UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File Number 000-25779
THESTREET.COM, INC.
----------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1515824
---------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14 Wall Street
New York, New York 10005
--------------------------
(Address of principal executive offices, including zip code)
(212) 321-5000
--------------
(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. YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
(Number of Shares Outstanding
(Title of Class) as of May 12, 2003)
---------------- ---------------------
Common Stock, par value $0.01 per share 23,876,168
THESTREET.COM, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Part I - FINANCIAL INFORMATION (UNAUDITED).....................................1
Item 1. Condensed Consolidated Financial Statements...........................1
Condensed Consolidated Balance Sheets.................................1
Condensed Consolidated Statements of Operations.......................2
Condensed Consolidated Statements of Cash Flows.......................3
Notes to Condensed Consolidated Financial Statements..................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........14
Item 4. Controls and Procedures..............................................14
PART II - OTHER INFORMATION...................................................27
Item 1. Legal Proceedings....................................................27
Item 2. Changes in Securities and Use of Proceeds............................27
Item 3. Defaults Upon Senior Securities......................................27
Item 4. Submission of Matters to a Vote of Security Holders..................27
Item 5. Other Information....................................................27
Item 6. Exhibits and Reports on Form 8-K.....................................28
SIGNATURES....................................................................29
CERTIFICATIONS................................................................30
ii
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THESTREET.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
------------------- -------------------
(unaudited) (Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,952,439 $ 21,565,018
Restricted cash 200,000 372,629
Short-term investments 517,886 4,811,164
Accounts receivable,
net of allowance for doubtful
accounts of $149,746
as of March 31, 2003 and
$212,312 as of December 31, 2002 1,598,532 1,676,974
Other receivables 196,223 91,622
Receivable from related parties 289,443 105,439
Prepaid expenses and other
current assets 822,861 1,020,433
------------------- -------------------
Total current assets 28,577,384 29,643,279
Property and equipment,
net of accumulated depreciation
and amortization of $10,628,087
as of March 31, 2003 and
$9,995,998 as of December 31, 2002 3,140,264 3,643,275
Other assets 457,231 491,875
Receivable from related parties - 206,222
Goodwill 1,990,312 1,990,312
Other intangibles, net 988,333 1,153,333
Restricted cash 2,300,000 2,300,000
------------------- -------------------
Total assets $ 37,453,524 $ 39,428,296
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 407,486 $ 733,409
Accrued expenses 2,473,200 3,660,029
Deferred revenue 6,744,624 5,512,669
Current portion of note payable 84,010 84,010
Other current liabilities 19,090 18,127
------------------- -------------------
Total current liabilities 9,728,410 10,008,244
Note payable 290,692 311,164
------------------- -------------------
Total liabilities 10,019,102 10,319,408
------------------- -------------------
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value;
10,000,000 shares authorized;
none issued and outstanding - -
Common stock; $0.01 par value;
100,000,000 shares authorized;
29,172,639 shares issued and
23,750,539 shares outstanding at
March 31, 2003, and 29,007,394
shares issued and 23,585,294
shares outstanding at December
31, 2002 291,722 290,074
Additional paid-in capital 183,968,255 183,794,159
Deferred compensation - (205,434)
Treasury stock at cost;
5,422,100 shares at
March 31, 2003 and
December 31, 2002 (7,215,410) (7,215,410)
Accumulated deficit (149,610,145) (147,554,501)
------------------- -------------------
Total stockholders' equity 27,434,422 29,108,888
------------------- -------------------
Total liabilities and
stockholders' equity $ 37,453,524 $ 39,428,296
=================== ===================
THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
1
THESTREET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2003 2002
------------------- -------------------
(unaudited) (unaudited)
Net revenues:
Subscription revenues $ 4,272,889 $ 3,001,000
Advertising and e-commerce revenues 1,200,743 710,070
Other revenues 182,610 361,950
------------------- -------------------
Total net revenues 5,656,242 4,073,020
------------------- -------------------
Operating expenses:
Cost of services 3,411,617 3,349,583
Sales and marketing expenses 1,658,233 1,456,901
General and administrative expenses 1,755,331 1,979,573
Depreciation and amortization 765,958 1,189,370
Noncash compensation expense 238,420 243,288
Restructuring income - (31,442)
------------------- -------------------
Total expenses 7,829,559 8,187,273
------------------- -------------------
Interest income, net 117,673 219,912
------------------- -------------------
Net loss from continuing
operations (2,055,644) (3,894,341)
Gain on disposal of discontinued
operations - 192,929
------------------- -------------------
Net loss $ (2,055,644) $ (3,701,412)
=================== ===================
Net (loss) income per share -
basic and diluted:
Continuing operations $ (0.09) $ (0.17)
Discontinued operations - 0.01
------------------- -------------------
Net loss $ (0.09) $ (0.16)
=================== ===================
Weighted average basic and
diluted shares outstanding 23,651,979 23,527,407
=================== ===================
THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
2
THESTREET.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2003 2002
------------------- -------------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,055,644) $ (3,701,412)
Adjustments to reconcile net loss to
cash used in operating activities,
net of acquired businesses:
Noncash compensation expense 238,420 243,288
Noncash advertising expense - 71,442
Gain on disposal of discontinued
operations - (192,929)
Gain on sale of investments - (119,582)
(Recovery) provision for doubtful
accounts (43,839) 3,404
Depreciation and amortization 765,958 1,228,848
Net current assets of discontinued
operations - 2,445
Changes in operating assets and
liabilities:
Accounts receivable 122,281 (159,200)
Other receivables (104,601) (39,467)
Receivable from related party 22,218 7,395
Prepaid expenses and other
current assets 197,572 400,966
Other assets 65,775 22,707
Accounts payable and accrued expenses (1,512,752) (494,291)
Restructuring reserve - (1,418,318)
Deferred revenue 1,231,955 2,094,081
Other current liabilities 963 3,096
------------------- -------------------
Net cash used in operating
activities (1,071,694) (2,047,527)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments - (2,028,700)
Sale of short-term investments 4,465,907 3,524,278
Purchase of investment in held
to maturity securities - (9,911,651)
Capital expenditures (129,078) (181,458)
------------------- -------------------
Net cash provided by (used in)
investing activities 4,336,829 (8,597,531)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock
options 142,758 9,199
Note payable (20,472) (19,132)
Purchase of treasury stock - (430,887)
------------------- -------------------
Net cash provided by (used in)
financing activities 122,286 (440,820)
------------------- -------------------
Net increase (decrease) in cash
and cash equivalents 3,387,421 (11,085,878)
Cash and cash equivalents, beginning
of period 21,565,018 24,740,508
------------------- -------------------
Cash and cash equivalents, end
of period $ 24,952,439 $ 13,654,630
=================== ===================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments made for interest $ 6,593 $ 7,933
=================== ===================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2002, the Company issued 489,644 shares of common stock in connection
with its purchase of SmartPortfolio.com, Inc.
The shares were valued at $430,886.
During 2003, $172,629 of restricted cash that was invested in short-term
investments became unrestricted.
THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
3
THESTREET.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
BUSINESS
TheStreet.com, Inc., a registered investment advisor, together with its
wholly-owned subsidiaries (collectively, the "Company"), is a leading provider
of independent, insightful, trustworthy and timely investment commentary,
advice, research, analysis and news. On the web, "RealMoney.com," the Company's
premium, subscription-based consumer site, and "TheStreet.com," its free,
flagship site, are accompanied by the professionally-oriented subscription-based
web sites, "Street Insight," and "RealMoney Pro Advisor." The Company also
produces 10 subscription-based advisory products emphasizing different
industries and/or investing styles, for use by self-directed investors and other
consumers, one subscription-based report for use by professional buy-side
investors, and a nationally syndicated financial radio program. In addition,
through partnerships with third parties, the Company offers two
consumer-oriented subscription products. Through these offerings, the Company
furnishes various segments of the investing population with the commentary,
advice, research, analysis and news they need to make better-informed investing
and trading decisions.
Building on the Company's strategy of expanding its offerings to the
professional sector, in the fourth quarter of 2002, the Company formally began
the development of a new subsidiary, Independent Research Group LLC ("IRG"). IRG
was formed for the purpose of generating independent proprietary equity research
for use by institutional clients. In April 2003, IRG was admitted for membership
in the NASD as a broker-dealer. This will enable IRG's institutional clients to
trade through IRG, and allows IRG to collect commissions on such trades in
payment for the equity research IRG provides to them.
