation,
brand and relations with advertisers.
Our operations depend on Globix's ability to protect its and our systems in its
data center against damage from fire, power loss, water damage,
telecommunications failure, vandalism and similar unexpected adverse events.
Although Globix provides comprehensive facilities management services, including
human and technical monitoring of all production servers 24 hours-per-day, seven
days-per-week, Globix does not guarantee that our Internet access will be
uninterrupted, error-free or secure. Any disruption in the Internet access to
our Web sites provided by Globix could materially adversely affect our business,
results of operations and financial condition. Our insurance policies may not
adequately compensate us for any losses that we may incur because of any
failures in our system or interruptions in the delivery of our services. Our
business, results of operations and financial condition could be materially
adversely affected by any event, damage or failure that interrupts or delays our
operations.
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THERE ARE RISKS OF INCREASED USERS STRAINING OUR SYSTEMS AND OTHER SYSTEM
MALFUNCTIONS.
In the past, our Web sites and the technology-based solutions we sell to our
corporate customers have experienced significant increases in traffic when there
have been important business or financial news stories and during the seasonal
periods of peak SEC filing activity. In addition, the number of users of our
information and technology-based solutions has continued to increase over time
and we are seeking to further increase the size of our user base and the
frequency with which they use our services. Therefore, our Web sites and
business solutions must accommodate an increasingly high volume of traffic and
deliver frequently updated information. Our Web sites and business solutions
have in the past, and may in the future, experience slower response times or
other problems for a variety of reasons, including hardware and communication
line capacity restraints and software failures. These strains on our system
could cause customer dissatisfaction and could discourage visitors from becoming
paying subscribers. We also depend on the Level I EDGAR feed we purchase in
order to provide SEC filings on a real-time basis. Our Web sites could
experience disruptions or interruptions in service due to the failure or delay
in the transmission or receipt of this information.
These types of occurrences could cause users to perceive our Web sites and
technology solutions as not functioning properly and cause them to use other
methods, including the SEC's Web site or services of our competitors, to obtain
EDGAR-based information and technology solutions.
WE LICENSE THE TERM EDGAR FROM THE SEC AND DEPEND ON OTHER INTELLECTUAL
PROPERTY.
Trademarks and other proprietary rights, principally our proprietary database
technology, are important to our success and our competitive position. The SEC
is the owner of a United States trademark registration covering the use of the
term EDGAR. We have obtained a non-exclusive, royalty-free license from the SEC
to use the term EDGAR in our trademarks, service marks and corporate name. This
license is due to expire in September 2009. Since we have built significant
brand recognition through the use of the term EDGAR in our service offerings,
company name and Web sites, our business, results of operations and financial
condition could be adversely affected if we were to lose the right to use the
term EDGAR in the conduct of our business.
We seek to protect our trademarks and other proprietary rights by entering into
confidentiality agreements with our employees, consultants and content
distribution partners, and attempting to control access to and distribution of
our proprietary information. Despite our efforts to protect our proprietary
rights from unauthorized use or disclosure, third parties may attempt to
disclose, obtain or use our proprietary information. The precautions we take may
not prevent this type of misappropriation. In addition, our proprietary rights
may not be viable or of value in the future since the validity, enforceability
and scope of protection of proprietary rights in Internet-related industries is
uncertain and still evolving.
Finally, third parties could claim that our database technology infringes their
proprietary rights. Although we have not been subjected to litigation relating
to these types of claims, such claims and any resultant litigation, should it
occur, could subject us to significant liability for damages and could result in
the invalidation of our proprietary rights. Even if we prevail, such litigation
could be time-consuming and expensive, and could result in the diversion of our
time and attention, any of which could materially adversely affect our business,
results of operations and financial condition. Any claims or litigation could
also result in limitations on our ability to use our trademarks and other
intellectual property unless we enter into license or royalty agreements, which
agreements may not be available on commercially reasonable terms, if at all.
WE ARE DEPENDENT ON THE INTERNET INFRASTRUCTURE.
