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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: MARCH 31, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [x] No
Number of shares of common stock outstanding at May 14, 2003: 17,007,792 shares
EDGAR ONLINE, INC.
FORM 10-Q
FOR THE QUARTERS ENDED MARCH 31, 2003 AND 2002
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 (unaudited) and December 31, 2002 ........................................ 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2003 (unaudited) and 2002 (unaudited) ...................... 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 (unaudited) and 2002 (unaudited) ...................... 5
Notes to Condensed Consolidated Financial Statements ............................................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .............................. 23
ITEM 4. Controls and Procedures ................................................................. 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................................................... 24
ITEM 2. Changes in Securities and Use of Proceeds ............................................... 24
ITEM 3. Defaults Upon Senior Securities ......................................................... 24
ITEM 4. Submission of Matters to a Vote of Security Holders ..................................... 24
ITEM 5. Other Information ....................................................................... 24
ITEM 6. Exhibits and Reports on Form 8-K ........................................................ 24
Signatures ...................................................................................... 25
Certifications .................................................................................. 26
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, 2003
(unaudited) December 31, 2002
----------- -----------------
ASSETS
Cash $ 5,963 $ 5,550
Accounts receivable, less allowance of $200 and $224, respectively 1,260 1,562
Other current assets 735 316
-------- --------
Total current assets 7,958 7,428
Property and equipment, net 1,665 1,693
Goodwill 2,189 2,189
Other intangible assets, net 10,717 11,135
Other assets 289 774
-------- --------
Total assets $ 22,818 $ 23,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,609 $ 1,271
Deferred revenues 1,845 1,744
Notes payable and accrued interest 3,833 1,949
Capital lease payable, current portion 3 7
-------- --------
Total current liabilities 7,290 4,971
Notes payable - 1,878
Long term payables 274 -
-------- --------
Total liabilities 7,564 6,849
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares authorized, 17,003,792
shares issued and outstanding at March 31, 2003 and
December 31, 2002 170 170
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares
issued or outstanding -- --
Additional paid-in capital 58,177 58,177
Accumulated deficit (43,093) (41,977)
-------- --------
Total stockholders' equity 15,254 16,370
-------- --------
Total liabilities and stockholders' equity $ 22,818 $ 23,219
======== ========
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
March 31,
2003 2002
---- ----
Revenues:
Seat-based subscriptions $ 1,423 $ 1,108
Data sales 1,192 1,443
Technical services 1,020 1,143
Advertising and e-commerce 201 392
--------- ---------
Total revenues 3,836 4,086
Cost of revenues 548 693
--------- ---------
Gross profit 3,288 3,393
Operating expenses:
Sales and marketing 536 593
Development expenses 526 488
General and administrative 1,843 1,801
Restructuring and severance charges 784 (100)
Depreciation and amortization 661 725
--------- ---------
4,350 3,507
Loss from operations (1,062) (114)
Interest and other income (expense), net (54) (94)
--------- ---------
Net loss $ (1,116) $ (208)
========= =========
Weighted average shares outstanding - basic and
diluted 17,004 16,789
Net loss per share - basic and diluted $ (0.07) $ (0.01)
See accompanying notes to condensed consolidated financial statements.
4
EDGAR ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 30,
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (1,116) $ (208)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 227 290
Amortization of intangibles 434 435
Stock compensation expense -- 2
Amortization of financing costs 5 --
Changes in assets and liabilities:
Accounts receivable 302 (590)
Other assets, net 50 (32)
Accounts payable and accrued expenses 339 (372)
Deferred revenues 101 127
Long term payables 274 --
-------- --------
Total adjustments 1,732 (140)
-------- --------
Net cash provided by (used in) operating activities 616 (348)
-------- --------
Cash used in investing activities:
Purchases of property and equipment (199) (61)
-------- --------
Net cash provided by (used in) investing activities (199) (61)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants -- 3,402
Proceeds from exercise of stock options -- 1
Principal payments on notes payable -- (346)
Principal payments on capital lease obligations (4) (13)
-------- --------
Net cash provided by (used in) financing activities (4) 3,044
-------- --------
Net change in cash and cash equivalents 413 2,635
Cash and cash equivalents at beginning of period 5,550 3,461
-------- --------
Cash and cash equivalents at end of period $ 5,963 $ 6,096
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 74 $ 118
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 provides its customers
with business, financial and competitive information about public companies. The
Company also provides information and technology solutions to the financial
services industry. The Company derives the information it sells primarily from
the SEC's EDGAR (Electronic Data Gathering Analysis and Retrieval) filing system
and provides it to corporations, Web sites and individuals on a real-time basis.