The Company's editorial staff consists of approximately 40 professional
reporters and editors who, together with approximately 60 financial analysts,
traders and money managers who contribute to its products from outside the
Company, produce, on average, more than 50 original commentary, analysis,
research and news pieces (plus numerous market diary entries) each business day
for the Company's four web sites, as well as its daily and weekly advisory
reports.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Exchange Act Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2002, filed with the Securities and Exchange Commission on March
31, 2003.
Certain prior period amounts have been reclassified to conform to current
period presentation.
4
2. STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), and elected to
continue to account for stock options granted to employees and directors based
on the accounting set forth in Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). Stock options granted during the
three months ended March 31, 2003 were exercisable at prices equal to the fair
market value of the Company's common stock on the dates the options were
granted; accordingly, no compensation expense has been recognized for the stock
options granted.
On December 31, 2002, the Company adopted Financial Accounting Standards
Board Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("FASB No. 148"). FASB No. 148 amends SFAS No. 123, to provide
alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation. FASB No. 148 also amends the
disclosure provisions of SFAS No. 123 and APB No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies on reported net income and earnings per share in annual and interim
financial statements. While FASB No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value method, the
disclosure provisions of FASB No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25.
Had compensation for the Company's 1998 Stock Incentive Plan, as amended
and restated, been determined consistent with the provisions of SFAS No. 123,
the effect on the Company's net loss and basic and diluted net loss per share
would have been changed to the following pro forma amounts:
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
------------- -------------
Net loss, as reported............................... $(2,055,644) $(3,701,412)
Add: noncash compensation, as reported.............. 238,420 243,288
Less: noncash compensation, pro forma............... (1,260,118) (924,008)
------------- -------------
Net loss, pro forma................................. $(3,077,342) $(4,382,132)
============= =============
Basic and diluted net loss per share, as reported... $ (0.09) $ (0.16)
============= =============
Basic and diluted net loss per share, pro forma..... $ (0.13) $ (0.19)
============= =============
3. TREASURY STOCK
In December 2000, the Company's Board of Directors authorized the
repurchase of up to $10 million worth of the Company's common stock, in private
purchases or in the open market. Under this program, the Company did not
purchase any shares of common stock during the three months ended March 31,
2003. Since the inception of the program, the Company has purchased a total of
5,422,100 shares of common stock at an aggregate cost of $7,215,410.
4. DISCONTINUED OPERATIONS
In November 2000, the Company's Board of Directors decided to discontinue
and liquidate the Company's U.K. operations and entered into an agreement with
the other shareholders of TheStreet.com (Europe) Limited pursuant to which the
Company purchased the minority interest for an aggregate consideration of $3
million in cash and 1,250,000 shares of the Company's common stock. In
accordance with British law, the operation went into Members Voluntary
Liquidation in May 2001. On April 30, 2002, the final meeting of the members was
held to bring the liquidation to a close. A final return in the liquidation was
filed on July 25, 2002 in order to formally dissolve the U.K. operations, and
the dissolution became effective on October 25, 2002.
5
5. NONCASH COMPENSATION EXPENSE
In 1998 and the first three months of 1999, the Company granted options to
purchase shares of its common stock at exercise prices that were less than the
fair market value of the underlying shares of common stock on the dates of
grant. This resulted in deferred compensation expense incurred over the period
that these options vested, the latest of which occurred in March 2003. The
Company recorded noncash compensation expense of $205,434 and $213,041 during
the three months ended March 31, 2003 and 2002, respectively, for these below
fair market value options.
On January 15, 2002, the Company issued options to purchase a total of
50,000 shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. The options vested immediately and have
an exercise period of the lesser of five years, or 90 days after the termination
of his services. The value of these options was $72,043, which is being
amortized over the two-year period of his service to the Company. The Company
recorded noncash compensation expense of $9,006 and $9,006 during the three
months ended March 31, 2003 and 2002, respectively, for these options.
On January 15, 2002, the Company issued options to purchase a total of
100,000 shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. One-half of these options vested
immediately and the other half vested on January 15, 2003. These options have an
exercise period of the lesser of five years, or 90 days after the termination of
his services. The value of these options at January 15, 2003 was $195,124, which
is being amortized over the two-year period of his service to the Company. The
Company recorded noncash compensation expense of $23,980 and $21,241 during the
three months ended March 31, 2003 and 2002, respectively, for these options.
6. LEGAL PROCEEDINGS
On December 5, 2001, a class action complaint alleging violations of the
federal securities laws was filed in the United States District Court for the
Southern District of New York naming as defendants TheStreet.com, certain of its
former officers and directors and a current director, and certain underwriters
of the Company's initial public offering (The Goldman Sachs Group, Inc., Chase
H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and Merrill
Lynch Pierce Fenner & Smith, Inc.). The complaint alleges, among other things,
that the underwriters of TheStreet.com's initial public offering violated the
securities laws by failing to disclose certain alleged compensation arrangements
(such as undisclosed commissions or stock stabilization practices) in the
offering's registration statement. TheStreet.com and certain of its former
officers and directors and a current director are named in the complaint
pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"). The plaintiffs seek
damages and statutory compensation against each defendant in an amount to be
determined at trial, plus pre-judgment interest thereon, together with costs and
expenses, including attorneys' fees. Similar complaints have been filed against
over 300 other issuers that have had initial public offerings since 1998 and all
such actions have been included in a single coordinated proceeding. Pursuant to
a Court Order dated October 9, 2002, each of the individual defendants to the
action has been dismissed without prejudice. Additionally, pursuant to a Court
Opinion and Order dated February 19, 2003, the claims against TheStreet.com for
violations of Section 10(b) of the Exchange Act have been dismissed with
prejudice. TheStreet.com remains a party to the action and intends to defend
itself vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of the litigation. Any
unfavorable outcome of this litigation could have an adverse impact on the
Company's business, financial condition and results of operations.
On February 21, 2003, a complaint alleging defamation PER SE was filed by
Jonathan Hoenig, a hedge fund manager and financial commentator, in the Circuit
Court of Cook County, Illinois, naming as defendants TheStreet.com and James J.
Cramer, its columnist and director. Mr. Hoenig's complaint alleges that Mr.
Cramer and TheStreet.com knowingly made false statements intended to harm his
reputation as a financial advisor and commentator. TheStreet.com believes that
the accusations are without merit and filed a motion to dismiss the complaint on
March 26, 2003. Due to the inherent uncertainties of litigation, TheStreet.com
cannot currently predict with any accuracy its ultimate outcome. An unfavorable
outcome of this litigation could have an adverse impact on TheStreet.com's
business, financial condition and results of operations.
6
7. BUSINESS SEGMENT INFORMATION
Effective January 1, 2003, the Company's operations have been classified
into two business segments, media and financial services. The Company's media
segment provides independent, insightful, trustworthy and timely investment
commentary, advice, research, analysis and news. The Company's financial
services segment generates independent proprietary equity research for use by
institutional clients, and as a broker-dealer, is able to accept payment for its
product through trading commissions, a standard payment method in the
professional markets. Beginning with the first quarter of 2003, these segments
are evaluated separately by key management in assessing performance and
allocating resources. The information presented below includes certain
intercompany transactions and is therefore, not necessarily indicative of the
results had the operations existed as stand-alone businesses. Eliminations
include intercompany sales of subscription-based products, which are billed at
prevailing market rates. These intercompany transactions are eliminated in
consolidation.
FOR THE THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------------------
FINANCIAL
MEDIA SERVICES ELIMINATIONS TOTAL
------------ ---------- ------------ ------------
STATEMENT OF
OPERATIONS DATA:
Subscription revenues $ 4,272,889 $ - $- $ 4,272,889
Advertising and 1,200,743 - - 1,200,743
e-commerce revenues
Commission revenues - - - -
Other revenues 182,610 - - 182,610
------------ ---------- ------------ ------------
Net revenues $ 5,656,242 $ - $- $5,656,242
============ ========== ============ ============
Net loss $(1,573,500) $(482,144) $- $(2,055,644)
============ ========== ============ ============
BALANCE SHEET DATA:
Total assets $37,968,392 $595,865 (1,110,733) $37,453,524
8. NET LOSS PER SHARE OF COMMON STOCK
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
Under the provisions of SFAS No. 128, basic net loss per common share ("Basic
EPS") is computed by dividing net loss by the weighted average number of common
shares outstanding. Diluted net loss per common share ("Diluted EPS") is
computed by dividing net loss by the weighted average number of common shares
and dilutive common share equivalents then outstanding. Diluted EPS is identical
to basic EPS since stock options were excluded from the calculation, as their
effect is antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements contained in this quarterly report on Form 10-Q relating to
plans, strategies, objectives, economic performance and trends and other
statements that are not descriptions of historical facts may be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Forward-looking information is
inherently subject to risks and uncertainties, and actual results could differ
materially from those currently anticipated due to a number of factors, which
include, but are not limited to, the factors set forth under the heading "Risk
Factors" and elsewhere in this quarterly report, and in other documents filed by
the Company with the Securities and Exchange Commission from time to time,
including, without limitation, the Company's annual report on Form 10-K for the
year ended December 31, 2002. Forward-looking statements may be identified by
terms such as "may", "will", "should", "could", "expects", "plans", "intends",
"anticipates", "believes", "estimates", "predicts", "forecasts", "potential", or
"continue" or similar terms or the negative of these terms. Although the Company
believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance or achievements. The Company has no obligation to update these
forward-looking statements.