Our future success will depend, in significant part, upon the maintenance of the
various components of the Internet infrastructure, such as a reliable backbone
network with the necessary speed, data capacity and security, and the timely
development of enabling products, such as high-speed modems, which provide
reliable and timely Internet access and services. To the extent that the
Internet continues to experience increased numbers of users, frequency of use or
increased user bandwidth requirements, we cannot be sure that the Internet
infrastructure will continue to be able to support the demands placed on it or
that the performance or reliability of the Internet will not be adversely
affected. Furthermore, the Internet has experienced a variety of outages and
other delays as a result of damage to portions of its infrastructure or
otherwise, and such outages or delays could adversely affect our Web sites and
the Web sites of our co-branded partners, as well as the Internet service
providers and online service providers our customers use to access our services.
In addition, the Internet could lose its viability as a commercial medium due to
delays in the development or adoption of new standards and protocols that can
handle increased levels of activity. We cannot predict whether the
infrastructure and complementary products and services necessary to maintain the
Internet as a viable commercial medium will be developed or maintained.
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WE ARE SUBJECT TO UNCERTAIN GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES
RELATING TO THE INTERNET.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Any new laws or regulations relating
to the Internet could adversely affect our business. In addition, current laws
and regulations may be applied and new laws and regulations may be adopted in
the future that address issues such as user privacy, pricing, taxation and the
characteristics and quality of products and services offered over the Internet.
For example, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. This could increase the cost of
transmitting data over the Internet, which could increase our expenses and
discourage people from using the Internet to obtain business and financial
information. Moreover, it may take years to determine the extent to which
existing laws relating to issues such as property ownership, libel and personal
privacy are applicable to the Internet.
WE FACE WEB SECURITY CONCERNS THAT COULD HINDER INTERNET COMMERCE.
Any well-publicized compromise of Internet security could deter more people from
using the Internet or from using it to conduct transactions that involve
transmitting confidential information, such as stock trades or purchases of
goods or services. Because a portion of our revenue is based on individuals
using credit cards to purchase subscriptions over the Internet and a portion
from advertisers who seek to encourage people to use the Internet to purchase
goods or services, our business could be adversely affected by this type of
development. We may also incur significant costs to protect against the threat
of security breaches or to alleviate problems, including potential private and
governmental legal actions, caused by such breaches.
WE COULD FACE LIABILITY AND OTHER COSTS RELATING TO OUR STORAGE AND USE OF
PERSONAL INFORMATION ABOUT OUR USERS.
Our policy is not to willfully disclose any individually identifiable
information about any user to a third party without the user's consent. This
policy statement is available to users of our subscription services when they
initially register. We also alert and seek the consent of registered subscribers
and users to use some of the information that they provide to market them
additional services provided by EDGAR Online or third party providers. Despite
this policy and consent, however, if third persons were able to penetrate our
network security or otherwise misappropriate our users' personal or credit card
information, we could be subject to liability. These could include claims for
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. They could also include claims for other misuses of
personal information such as for unauthorized marketing purposes. These claims
could result in litigation. In addition, the Federal Trade Commission and
several states have been investigating certain Internet companies regarding
their use of personal information. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if these
regulators chose to investigate our privacy practices.
WE MAY BE LIABLE FOR INFORMATION DISPLAYED ON OUR WEB SITES.
We may be subjected to claims for defamation, negligence, copyright or trademark
infringement, violation of the securities laws or other claims relating to the
information that we publish on our Web sites, which may materially adversely
affect our business. These types of claims have been brought, sometimes
successfully, against online services as well as other print publications in the
past. We could also be subjected to claims based upon the content that is
accessible from our Web sites through links to other Web sites. Our general
liability insurance may not cover these claims and may not be adequate to
protect us against all liabilities that may be imposed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE FLUCTUATIONS
In prior years, we were exposed to market risk primarily through our investments
in available-for-sale investments. Our policy calls for investment in
short-term, low risk investments. As of June 30, 2002, we had no
available-for-sale investments and as a result, any decrease in interest rates
would not have a material effect on our financial statements.
CURRENCY RATE FLUCTUATIONS
Our results of operations, financial position and cash flows are not materially
affected by changes in the relative values of non-U.S. currencies to the U.S.
dollar. We do not use derivative financial instruments to limit our foreign
currency risk exposure.
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PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K: On April 22, 2002, the Company filed a Report on Form
8-K announcing the resignation of Albert Girod from the Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDGAR ONLINE, INC.
(Registrant)
Dated: August 14, 2002 /s/ Greg D. Adams
-----------------------
Greg D. Adams
Chief Financial Officer
Dated: August 14, 2002 /s/ Susan Strausberg
-----------------------
Susan Strausberg
Chief Executive Officer
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