The Company enhances raw SEC filings by organizing and processing them into an
easily accessible and searchable format and uses proprietary software to extract
specific information requested by its customers.
Although the Company has generated cash flows from operations during the quarter
ended March 31, 2003 and the years ended December 31, 2002 and 2001, the Company
has a history of operating losses. The Company has experienced a reduction in
revenues in the quarter ended March 31, 2003 as well as in the year ended
December 31, 2002 as compared to the respective prior periods and, as a result,
has taken actions to reduce operating expenses -- see note 6. The Company
believes that its existing capital resources and cash generated from operations
will be sufficient to meet its anticipated cash requirements for working capital
and capital expenditures through March 31, 2004. These financial statements have
been prepared on a basis that the Company will continue as a going concern.
The unaudited interim financial statements of the Company as of March 31, 2003
and for the three months ended March 31, 2003 and 2002, 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 March 31, 2003, and the results of its operations for the three months
ended March 31, 2003 and 2002, and its cash flows for the three months ended
March 31, 2003 and 2002. The results for the three months ended March 31, 2003
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 for the year ended December 31, 2002, filed with the SEC in March 2003.
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 values of goodwill and other intangible assets
and the estimated useful lives of intangible assets.
6
(2) 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 which was made on April 1,
2002, $1,900,000 which was made on April 1, 2003 and $1,900,000 which is payable
on January 2, 2004. Interest will remain at 7.5% and will be payable according
to the original terms of the FIS Notes.
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 $9,316,884 million in the second quarter of 2002. This reflects
overall market declines since the merger was announced in 2000, and was
reflected as a cumulative effect of change in accounting principle in the
condensed consolidated statement of operations in the second quarter of 2002.
See note 5 for further discussion. The Company has treated this acquisition as a
tax-free reorganization and may be contingently liable for taxes associated with
such an acquisition. In the event the tax-free nature of the transaction is
successfully challenged, there may be a material adverse impact to the Company's
financial position and results of operations. Management does not currently
believe an unfavorable outcome to be probable or the resulting impact to be
estimable. Accordingly, no provision has been made in connection with this
contingency in the consolidated financial statements as of March 31, 2003.
(3) REVENUE RECOGNITION
We derive revenues from four primary sources: seat based subscriptions to our
Web site services, 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, and advertising and other e-commerce based revenues.
Revenue from seat-based subscriptions is recognized ratably over the
subscription period, which is typically three or twelve months. 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. 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.
7
(4) 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 23%
and 24% of the Company's total gross receivable balance at March 31, 2003 and
December 31, 2002, respectively. No other customer accounted for more than 10%
of accounts receivable at March 31, 2003 or December 31, 2002. NASDAQ comprised
32% and 34% of the company's total revenue during the three months ended March
31, 2003 and 2002, respectively. The Company's 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 March 31,
2003 or 2002. 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 March 31, 2003 and December 31, 2002, 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.