7
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed consolidated financial statements and notes
thereto.
OVERVIEW
TheStreet.com was organized as a limited liability company in June 1996 and
converted to a C-corporation, incorporated in Delaware, in May 1998. In May
1999, the Company completed its initial public offering. The Company, including
its subsidiaries, is a leading provider of independent, insightful, trustworthy
and timely investment commentary, advice, research, analysis and news. Over the
past several years, our services have expanded from a single, subscription-based
news and commentary web site, to a network of sites, accompanied by a full
panoply of subscription products, all geared to furnishing various segments of
the investing population with the commentary, advice, research, analysis and
news they need to make better-informed investing and trading decisions.
Today, the Company's content is available across diverse media platforms,
including the internet, radio and conferences, allowing the Company to create
content once and then earn additional revenue by repackaging and redistributing
the same content to different audiences through separate products and
distribution channels. The Company's strategic relationships with leading
companies in the media, technology and financial services sectors help it create
brand awareness and increase its subscription and advertising revenues.
As our business has evolved to include our offering of stand-alone advisory
reports, in 2002 the Company applied for, and was granted, registration with the
SEC as an investment advisor. Additionally, in 2002, the Company continued its
strategy of building out its product lines, on both the retail consumer and
professional sides, with the introduction of four new subscription-based
advisory reports for consumers and two new subscription-based web sites aimed
expressly at professional investors/traders and financial planners/advisors.
This effort has continued into 2003, with the introduction of two new consumer
advisory reports in the first quarter of 2003, which are discussed below under
"Recent Developments."
Building on the Company's strategy of expanding its offerings to the
professional sector, in the fourth quarter of 2002, the Company formally began
the development of a new subsidiary, Independent Research Group LLC ("IRG"). IRG
has been formed for the purpose of generating independent proprietary equity
research for use by institutional clients. On April 22, 2003, IRG was admitted
for membership in the NASD as a registered broker-dealer. This will enable IRG's
institutional clients to trade through IRG, and allow IRG to collect commissions
on such trades in payment for both the equity research IRG provides to them, as
well as for the institutional products produced by TheStreet.com.
RECENT DEVELOPMENTS
On January 28, 2003, the Company announced the launch of THE SAVE SAFE
PLAN, a subscription email service that provides comprehensive advice on
establishing and maintaining a well-balanced long-term portfolio. This weekly
service contains exclusive financial advice and analysis from THESTREET.COM
columnist Dagen McDowell and a model portfolio of high-yielding stocks and bonds
selected by David Peltier, one of the Company's research associates. Each issue
also contains a Q&A section in which Ms. McDowell and Mr. Peltier answer
questions from subscribers.
In March 2003, the Company launched THESTREET.COM'S SHORT ADVISOR. This
subscription report, delivered periodically via email, contains recommendations
and analysis of potential short-selling candidates, plus investor education
concerning stock-shorting methods and "tricks of the trade" from several of our
journalists and outside contributors. Writers include THESTREET.COM staff
reporters Melissa Davis and Steven Smith, REALMONEY senior writer Adam
Feuerstein, and outside contributors Dan Fitzpatrick, Christopher Schumacher and
Bo Yoder.
8
On April 22, 2003, the Company announced that Independent Research Group
LLC, a wholly owned subsidiary of TheStreet.com, had been approved by the SEC
and admitted for membership in the NASD as a registered broker-dealer.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
NET REVENUES
SUBSCRIPTION REVENUES. Subscription revenues are derived from annual,
semi-annual, quarterly and monthly subscriptions. Subscription revenues
increased to $4,272,889 for the three months ended March 31, 2003, as compared
to $3,001,000 for the three months ended March 31, 2002. All subscription
revenues for the three months ended March 31, 2003 are attributable to the
Company's media segment.
The increase in subscription revenues for the Company's media segment is
primarily the result of increased revenue associated with ACTION ALERTS PLUS,
STREET INSIGHT (formerly known as REALMONEY PRO) and THESTREET(TM)VIEW, as well
as revenues from several new subscription-based products, such as THE TURNAROUND
REPORT and THE TRADING REPORTS, launched subsequent to the quarter ended March
31, 2002. For the three months ended March 31, 2003, approximately 64% of the
segment's net subscription revenue was derived from annual subscriptions, as
compared to approximately 54% for the three months ended March 31, 2002. This
increase in the proportion of annual subscription revenues is partially due to
the Company's initial need to outsource fulfillment of new email subscription
products to a third party and that third party's technological inability to
provide annual subscriptions. The Company has since internally developed the
requisite technological infrastructure for its subscription products fulfilled
via email. The Company migrated these monthly subscribers to its own commerce
system in March 2002, and has successfully converted many of these monthly
subscribers into annual subscribers. This increase in the proportion of annual
subscribers was partially offset by the expiration of two-year grandfathered
subscriptions to REALMONEY that had been issued at a 50% discount to current
price points and the expiration of a number of discounted annual REALMONEY bulk
subscription deals.
The Company calculates net subscription revenues by deducting refunds and
cancellation chargebacks from gross revenues. Refunds and cancellation
chargebacks issued by the media segment during the three months ended March 31,
2003, totaled less than 1% of gross subscription revenues for the period.
ADVERTISING & E-COMMERCE REVENUES. Advertising and e-commerce revenues are
derived from internet sponsorship arrangements and from the delivery of banner
and e-mail advertisements, as well as from conference sponsorships. Advertising
and e-commerce revenues increased to $1,200,743 for the three months ended March
31, 2003, as compared to $710,070 for the three months ended March 31, 2002. All
advertising and e-commerce revenues are attributable to the Company's media
segment.
The increase in advertising and e-commerce revenues for the Company's media
segment is primarily the result of improvements in the Company's advertising
sales infrastructure, selling techniques, and ability to more effectively
monetize revenue generating page views. During the first quarter of 2002, the
Company experienced depressed revenues as it reorganized its advertising sales
group to better address market needs. A new Advertising Sales Director was hired
in February 2002, which has resulted in the improvements described above. During
the three months ended March 31, 2003, the Company achieved a 93% increase in
revenue per 1,000 revenue generating page views, when compared to the three
months ended March 31, 2002. This increase was partially offset by a decrease of
10% in total revenue generating page views.
9
For the three months ended March 31, 2003, 86% of the Company's advertising
and e-commerce revenues, excluding conference sponsorship revenues, were derived
from sponsorship contracts, as compared to 62% for the three months ended March
31, 2002. The number of the Company's advertisers, excluding conference
sponsorships, for the three months ended March 31, 2003 was 51, as compared to
31 for the three months ended December 31, 2002.
For the three months ended March 31, 2003, the Company's top five
advertisers, excluding conference sponsorship revenues, accounted for
approximately 50% of its total advertising and e-commerce revenues, as compared
to approximately 52% for the three months ended March 31, 2002.
OTHER REVENUES. Other revenues consist primarily of syndication revenues,
revenue related to James J. Cramer's daily radio program, REALMONEY WITH JIM
CRAMER, and reprint revenues. Other revenues decreased to $182,610 for the three
months ended March 31, 2003, as compared to $361,950 for the three months ended
March 31, 2002. All of the other revenues are attributable to the Company's
media segment.
The decrease in other revenues for the Company's media segment is primarily
the result of the absence in 2003 of a $150,000 one-time payment received in
March 2002 from the WTC Business Recovery Grant program as compensation for
revenue lost as a result of the September 11th attacks, as well as reduced
syndication revenues, partially offset by increased revenue related to Mr.
Cramer's radio program.
COST OF SERVICES
Cost of services increased to $3,411,617 for the three months ended March
31, 2003, as compared to $3,349,583 for the three months ended March 31, 2002.
Cost of services for the Company's media segment includes compensation and
benefits for the Company's editorial, technology and product development staffs,
as well as fees paid to outside contributors, licensing fees payable to content
providers, direct costs related to conference hosting, expenses for contract
programmers and developers, communication lines and other technology costs. Cost
of services for the Company's media segment decreased to $3,031,202 for the
three months ended March 31, 2003, as compared to $3,349,583 for the three
months ended March 31, 2002. This decrease is primarily the result of decreased
costs associated with content licensing and hosting fees.
Cost of services for the Company's financial services segment includes
compensation and benefits for the Company's research and broker-dealer staffs,
as well as licensing fees payable to content providers, communication lines and
other technology costs. Cost of services for the Company's financial services
segment totaled $380,415 for the three months ended March 31, 2003. Due to the
recent start-up of this segment, there were no costs during the three months
ended March 31, 2002.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased to $1,658,233 for the three months
ended March 31, 2003, as compared to $1,456,901 for the three months ended March
31, 2002.
Sales and marketing expenses for the Company's media segment consist
primarily of advertising and promotion, promotional materials, content
distribution fees, and compensation expenses for the Company's direct sales
force and customer service and conference departments. Sales and marketing
expenses for the Company's media segment increased to $1,655,410 for the three
months ended March 31, 2003, as compared to $1,456,901 for the three months
ended March 31, 2002. This increase is primarily the result of increased
salaries and commissions due to the build-up of the Company's direct sales
force, as well as higher advertisement-serving expenses, partially offset by
reduced advertising and promotion and content distribution expenses.
10
Sales and marketing expenses for the Company's financial services segment
consist primarily of marketing and promotion costs. Sales and marketing expenses
for the Company's financial services segment totaled $2,823 for the three months
ended March 31, 2003. Due to the recent start-up of this segment, there were no
costs during the three months ended March 31, 2002.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative costs decreased to $1,755,331 for the three
months ended March 31, 2003, as compared to $1,979,573 for the three months
ended March 31, 2002.
General and administrative expenses for the Company's media segment consist
primarily of compensation for general management, finance and administrative
personnel, occupancy costs, professional fees, equipment rental and other office
expenses. General and administrative expenses for the Company's media segment
decreased to $1,679,640 for the three months ended March 31, 2003, as compared
to $1,979,573 for the three months ended March 31, 2002. This decrease is
primarily the result of reductions in compensation, telephone, equipment lease,
tax and bad debt expenses.
General and administrative expenses for the Company's financial services
segment consist primarily of occupancy costs, professional fees, and other
office expenses. General and administrative expenses for the Company's financial
services segment totaled $75,691 for the three months ended March 31, 2003. Due
to the recent start-up of this segment, there were no costs during the three
months ended March 31, 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased to $765,958 for the three
months ended March 31, 2003, as compared to $1,189,370 for the three months
ended March 31, 2002.
Depreciation and amortization expenses for the Company's media segment
decreased to $738,374 for the three months ended March 31, 2003, as compared to
$1,189,370 for the three months ended March 31, 2002. The decrease is
attributable to lower capital expenditures and fully depreciated assets.
Depreciation and amortization expenses for the Company's financial services
segment totaled $27,584 for the three months ended March 31, 2003. Due to the
recent start-up of this segment, there were no costs during the three months
ended March 31, 2002.
NONCASH COMPENSATION EXPENSE
Noncash compensation expense decreased to $238,420 for the three months
ended March 31, 2003, as compared to $243,288 for the three months ended March
31, 2002.
Noncash compensation expense for the Company's media segment decreased to
$236,605 for the three months ended March 31, 2003, as compared to $243,288 for
the three months ended March 31, 2002. Noncash compensation expense for the
Company's financial services segment totaled $1,815 for the three months ended
March 31, 2003. Due to the recent start-up of this segment, there were no costs
during the three months ended March 31, 2002.
In 1998 and the first three months of 1999, the Company granted options to
purchase shares of its common stock at exercise prices that were less than the
fair market value of the underlying shares of common stock on the dates of
grant. This resulted in deferred compensation expense incurred over the period
that these options vested, the latest of which occurred in March 2003. The
Company recorded noncash compensation expense of $205,434 during the three
months ended March 31, 2003 for these below fair market value options, as
compared to $213,041 during the three months ended March 31, 2002. As all of
these below fair market value options have vested, there is no remaining
compensation expense to be recognized in the future.
11
On January 15, 2002, the Company issued options to purchase a total of
50,000 shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. The options vested immediately and have
an exercise period of the lesser of five years, or 90 days after the termination
of his services. The value of these options was $72,043, which is being
amortized over the two-year period of his service to the Company. For the three
months ended March 31, 2003, the Company recorded noncash compensation expense
of $9,006 for these options, as compared to $9,006 for the three months ended
March 31, 2002. The balance of $27,015 will be recognized as noncash
compensation expense during the remainder of the year ending December 31, 2003.
On January 15, 2002, the Company issued options to purchase a total of
100,000 shares of common stock to a non-employee in connection with his outside
contributor agreement with the Company. One-half of these options vested
immediately and the other half vested on January 15, 2003. These options have an
exercise period of the lesser of five years, or 90 days after the termination of
his services. The value of these options at January 15, 2003 was $195,124, which
is being amortized over the two-year period of his service to the Company. For
the three months ended March 31, 2003, the Company recorded noncash compensation
expense of $23,980 for these options, as compared to $21,241 for the three
months ended March 31, 2002. The balance of $71,941 will be recognized as
noncash compensation expense during the remainder of the year ending December
31, 2003.
RESTRUCTURING INCOME
During the year ended December 31, 2000, the Company recorded restructuring
expenses totaling $17,575,522 to align its cost structure with changing market
conditions and decreased dependence on the advertising market, to create a more
flexible and efficient organization. There was no restructuring activity during
the three months ended March 31, 2003. For the three months ended March 31,
2002, the Company's media segment recorded a gain of $31,442, which primarily
represented adjustments to the Company's original estimates related to the
consolidation of the facilities and reduction in non-performing assets.
INTEREST INCOME, NET
Interest income, net decreased to $117,673 for the three months ended March
31, 2003, as compared to $219,912 for the three months ended March 31, 2002.
Interest income, net for the Company's media segment decreased to $111,489
for the three months ended March 31, 2003, as compared to $219,912 for the three
months ended March 31, 2002. This decrease is the result of lower interest rates
and reduced cash balances.
Interest income, net for the Company's financial services segment totaled
$6,184 for the three months ended March 31, 2003. Due to the recent start-up of
this segment, there was no income during the three months ended March 31, 2002.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
In November 2000, the Company's Board of Directors decided to discontinue
and liquidate the Company's U.K. operations. On April 30, 2002, the final
meeting of the members was held to bring the liquidation to a close. A final
return in the liquidation was filed on July 25, 2002 in order to formally
dissolve the U.K. operations, and the dissolution became effective on October
25, 2002. As of December 31, 2002, the liquidation process had been completed,
and there were no remaining assets or liabilities related to the discontinued
operations.
For the three months ended March 31, 2002, the Company's media segment
recorded a gain on disposal of discontinued operations of $192,929. The gains
primarily represent adjustments to the Company's original estimate related to
costs to be incurred in completing the liquidation process for the Company's
U.K. operations.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company currently invests in money market funds and other short-term,
investment grade instruments that are highly liquid, of high-quality, and have
maturities of up to two years, with the intent that such funds can easily be
made available for operating purposes. As of March 31, 2003, the Company's cash
and cash equivalents, current and noncurrent restricted cash, and short-term
investments amounted to $27,970,325, representing 75% of total assets.
Net cash used in operating activities of $1,071,694 for the three months
ended March 31, 2003 was primarily due to a net loss of $2,055,644, a decrease
in accounts payable and accrued expenses, and an increase in other receivables.
This was partially offset by noncash charges, an increase in deferred revenue
and decreases in both prepaid expenses and other current assets, accounts
receivable, and other assets.
Net cash provided by investing activities of $4,336,829 for the three
months ended March 31, 2003 consisted of sales of short-term investments,
partially offset by capital expenditures. Capital expenditures generally
consisted of purchases of computer software and hardware, as well as purchases
of telephone equipment, office furniture and fixtures and leasehold improvements
related to the office space now occupied by IRG.