(5) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
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 this
accounting standard 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 was an impairment of goodwill. To perform this
assessment, the Company compared the fair value of the FIS reporting unit
calculated under a present value methodology with a rate of interest
commensurate to the risks involved to the carrying amount of the related net
assets. This assessment, which was performed with the assistance of an
independent valuation firm, indicated that goodwill associated with the FIS
acquisition was impaired as of January 1, 2002. Accordingly, the Company
recognized a $9,316,884 non-cash charge, recorded in the second quarter of
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
deductible 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. The Company determined, assisted by an independent
valuation firm, that there was no further impairment at December 31, 2002. If
the Company fails to improve revenues, deliver desired services and
appropriately manage costs, subsequent reviews may result in future periodic
impairments that could have a material adverse effect on the results of
operations in the period recognized.
8
(6) RESTRUCTURING AND SEVERANCE COSTS
In the first quarter of 2003, the Company effected a 17% workforce reduction in
response to an expected decline in revenues beginning in the second half of
2003. All terminated employees were notified prior to March 31, 2003. In
addition, the Company negotiated payments under a Separation and Release
Agreement with the Company's former President and Chief Operating Officer which
releases him from any further obligation to perform services as an employee of
the Company. The Company accrued $783,600 of related severance costs. $606,195
of these obligations are included in accrued expenses and $177,405 are included
in long term payables at March 31, 2003. The Company does not expect to incur
additional costs in relation to these actions.
During the second quarter of 2001, the Company recorded a $912,000 pre-tax
charge related to the consolidation of its technical operations and closing of
the Kirkland, WA office. In September 2001, the Company incurred $84,000 of
additional severance costs related to restructuring at FIS. In 2002, the Company
negotiated contract terminations, thereby eliminating $182,429 of these
obligations. At December 31, 2002, there were $4,653 of charges remaining which
were paid in January 2003.
(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 3,305,612 and 3,382,638 at March 31,
2003 and 2002, respectively.
(8) STOCK BASED TRANSACTIONS
The Company accounts for stock-based transactions in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation". In accordance with SFAS No. 123, the
Company has elected to measure stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) No. 25,
"Accounting for Stock Issued to Employees". Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's common stock and the exercise price. SFAS No. 148
provides alternative methods of transition for an entity that voluntarily
changes from the intrinsic value based method of accounting for stock-based
employee compensation prescribed in APB No. 25 to the fair value method
prescribed in SFAS 123. As permitted under SFAS 148, we have continued to apply
the accounting provisions of APB No. 25, and to provide the pro forma
disclosures of the effect of adopting the fair value method as required by SFAS
123. The Financial Accounting Standards Board recently indicated that they will
require stock-based employee compensation to be recorded as a charge to earnings
beginning in 2004. We will continue to monitor their progress on the issuance of
this standard as well as evaluate our position with respect to current guidance.
9
Had the Company determined compensation expense based on the fair value of the
option on the grant date under SFAS No. 123, the Company's results of operations
for the three months ended March 31, 2003 and 2002 would have been as follows:
Three Months Ended
March 31,
2003 2002
---- ----
Net loss -- as reported...................... $ (1,116) $ (208)
Compensation expense related to options-
as reported ................................. -- 2
Compensation expense related to options-
Fair value method ........................... (428) (635)
--------- --------
Net loss -- pro forma........................ $ (1,544) $ (841)
========= ========
Basic and diluted net loss per share -- as
reported................................... $ (0.07) $ (0.01)
Basic and diluted net loss per share -- pro
forma...................................... $ (0.09) $ (0.05)
(9) 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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
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 previously recorded
by the Company.
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation" ("SFAS 148"), is an amendment to Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", and provides
alternative methods of transition for an entity that voluntarily changes from
the intrinsic value based method of accounting for stock-based employee
compensation prescribed in APB No. 25 to the fair value method prescribed in
SFAS 123. As permitted under SFAS 148, we have continued to apply the accounting
provisions of APB No. 25, and to provide the annual pro forma disclosures of the
effect of adopting the fair value method as required by SFAS 123. SFAS 148 also
requires pro forma disclosure to be provided on a quarterly basis. The Financial
Accounting Standards Board recently indicated that they will require stock-based
employee compensation to be recorded as a charge to earnings beginning in 2004.
We will continue to monitor their progress on the issuance of this standard as
well as evaluate our position with respect to current guidance.
10
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 were founded in November 1995 as Cybernet Data Systems, Inc. In January 1999,
we changed our corporate name to EDGAR Online, Inc. We provide our customers
with business, financial and competitive information about public companies. We
also provide information and technology solutions to the financial services
industry. We derive the information we sell primarily from the SEC's EDGAR
(Electronic Data Gathering Analysis and Retrieval) filing system and provide it
to corporations, Web sites and individuals on a real-time basis. We enhance raw
SEC filings by organizing and processing them into an easily accessible and
searchable format and use proprietary software to extract specific information
requested by our customers.
We derive revenues from four primary sources: seat-based subscriptions to our
Web site services, 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, and advertising and other e-commerce based revenues.
Revenue from seat-based subscriptions is recognized ratably over the
subscription period, which is typically three or twelve months. 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. Advertising
and e-commerce revenue is recognized as the services are provided.
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 consummation
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 which was made on April 1, 2002, $1,900,000 which was made on April
1, 2003 and $1,900,000 which is payable 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 $9,316,884 million impairment in FIS
goodwill as the result of the implementation of SFAS 142. The impairment charge
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.
11
RESULTS OF OPERATIONS
REVENUES
Revenues decreased 6% to $3.8 million for the three months ended March 31, 2003,
from $4.1 million for the three months ended March 31, 2002. The net decrease in
revenues is primarily attributable to a $251,000, or 17%, decrease in data
sales, a $123,000, or 11%, decrease in technical services revenues, and a
$191,000, or 49%, decrease in advertising and e-commerce revenues. These
decreases were partially offset by a $315,000, or 28%, increase in seat-based
subscriptions to $1.4 million in 2003 from $1.1 million in 2002.
The increase in seat-based subscription revenue 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 27,000 as of March 31, 2003 from approximately 23,100 as of March
31, 2002. Sales leads, which were primarily provided by the traffic to our web
sites and free to fee initiatives, contributed to the increase in new seats
sold. Seat-based subscriptions represented 37% of revenues for the three months
ended March 31, 2003, compared to 27% of revenues in the same quarter last year.
The decrease in data sales is primarily due to reductions from two major
customers in 2003 as well as a decrease in the number of corporate contracts to
200 at March 31, 2003 from 215 at March 31, 2002. Data sales represented 31% of
revenues for the three months ended March 31,2003, compared to 35% of revenues
in the same quarter last year.
The decrease in technical services revenue is primarily due to decreases in the
services provided to Nasdaq, our sole client to whom we provide technical
services. Technical services represented 27% of revenues for the three months
ended March 31, 2003, compared to 28% of revenues in the same quarter last year.
Technical services revenues are expected to continue to decrease as the Company
anticipates an approximate $2.0 million annual reduction in revenues related to
Nasdaq work orders beginning in the second half of 2003.
The decrease in advertising and e-commerce revenues is primarily due to the
decrease in advertising impressions and rates and reflects the significant
decline in the online and overall advertising industry that has taken place in
the past year. Advertising and e-commerce represented 5% of revenues for the
three months ended March 31, 2003, compared to 10% in the same quarter 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. In addition, for
each period, online barter advertising expense is recorded equal to the online
barter advertising revenue for that period. Total cost of revenues decreased
$145,000, or 21%, to $548,000 for the three months ended March 31, 2003, from
$693,000 for the three months ended March 31, 2002. The decrease in cost of
revenues is primarily attributable to a decrease in software and Web site
maintenance costs, and content feeds and communications lines, as well as a
decrease in barter revenues. Gross margins increased to 86% for the three months
ended March 31, 2003, from 83% for the three months ended March 31, 2002.
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 $57,000, or
10%, to $536,000 for the three months ended March 31, 2003, from $593,000 for
the three months ended March 31, 2002. As a percentage of revenues, sales and
marketing expenses decreased to 14% for the three months ended March 31, 2003
from 15% for the three months ended March 31, 2002. The net decrease in sales
and marketing expenses in dollar terms resulted from a reduction in our
discretionary advertising spending and marketing campaigns.