Net cash provided by financing activities of $122,286 for the three months
ended March 31, 2003 consisted primarily of the proceeds from the exercise of
stock options.
The Company has a total of $2,500,000 of cash that is invested in
certificates of deposit and money market investments that serve as collateral
for outstanding letters of credit, and is therefore restricted. The letters of
credit serve as security deposits for operating leases. Of this total, the
Company anticipates that $200,000 will become unrestricted within the next 12
months, and is therefore classified as a current asset on the Condensed
Consolidated Balance Sheet. The Company anticipates that the remaining
$2,300,000 of restricted cash will become unrestricted at various times through
the year 2009.
The Company believes that its current cash and cash equivalents and
short-term investments will be sufficient to meet the Company's anticipated cash
needs for at least the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may need to raise additional funds through public or private financings,
strategic relationships or other arrangements. There can be no assurance that
additional funding, if needed, will be available on terms attractive to the
Company, or at all. Strategic relationships, if necessary to raise additional
funds, may require the Company to provide rights to certain of its content. The
failure to raise capital when needed could materially adversely affect the
Company's business, results of operations and financial condition. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the Company's then-current stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to those of the Company's common stock.
COMMITMENTS AND CONTINGENCIES
The Company is committed under operating leases, principally for office
space, furniture and fixtures, and equipment. Certain leases are subject to rent
reviews and require payment of expenses under escalation clauses. Rent and
equipment rental expenses were $431,333 and $479,785 for the three months ended
March 31, 2003 and 2002, respectively. Additionally, the Company has employment
agreements with certain of its employees and outside contributors. Future
minimum payments under these obligations are as follows:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS: TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
- --------------------------------------- ----------- ---------- ---------- ---------- ----------
Operating leases $7,756,564 $1,285,844 $2,631,586 $2,377,518 $1,461,616
Employment agreements 2,037,673 1,409,923 627,750 - -
Outside contributor agreements 414,667 414,667 - - -
Note payable 374,702 84,010 190,698 99,994 -
----------- ---------- ---------- ---------- ----------
Total contractual cash obligations $10,583,606 $3,194,444 $3,450,034 $2,477,512 $1,461,616
=========== ========== ========== ========== ==========
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its market risk exposures are immaterial as the
Company does not have instruments for trading purposes, and reasonable possible
near-term changes in market rates or prices are not expected to result in
material near-term losses in earnings, material changes in fair values or cash
flows for all instruments.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company
carried out, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures are effective. No
significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
14
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING MATERIAL RISKS FACING THE
COMPANY. IF ANY OF THE FOLLOWING RISKS OCCUR, THE COMPANY'S BUSINESS, RESULTS OF
OPERATIONS OR FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED. THE
COMPANY MAY ALSO FACE OTHER RISKS THAT ARE NOT DISCUSSED IN THE FOLLOWING
DESCRIPTION OF ITS RISK FACTORS EITHER BECAUSE IT IS UNAWARE OF SUCH RISKS OR
BECAUSE IT PRESENTLY BELIEVES THAT SUCH RISKS ARE IMMATERIAL. THE COMPANY CANNOT
ASSURE YOU THAT ANY OF THESE OTHER RISKS, IF THEY WERE TO OCCUR, WOULD NOT
MATERIALLY ADVERSELY AFFECT THE COMPANY'S BUSINESS, RESULTS OF OPERATIONS OR
FINANCIAL CONDITION.
THE COMPANY HAS A HISTORY OF LOSSES AND MAY INCUR FURTHER LOSSES
The Company has incurred operating losses in each fiscal quarter since its
formation and may continue to experience operating losses in the future. As of
March 31, 2003, the Company had an accumulated deficit of $149.6 million.
Notwithstanding this history of operating losses, the Company expects to achieve
a positive operating cash flow by the end of 2003. However, the Company will
need to generate significant revenues in order to cover the significant
operating expenses it expects to incur throughout the coming year. Accordingly,
the Company can make no assurances that it will achieve its profitability goals
and, even if the Company does achieve its profitability goals, the Company may
be unable to sustain or increase profitability on a quarterly or annual basis in
the future.
THE COMPANY'S QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE AND ITS FUTURE REVENUES
ARE DIFFICULT TO FORECAST AND MAY BE SEASONAL
The Company's quarterly operating results may fluctuate significantly in
the future as a result of a variety of factors, many of which are outside the
Company's control, including:
o demand for advertising on the Company's web sites and the internet
generally;
o advertising rate reductions and subscription price reductions due to
decreased demand or increased competition;
o advertising budget cycles of the Company's customers;
o the Company's success in developing new products or services and the
amount and timing of costs associated with that process;
o the Company's ability to enter into new and maintain its current
strategic relationships;
o the amount and timing of the Company's costs for marketing and other
initiatives;
o new products or services introduced by the Company or its competitors;
o content distribution fees or other costs incurred by the Company;
o costs associated with system downtime affecting the internet generally
or the Company's web sites in particular; and
o general economic and market conditions.
The Company forecasts its current and future expense levels based on
expected revenues and the Company's investment plans. The Company's expenses are
largely fixed in nature. Therefore, the Company may not be able to adjust its
spending fast enough to mitigate losses in the event its revenues decline
unexpectedly. In addition, the Company believes that advertising sales in
traditional media, such as television and radio, generally are lower in the
first and third calendar quarters of each year and that similar seasonal
patterns have developed in the Company's industry. The Company believes that
quarter-to-quarter comparisons of its operating results may not be a good
indication of its future performance, nor would its operating results for any
particular quarter be indicative of future operating results. Due to the above
factors, the Company's operating results may be below the expectations of public
market analysts and investors in some future quarters. In such an event, the
price of the Company's common stock is likely to decline.
15
THE COMPANY MAY HAVE DIFFICULTY SELLING ITS ADVERTISING INVENTORY, A SIGNIFICANT
PORTION OF WHICH IS CONCENTRATED AMONG THE COMPANY'S TOP ADVERTISERS
Although the market for online advertising sales has shown some signs that
it is beginning to recover from its severe decline, many factors continue to
weigh heavily on it, including the prolonged stock market slump, the declines in
business and consumer spending, recent acts of terrorism and the war in Iraq,
all of which have negatively affected readership of financial market content,
such as that produced by the Company. As a result, many advertising supported
web sites, particularly those in the financial sector, continue to experience
difficulty selling their available inventories and maintaining their rate
structures. Although the Company believes that its demographic profiles will
continue to enable it to maintain its high sell-through, its ability to increase
its advertising revenues depends on a variety of factors, including general
market conditions, seasonal fluctuations in financial news consumption and
overall online usage and the Company's ability to increase its unique visitors
and page view inventory. If the Company is unable to attract the necessary
traffic, or if despite such traffic, advertising revenues decrease due to the
factors discussed above, the Company's business, results of operations and
financial condition could be materially adversely affected.
In the first quarter of 2003, the Company's top five advertisers accounted
for approximately 50% of its total advertising and e-commerce revenues,
excluding conference sponsorship revenues, as compared to approximately 51% for
the three months ended December 31, 2002 and approximately 52% for the three
months ended March 31, 2002. The Company's business, results of operations and
financial condition could be materially adversely affected by the loss of a
number of its top advertisers, and such a loss could be concentrated in a single
quarter. Further, if the Company does not continue to increase its revenue from
financial-services advertisers or attract advertisers from non-financial
industries, its business, results of operations and financial condition could be
materially adversely affected. As is typical in the advertising industry, the
Company's advertising contracts have short notice cancellation provisions.
A GENERAL DECLINE IN ONLINE ADVERTISING OR COMMERCIAL EMAIL COULD HARM THE
COMPANY'S BUSINESS
The Company's future success is dependent in part on the use of the
internet as an advertising medium. The internet advertising industry continues
to evolve, and it cannot yet be compared with traditional advertising media to
gauge its effectiveness, particularly from a branding perspective. As a result,
demand and market acceptance for internet advertising solutions is uncertain and
its growth has slowed significantly. The adoption of internet advertising,
particularly by those entities that have historically relied upon traditional
media for advertising, requires the acceptance of a new way of conducting
business, exchanging information and advertising products and services. Some of
these customers may find internet advertising to be less effective for promoting
their products and services relative to traditional advertising media. The
Company cannot assure you that current or potential advertising customers will
continue to allocate a portion of their advertising budget to internet
advertising or that the demand for internet advertising will continue to develop
to sufficiently support internet advertising as a significant advertising
medium. If the demand for internet advertising decreases, then the Company's
business, results of operations and financial condition could be materially and
adversely affected.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to a web user's computer are available. Widespread adoption of
this software could materially adversely affect the commercial viability of web
advertising, which could materially adversely affect the Company's advertising
revenues. In addition, some internet commentators, privacy advocates and federal
and state officials have suggested that legislation may be needed to better
safeguard online privacy, by the limitation or elimination of the use of
cookies, by so-called "opt-in" requirements that permit the sharing of personal
information only if consumers have actively agreed to it, or by other methods.