12
Development. Development expenses increased $38,000, or 8%, to $526,000 for the
three months ended March 31, 2003 from $488,000 for the three months ended March
31, 2002. As a percentage of revenues, development expenses increased to 14% for
the three months ended March 31, 2003, from 12% for the three months ended March
31, 2002. The net increase in development is primarily due to additional
personnel in development activities.
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
were relatively consistent at $1.8 million for both the three months ended March
31, 2003 and 2002. As a percentage of revenues, general and administrative
expenses increased to 48% in the three months ended March 31, 2003, from 44% for
the three months ended March 31, 2002 as a result of the decrease in revenues in
2003. The slight increase in general and administrative expenses was primarily
due to costs incurred in association with a terminated proposed transaction.
Restructuring and Severance Charges. In the first quarter of 2003, the Company
effected a 17% workforce reduction in response to an expected decline in
revenues beginning in the second half of 2003. In addition, the Company
negotiated payments under a Separation and Release Agreement with the Company's
former President and Chief Operation Officer. The Company accrued $783,600 of
related severance costs. During the first quarter of 2002, the Company
negotiated contract terminations, thereby eliminating $100,000 of pre-existing
contractual obligations associated with the Kirkland, WA office.
Depreciation and Amortization. Depreciation and amortization expenses include
the depreciation of property and equipment and the amortization of intangible
assets. Depreciation and amortization decreased $64,000, or 9%, to $661,000 for
the three months ended March 31, 2003, from $725,000 for the three months ended
March 31, 2002. As a percentage of revenues, depreciation and amortization
decreased to 17% for the three months ended March 31, 2003, from 18% for the
three months ended March 31, 2002. The decrease in depreciation and amortization
is due to several fixed assets becoming fully depreciated in 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $616,000 for the three months
ended March 31, 2003 compared to net cash used in operating activities of
$348,000 for three months ended March 31, 2002. We have historically financed
our operations through private debt placements and the sale of equity securities
to investors. We continue to focus on growing our corporate customer base and
have implemented recent and forthcoming expense reductions. We expect to
continue to yield positive cash flows from operations (although less than that
which was provided from operations during the quarter ended March 31, 2003)
although no assurance can be given in this regard.
Capital expenditures, primarily for computers, office and communications
equipment, totaled $199,000 for the three months ended March 31, 2003 and
$61,000 for the three months ended March 31, 2002. The purchases were made
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. 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.
13
On March 28, 2003, the Company entered into a Separation and Release Agreement
with Tom Vos, the Company's former President and Chief Operating Officer. Under
the Agreement, the Company is required to make payments of $340,000 in 2003,
$170,000 in 2004, and $42,000 in either 2005 or in 2005 and 2006. The Company
will also make three payments of $60,972 to a deferred compensation plan for the
benefit of Mr. Vos; one payment per year in 2003, 2004 and 2005. On March 31,
2003, the Company effected a plan to align the Company's cost structure with
current business conditions. These conditions include an anticipated reduction
in technical services revenues related to the Nasdaq contract beginning in the
second half of 2003 by approximately $2 million annually. The plan entailed a
reduction in workforce of 17% which was effected in March 2003. The Company
anticipates that this action will reduce operating expenses on an annualized
basis by approximately $1.2 to $1.3 million. The Company incurred severance
charges of $783,600 in the quarter ended March 31, 2003 associated with the work
force reduction and the Separation and Release Agreement with the Company's
former President and Chief Operating Officer.
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 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 which was made on April 1, 2002,
$1,900,000 which was made on April 1, 2003 and $1,900,000 which is payable 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.
At March 31, 2003, we had cash and cash equivalents on hand of $6.0 million. We
believe that our existing capital resources and projected 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. Thereafter, if
cash generated from operations is insufficient to satisfy our liquidity
requirements, we may need to raise additional funds through public or private
financings, strategic relationships or other arrangements. There can be no
assurance that 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.