If such legislation is passed, it is likely to restrict the ability of online
advertisers to target their ads, which may result in a decrease in online
advertising rates or online advertising spending generally. Such a decrease
could materially adversely affect the Company's advertising revenues.
16
The Company also derives advertising revenues from email advertising and
other email services (including the marketing of its own products via email),
which exposes it to potential liabilities or claims resulting from unsolicited
email, lost or misdirected messages, illegal or fraudulent use of email, privacy
violations or interruptions or delays in email service. Recently, many internet
service providers, or ISPs, have implemented aggressive campaigns to reduce the
use of unsolicited commercial email, popularly known as "spam," on their
networks. Although the Company believes that its email advertising practices are
in compliance with applicable laws and policies, if one or more ISPs were to
deem the Company's email advertising and marketing practices to be violative of
their anti-spam policies, their technology could be used to block or limit the
Company's advertising and marketing efforts. The occurrence of any of the
foregoing could materially adversely affect the Company's business, results of
operations and financial condition.
The Company competes with other web sites, television, radio and print
media for a share of advertisers' total advertising budgets. If advertisers
perceive the web in general or the Company's web sites in particular to be a
limited or an ineffective advertising medium, they may be reluctant to devote a
portion of their advertising budget to online advertising or to advertising on
the Company's web sites.
THE COMPANY MAY HAVE DIFFICULTY ADDING SUBSCRIBERS AND RETAINING CURRENT
SUBSCRIBERS
The Company continues to seek to retain its current subscribers and to
attract new subscribers. As of March 31, 2003, the Company had approximately
62,200 paid annual and monthly subscriptions (not including free trials, but
including an estimate of subscriptions paid for as part of certain bulk deals)
to 16 subscription products, as compared to approximately 66,000 such
subscriptions to 14 subscription products as of December 31, 2002 and 79,500
such subscriptions to 13 subscription products as of March 31, 2002. The Company
believes it has significantly enhanced its subscription offerings to
differentiate them from the free financial and investing information that is
widely available on the web, including on THESTREET.COM site. However, given the
availability of such free financial information, the Company may not be able to
retain its current subscription base and attract additional subscribers in a
cost-effective manner. If the Company's subscription base declines significantly
or the cost of subscriber acquisition increases, the Company's business, results
of operations and financial condition could be materially adversely affected.
DIFFICULTIES IN DEVELOPING NEW AND ENHANCED PRODUCTS AND SERVICES COULD HARM THE
COMPANY'S BUSINESS
In 2002 and the first quarter of 2003, the Company introduced additional
products and services and enhanced existing products and services designed to
help retain its current subscribers and attract new subscribers. The Company
intends to do more of the same in the remainder of 2003. However, if the Company
introduces a product or service that is not favorably received, its current
readers may choose a competitive service over the Company's. The Company may
also experience difficulties that could delay or prevent it from introducing new
products and services, or the new products or services the Company introduces
could contain errors that are discovered after they are introduced. In some
cases, the Company is dependent on third parties, including software companies,
application service providers and technology consulting firms, to help the
Company develop and implement new products and services. If these third parties
are not able to fulfill their responsibilities to the Company on schedule or if
the technology developed by them for the Company's use does not function as
anticipated, implementation may be delayed and the cost of implementation may be
higher than anticipated. Such developments could materially adversely affect the
Company's business, results of operations and financial condition.
17
BECAUSE THE COMPANY IS IN THE EARLY STAGES OF DEVELOPING ITS PROPRIETARY EQUITY
RESEARCH BUSINESS, THE COMPANY IS SUBJECT TO RISKS AND UNCERTAINTIES ASSOCIATED
WITH DEVELOPING AND OPERATING A NEW BUSINESS AND MAY NOT ACHIEVE PROFITABILITY
IN THIS NEW BUSINESS
In October 2002, the Company formed Independent Research Group LLC as a
wholly-owned subsidiary to operate its proprietary equity research business. IRG
began coverage of equities in the second quarter of 2003, when it became a
registered broker-dealer. Since its formation, IRG has incurred start-up costs
and expenses, but has not generated any revenues as of March 31, 2003. The
Company will encounter risks, uncertainties, expenses and difficulties as it
proceeds to develop and operate this new business, including, among others,
those relating to licensing, staffing, regulatory compliance and gaining market
acceptance of its products. The limited operating history of IRG makes it
difficult to evaluate the business and its prospects or to accurately predict
future revenues or results of operations for the business. Accordingly, the
prospects for this business should be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
an early stage of development. The Company can make no assurances that it will
successfully develop and operate its proprietary equity research business or
achieve profitability for this business.
IRG'S REVENUES MAY NOT BE SUFFICIENT TO COVER ITS EXPENSES
IRG's current business plan involves only the production of proprietary
equity research and the dissemination of that research to institutional money
managers and hedge funds at no charge to these customers. In return, IRG expects
that these institutional money managers and hedge funds will voluntarily elect
to execute transactions through IRG's correspondent clearing broker and direct
to IRG a portion of commissions reasonable in relation to the value of the
research provided by IRG. These arrangements are subject to various regulatory
requirements. See "Business - Marketing - Professional Marketing - Soft-Dollar
Brokers" in the Company's annual report on Form 10-K for the year ended December
31, 2002. IRG does not expect to conduct other revenue generating activities at
this time. Because there is no guarantee that revenues will be generated in
connection with its proprietary equity research, the Company can make no
assurances that IRG's revenues will be sufficient to cover its expenses.
THE COMPANY'S SUCCESS IN DEVELOPING AND OPERATING ITS PROPRIETARY EQUITY
RESEARCH BUSINESS WILL DEPEND IN PART ON THE DEMAND FOR EQUITY INVESTMENT IN THE
MARKETPLACE
The Company's ability to develop and operate its proprietary equity
research business will depend in part on the strength of the market for equity
securities generally. Recently, the market for equity securities has been
depressed due to factors beyond the Company's control, including the adverse
effects of current general economic conditions, recent acts of terrorism and the
war in Iraq. These events may have a material adverse affect on demand for the
Company's proprietary equity research.
IF THE COMPANY DOES NOT DEVELOP AND MAINTAIN AN EFFECTIVE SALES FORCE ITS
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY
ADVERSELY AFFECTED
The Company depends upon its sales force to sell advertising on, and
subscriptions for, its web sites and other products. The Company has experienced
in the past, and may experience in the future, costly, high turnover in the
ranks of its sales force. In addition to replacement costs, this exposes the
Company to risks of competition from other companies in hiring and retaining
qualified sales personnel, decreased productivity during training and
orientation periods, and potential failure to integrate and motivate new and
existing sales personnel. If the Company is unable to attract and retain
qualified sales representatives, its business, results of operations and
financial condition could be materially adversely affected.
18
UNFORESEEN DEVELOPMENT DIFFICULTIES MAY HINDER THE COMPANY'S EFFORTS
Over the past two years, the Company has significantly enhanced its design
and its technological infrastructure to further improve its sites and to
accommodate increased traffic, and intends to continue such development
activities. However, unforeseen development difficulties could prevent the
Company from implementing such improvements or cause the costs to implement such
improvements, including design, technology and related costs, to be higher than
anticipated.
In the past, the Company has experienced significant spikes in traffic on
its web sites when there have been important financial news events. Accordingly,
the Company's web sites must accommodate a high volume of traffic, often at
unexpected times. Although the Company has upgraded and continues to improve its
systems, the Company's web sites have in the past, and may in the future,
experience publishing problems, slower response times than usual or other
problems for a variety of reasons. These occurrences could cause the Company's
readers to perceive its web sites as not functioning properly and, therefore,
cause them to use other methods to obtain their financial news and information.
In such a case, the Company's business, results of operations and financial
condition could be materially adversely affected.
THE COMPANY FACES A RISK OF SYSTEM FAILURE THAT MAY RESULT IN REDUCED TRAFFIC,
REDUCED REVENUE AND HARM TO ITS REPUTATION
The Company's ability to provide timely information and continuous news
updates depends on the efficient and uninterrupted operation of its computer and
communications hardware and software systems. Similarly, the Company's ability
to track, measure and report the delivery of advertisements on its site depends
on the efficient and uninterrupted operation of a third-party system. In
February 2002, in connection with the acquisition of the assets of Exodus
Communications, Inc. by Cable & Wireless plc, a global telecommunications
company headquartered in Great Britain, the Company's June 2001 internet-hosting
agreement with Exodus was assumed by Cable & Wireless. The Company's operations
depend on the ability of Cable & Wireless to protect its own systems and the
Company's systems in its data center against damage from fire, power loss, water
damage, telecommunications failure, acts of terrorism, vandalism and similar
unexpected adverse events. Although Cable & Wireless provides comprehensive
facilities management services, including human and technical monitoring of all
production servers 24 hours per day, seven days per week, Cable & Wireless does
not guarantee that the Company's internet access will be uninterrupted,
error-free or secure. Any disruption in the internet access to the Company's web
sites provided by Cable & Wireless could materially adversely affect the
Company's business, results of operations and financial condition. The Company's
own internal systems and operations, as well as those of Cable & Wireless, may
be subject to damage or interruption from human error, natural disasters, fire,
water damage, power loss, telecommunication failures, acts of terrorism,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. Any system failure, including network, software or hardware failure,
that causes an interruption in the Company's service or a decrease in
responsiveness of its web sites could result in reduced traffic, reduced revenue
and harm to the Company's reputation, brand and the Company's relations with its
advertisers and e-commerce partners.
Like most web sites, the Company may be vulnerable to computer viruses,
physical or electronic break-ins and other deliberate attempts to disrupt its
technological operations, which could lead to interruptions, delays or loss of
data. In addition, unauthorized persons may improperly access the Company's
data. The Company's insurance policies may not adequately compensate the Company
for any losses that the Company may incur because of any failures in its system
or interruptions in its delivery of content. The Company's business, results of
operations and financial condition could be materially adversely affected by any
event, damage or failure that interrupts or delays the Company's operations.
THE COMPANY'S FUTURE SUCCESS DEPENDS ON ITS ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL
The Company's future success depends upon its ability to attract and retain
key personnel, including executives, editors, writers, and technology personnel.
Certain of the Company's key employees are bound by employment or
non-competition agreements. The loss of one or more of the Company's key
personnel, or the Company's inability to attract replacements with appropriate
expertise, could materially adversely affect the Company's business, results of
operations and financial condition.
19
INTENSE COMPETITION COULD REDUCE THE COMPANY'S MARKET SHARE AND HARM ITS
FINANCIAL PERFORMANCE
As our business has expanded into new areas, such as equity research and
advisory reports, we face competition for customers, advertisers, employees and
contributors not only with financial news and information sources, but also with
many types of companies, including:
o online services or web sites focused on business, finance, or
investing such as THE WALL STREET JOURNAL INTERACTIVE EDITION
(www.wsj.com), DowJones.com, Forbes.com, SmartMoney.com,
CBS.Marketwatch.com and The Motley Fool;
o publishers and distributors of traditional media focused on finance
and investing, including print and radio, such as THE WALL STREET
JOURNAL and financial talk radio programs;
o investment newsletter publishers such as Phillips Publishing, KCI
Communications and Agora Publishing;
o information and analysis providers such as Standard & Poors; and
o those involved in the creation and production of investor education
conferences.
The Company, through IRG, is a new entrant into the proprietary equity
research business. As a result, the Company will face significant competition
from established Wall Street investment banking firms, large financial
institutions, equity research boutiques and other securities professionals that
offer similar information and that have firmly established customer
relationships. The Company cannot guarantee that it will be able to compete
effectively with its current or future competitors or that this competition will
not significantly harm its business.
The Company's ability to compete depends on many factors, including the
independence, insightfulness, trustworthiness and timeliness of its content and
that of the Company's competitors, the success of the Company's recommendations
and research, the ease of use of services developed either by the Company or its
competitors and the effectiveness of the Company's sales and marketing efforts.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company does. This may allow them to
devote greater resources than the Company can to the development and promotion
of their services. These competitors may also engage in more extensive research
and development, undertake more far-reaching marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to existing and
potential employees, outside contributors, strategic partners and advertisers.
The Company's competitors may develop content that is equal or superior to the
Company's or that achieves greater market acceptance than the Company's. It is
also possible that new competitors may emerge and rapidly acquire significant
market share. The Company may not be able to compete successfully for customers,
advertisers, employees and contributors, which could materially adversely affect
the Company's business, results of operations and financial condition. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could materially adversely affect the Company's business,
results of operations and financial condition.
The Company also competes with other web sites, television, radio, print
media and conference providers for a share of advertisers' total advertising
budgets. If advertisers perceive the internet or the Company's web sites to be a
limited or an ineffective advertising medium, they may be reluctant to devote a
portion of their advertising budget to internet advertising or to advertising on
the Company's web sites.
20
A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER COMPANIES
COULD DECREASE THE COMPANY'S SUBSCRIBER AND READER BASE, WHICH MAY HARM THE
COMPANY'S BUSINESS
The Company depends on establishing and maintaining content syndication and
headline indexing relationships with high-traffic web sites for a significant
portion of its current subscriber and reader base. There is intense competition
for relationships with these firms and placement on these sites, and the Company
may have to pay significant fees to establish additional content syndication and
headline indexing relationships with large, high-traffic partners or maintain
existing relationships in the future. The Company may be unable to enter into or
successfully renew relationships with these firms or sites on commercially
reasonable terms or at all. These relationships may not attract significant
numbers of subscribers or readers.
Many companies that the Company may approach for a strategic relationship
or who already have strategic relationships with the Company also provide
investment commentary, advice, research, analysis or news from other sources. As
a result, these companies may be reluctant to enter into or maintain strategic
relationships with the Company. The Company's business, results of operations
and financial condition could be materially adversely affected if the Company
does not establish additional, and maintain existing, strategic relationships on
commercially reasonable terms or if any of the Company's strategic relationships
do not result in an increase in the number of subscribers or readers of its web
sites and other products.
THE COMPANY MAY BE UNABLE TO GROW THROUGH ACQUISITIONS AND INTEGRATE FUTURE
ACQUISITIONS INTO ITS BUSINESS
The Company's growth strategy may involve acquisitions of other companies.
However, the Company may be unable to successfully pursue and complete
acquisitions in a timely and cost-effective manner. Further, the pursuit and
integration of acquisitions will require substantial attention from the
Company's senior management, which will limit the amount of time these
individuals will have available to devote to the Company's existing operations.
There can be no assurance that the Company would be able to successfully
integrate these acquisitions into its business or implement its plans without
delay or substantial cost. In addition, future acquisitions by the Company could
result in the incurrence of debt and contingent liabilities, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. Any failure or any inability to effectively manage and
integrate growth could have a material adverse effect on the Company's business,
financial condition and results of operations.
DIFFICULTIES ASSOCIATED WITH THE COMPANY'S BRAND DEVELOPMENT MAY HARM ITS
ABILITY TO ATTRACT SUBSCRIBERS AND READERS
The Company believes that maintaining and growing awareness about the
THESTREET.COM and REALMONEY brands, among others, is an important aspect of its
efforts to continue to attract users. The Company's new products do not have
widely recognized brands, and the Company will need to increase awareness of
these brands among potential users. Although the Company's efforts to build
brand awareness have been successful with respect to certain of the Company's
brands, they may not be cost effective or successful in the future in reaching
potential users, and some potential users may not be receptive to the Company's
advertising campaign or other efforts. Accordingly, the Company cannot assure
you that such efforts will be successful in raising awareness of THESTREET.COM,
REALMONEY or other brands or in persuading potential users to subscribe to the
Company's products or visit the Company's sites.
FAILURE TO MAINTAIN THE COMPANY'S REPUTATION FOR TRUSTWORTHINESS MAY REDUCE THE
NUMBER OF ITS READERS, WHICH MAY HARM ITS BUSINESS
It is very important that the Company maintains its reputation as a
trustworthy organization. The occurrence of events, including the Company's
misreporting a news story, the non-disclosure of a stock ownership position by
one or more of the Company's writers, the manipulation of a security by one or
more of the Company's outside contributors, or other breach of the Company's
compliance policies, could harm the Company's reputation for trustworthiness.