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.
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, we face numerous risks and uncertainties in achieving
increased revenues. 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:
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- - implement our marketing plan to increase subscriptions and corporate sales,
attract more individual online users to our services and 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 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.
OUR CONTRACTS WITH NASDAQ ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR TOTAL
REVENUES AND SUCH REVENUES WILL DECREASE OVER TIME.
A significant portion of our total revenues over the last two fiscal years has
been attributable to the numerous work orders that we have performed pursuant to
our contract with Nasdaq. Sales to Nasdaq accounted for 32% and 34% of our total
revenues for the three months ended March 31, 2003 and 2002, respectively. 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.
The loss of a significant customer such as Nasdaq would have a material adverse
affect on our business, results of operations and financial condition.
We have recently renewed certain work orders and have negotiated new services
pursuant to additional work orders with Nasdaq. However, revenues to be
generated from our Nasdaq business are expected to decrease by approximately $2
million annually beginning in the second half of 2003. If we do not generate new
business to offset a portion of the Nasdaq revenue shortfall, there could be a
material adverse effect on our business, results of operations and financial
condition.
WE HAVE A HISTORY OF LOSSES AND CANNOT ASSURE THAT WE WILL ATTAIN PROFITABILITY.
As of March 31, 2003, we had an accumulated deficit of $43,093,000. We incurred
net losses of $15,237,000 for the year ended December 31, 2000, $6,788,000 for
the year ended December 31, 2001, $11,042,000 for the year ended December 31,
2002 and $1,116,000 for the three months ended March 31, 2003. In addition, we
expect to continue to incur ongoing operating costs and capital expenditures. As
a result, we will need to generate 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 more slowly 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.
15
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.
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, this
competition may continue to intensify. The types of companies with which we
compete for users and advertisers include:
- - traditional vendors of financial information, such as Thomson Financial;
- - proprietary information services and Web sites targeted to business, finance
and investing needs, including those providing EDGAR content, such as Bloomberg,
10K Wizard 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: using technology to add value to raw EDGAR information, keeping our
pricing models below those of our competitors, maintaining a strong corporate
sales presence in the marketplace and maintaining our branding on high-traffic
Web sites.
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 I EDGAR feed has been significantly reduced since
the introduction of the EDGAR system and is currently approximately $50,000 per
year. Further reductions of the cost of the Level I 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.
16
Many of our existing competitors, as well as a number of potential competitors,
have longer operating histories, 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.
WE RISK BEING DELISTED FROM NASDAQ WHICH COULD REDUCE OUR ABILITY TO RAISE
FUNDS.
If the closing bid price of our stock were to drop below $1.00 per share and
remain below $1.00 share for thirty consecutive business days, we would be in
violation of 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. In addition, an
affiliate of our Chairman and Chief Executive Officer has pledged an aggregate
of 1,200,000 shares of our common stock to an institutional lender as collateral
for a certain extension of credit of which $455,265, is outstanding as of
March 31, 2003. If a foreclosure occurs under this credit arrangement, the
lender would have the right to sell any and all of the pledged shares, which is
likely to have a material adverse effect on the market price of our common
stock.
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.
17
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 MARKET FOR BUSINESS AND
FINANCIAL INFORMATION.
The market for the distribution of business and financial information, including
EDGAR-based content, is rapidly evolving. 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 continues
to evolve, 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 new service offerings 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 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 content
distribution relationships on commercially reasonable terms 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. Even if we
maintain our existing relationships, 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, 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 and the
lingering effects of the war in Iraq have 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. 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.
18
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 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 FACE INTENSE COMPETITION FOR ADVERTISING AND E-COMMERCE REVENUES AND THE
VIABILITY OF THE INTERNET AS AN ADVERTISING AND E-COMMERCE 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 5% and 10% of our total
revenues for the three months ended March 31, 2003 and 2002, 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 and e-commerce revenues. In addition, if we are unable to
generate sufficient traffic on our Web sites, we could potentially lose
advertising and e-commerce 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 and e-commerce revenues. Although
advertising and e-commerce revenues do not make up a significant component of
our total revenues, any of these developments could still have an adverse impact
on our business, results of operations or financial condition.
WE MAY NOT BE ABLE TO MAINTAIN 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 maintain an effective sales force to market our
services to this customer group. Our efforts in maintaining 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 growth. If we are unable to manage our
growth effectively, our business will be adversely affected. 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;
- - expenses associated with amortization or impairment of goodwill and other
purchased intangible assets;
19
- - 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, our prior
acquisitions have been structured to be treated as tax-free reorganizations. In
the event the tax-free nature of our transactions is successfully challenged,
there may be a material adverse impact to our business, results of operations
and financial condition. Even if we were to prevail in such challenge, the
dispute could be time consuming and expensive, and could result in the diversion
of our time and attention, which could materially adversely affect our business,
results of operations and financial condition.
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 and President; Marc Strausberg, Chairman; Greg Adams,
Chief Financial Officer and Chief Operating 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 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, 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. The resulting reorganization plan was confirmed
by the United States Bankruptcy Court in April 2002. 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 Max Worldwide. 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.
20
Our operations depend on our and Globix's ability to protect the systems in the
data centers against damage from fire, power loss, water damage,
telecommunications failure, vandalism and similar unexpected adverse events.
Although our Rockville, Maryland facility and Globix provide comprehensive
facilities management services, including human and technical monitoring of all
production servers 24 hours-per-day, seven days-per-week, neither facility can
guarantee that our Internet access will be uninterrupted, error-free or secure.
Any disruption in the Internet access to our Web sites 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.
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.
21
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.
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.
22
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 March 31,2003, 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)- 14(c). This
evaluation has provided our principal executive officer and principal financial
officer with reasonable assurance that our disclosure controls and procedures
are effective and can be relied upon to gather, analyze and disclose all
information required to be included in our periodic SEC reports. There were no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation,
nor were there any deficiencies or material weaknesses in our internal controls.
As a result, no corrective actions were taken.
23
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
In April 2003, we commenced an action in the Delaware Chancery Court against
Albert E. Girod, a former director, Executive Vice President and
Chief Technology Officer, and an owner of more than 5% of our outstanding
common stock. In our complaint, we are seeking to permanently enjoin defendant
from further breaches of the non-disparagement provisions of his employment
agreement, which remain in effect. We also seek compensatory damages and/or
restitution for defendant's fraud, unjust enrichment, breach of fiduciary duty,
breach of contract and trespass and nuisance by e-mail and other actions that
we allege to have occurred in connection with and/or following our
acquisition of Financial Insight Systems, Inc. As of the date of this Report,
our complaint has been filed and we are awaiting the defendant's response.
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 President and 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 Operating Officer and 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 January 27, 2003, the Company filed a Current Report
on Form 8-K announcing the addition of a member to its Board of Directors, as
well as the assumption of specific executive positions by certain members of
existing management.
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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: May 14, 2003 /s/ Susan Strausberg
-----------------------
Susan Strausberg
President and
Chief Executive Officer
Dated: May 14, 2003 /s/ Greg Adams
-----------------------
Greg Adams
Chief Operating Officer and
Chief Financial Officer
25
CERTIFICATIONS
I, Susan Strausberg, certify that:
1) I have reviewed this quarterly report on Form 10-Q of EDGAR Online, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Susan Strausberg
-----------------------
Susan Strausberg
President and
Chief Executive Officer
May 14, 2003
26
CERTIFICATIONS
I, Greg Adams, certify that:
1) I have reviewed this quarterly report on Form 10-Q of EDGAR Online, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Greg Adams
---------------------------
Greg Adams
Chief Operating Officer and
Chief Financial Officer
May 14, 2003
27