These events could result in a significant reduction in the number of the
Company's readers, which could materially adversely affect its business, results
of operations and financial condition.
21
POTENTIAL LIABILITY FOR INFORMATION DISPLAYED ON THE COMPANY'S WEB SITES MAY
REQUIRE IT TO DEFEND AGAINST LEGAL CLAIMS, WHICH MAY CAUSE SIGNIFICANT
OPERATIONAL EXPENDITURES
The Company may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to the information
the Company publishes on its web sites or in other media. These types of claims
have been brought, sometimes successfully, against online services as well as
other print publications in the past. The Company could also be subject to
claims based upon the content that is accessible from its web sites through
links to other web sites. The Company's insurance may not adequately protect it
against these claims.
FAILURE TO PROTECT THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS COULD HARM ITS
BRAND-BUILDING EFFORTS AND ABILITY TO COMPETE EFFECTIVELY
To protect the Company's rights to its intellectual property, the Company
relies on a combination of trademark and copyright law, trade secret protection,
confidentiality agreements and other contractual arrangements with its
employees, affiliates, customers, strategic partners and others. The protective
steps the Company has taken may be inadequate to deter misappropriation of its
proprietary information. The Company may be unable to detect the unauthorized
use of, or take appropriate steps to enforce, its intellectual property rights.
The Company has registered several trademarks in the United States and also has
pending U.S. applications for other trademarks. Failure to adequately protect
the Company's intellectual property could harm its brand, devalue its
proprietary content and affect its ability to compete effectively. Further,
defending the Company's intellectual property rights could result in the
expenditure of significant financial and managerial resources, which could
materially adversely affect the Company's business, results of operations and
financial condition.
THE COMPANY MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT
CLAIMS, WHICH MAY CAUSE SIGNIFICANT OPERATIONAL EXPENDITURES
Although the Company believes that its proprietary rights do not infringe
on the intellectual property rights of others, other parties may assert
infringement claims against the Company or claims that the Company has violated
a patent or infringed a copyright, trademark or other proprietary right
belonging to them. The Company incorporates licensed third-party technology in
some of its services. In these license agreements, the licensors have generally
agreed to defend, indemnify and hold the Company harmless with respect to any
claim by a third party that the licensed software infringes any patent or other
proprietary right. The Company cannot assure you that these provisions will be
adequate to protect it from infringement claims. Any infringement claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources on the Company's part, which could materially adversely
affect the Company's business, results of operations and financial condition.
THE COMPANY'S ABILITY TO MAINTAIN AND INCREASE ITS CUSTOMER BASE DEPENDS IN
LARGE PART ON THE CONTINUED GROWTH IN USE AND EFFICIENT OPERATION OF THE WEB
The web-based information market continues to evolve. The Company's
business would be materially adversely affected if web usage does not continue
to grow or grows slowly. Web usage may be inhibited for a number of reasons,
such as:
o inadequate network infrastructure;
o security and privacy concerns;
o inconsistent quality of service; and
o unavailability of cost-effective, high-speed access to the internet.
22
The Company's readers depend on internet service providers, online service
providers and other web site operators for access to its web sites. Many of
these companies providing such services have filed for bankruptcy. Many have
experienced significant service outages in the past and could experience service
outages, delays and other difficulties due to system failures unrelated to the
Company's systems. These occurrences could cause the Company's readers to
perceive the web in general or the Company's web sites in particular as an
unreliable medium and, therefore, cause them to use other media to obtain their
financial news and information. The Company also depends on a number of
information providers to deliver information and data feeds to it on a timely
basis. The Company's web sites could experience disruptions or interruptions in
service due to the failure or delay in the transmission or receipt of this
information, which could materially adversely affect the Company's business,
results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
INTERNET COMMUNICATIONS, COMMERCE AND PRIVACY REGULATION. Existing domestic
and international laws or regulations and private industry guidelines
specifically regulate communications or commerce on the web. Further, laws and
regulations that address issues such as user privacy, pricing, online content
regulation, taxation of e-commerce transactions and the characteristics and
quality of online products and services are under consideration by federal,
state, local and foreign governments and agencies and by private industry
groups. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate internet service providers and online
services providers in a manner similar to the regulation of long distance
telephone carriers and to impose access fees on such companies. The governments
of other states or foreign countries might attempt to regulate the Company's
transmissions or levy sales or other taxes relating to the Company's activities.
These regulations, if imposed, could increase the cost of transmitting data over
the web.
In addition, the growth and development of the market for internet commerce
may prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business over the internet. The Company's business, results of operations and
financial condition could be materially and adversely affected by the adoption
or modification of laws or regulations relating to the internet.
The Company is also subject to various federal and state regulations
concerning the collection and use of information regarding individuals. These
laws include the Children's Online Privacy Protection Act, and state laws that
limit or preclude the use of voter registration and drivers license information,
as well as other laws that govern the collection and use of consumer credit and
financial information, including the Gramm-Leach-Bliley Act. Although the
Company's compliance with applicable federal and state laws, regulations and
industry guidelines has not had a material adverse effect on it, governments,
trade associations and industry self-regulatory groups may enact more burdensome
laws, regulations and guidelines, including antitrust and consumer privacy laws,
affecting the Company and its customers. Over the past several years, the U.S.
federal and various state governments have investigated certain internet
companies regarding their use of personal information and have proposed
limitations on the collection and use of information regarding internet users
including, for example, a prohibition on the sharing of personal information
absent explicit consumer agreement, or "opt-in." The European Union has enacted
its own privacy regulations, which have resulted in limits on the collection and
use of certain information from users in Europe. Other jurisdictions may follow.
The Company could incur additional expenses if any new regulations regarding the
use of personal information are introduced or if the Company were required to
defend its privacy practices against agency investigations. Also, as a
consequence of governmental legislation or regulation or enforcement efforts or
evolving standards of fair information collection practices, the Company may be
required to make changes to its products or services in ways that could diminish
the effectiveness of the product or service or its attractiveness to potential
customers, which could materially and adversely affect the Company's business,
financial condition and results of operations.
23
Laws and regulations directly applicable to internet communications,
commerce and advertising are becoming more prevalent, and new laws and
regulations are under consideration by the U.S. Congress and state legislatures.
Any legislation enacted or restrictions arising from current or future
government investigations or policy could dampen the growth in use of the
internet generally and decrease the acceptance of the internet as a
communications, commercial and advertising medium. The laws governing the
internet remain largely unsettled, even in areas where there has been some
legislative action. Moreover, it may take years to determine the extent to which
existing laws relating to issues such as intellectual property ownership and
infringement, libel, obscenity and personal privacy apply to the internet,
internet publishing and internet advertising. Any new laws or regulations
relating to the delivery of the Company's products and services, the
dissemination of commercial email advertising and marketing messages, or certain
application or interpretation of existing laws, could decrease the growth in the
use of the internet, decrease the demand for the Company's products and
services, reduce the Company's ability to market its products and services, or
otherwise materially adversely affect the Company's business, financial
condition and results of operations.
SECURITIES INDUSTRY REGULATION. Over the past two years, the Company's
activities have evolved to include, among other things, the offering of
stand-alone products providing stock recommendations and analysis to
subscribers, in contrast to providing such advice as part of a larger online
financial publication of more general and regular circulation. As a result, the
Company registered in 2002 with the SEC as an investment advisor under the
Investment Advisers Act of 1940. In addition, IRG has registered with the SEC
and been admitted as a member of the NASD as a broker-dealer in connection with
its recently begun activities as an introducing broker and provider of
proprietary and third-party research. The securities industry in the United
States is subject to extensive regulation under both federal and state laws. A
failure to comply with regulations applicable to securities industry
participants could materially and adversely affect the Company's and IRG's
business, results of operations and financial condition.
Investment advisors such as the Company are subject to SEC regulations
covering all aspects of the operation of their business, including, among
others:
o advertising,
o record-keeping,
o conduct of directors, officers and employees, and
o supervision of advisory activities.
Likewise, broker-dealers are subject to regulations of the SEC, state
regulators and self-regulatory organizations, such as the NASD, covering all
aspects of the operation of their business, including, among others:
o recommendations of securities,
o equity research,
o execution of customers' orders,
o capital structure,
o record-keeping,
o advertising,
o conduct of directors, officers and employees, and
o supervision of securities and research activities.
Violations of the regulations governing the actions of investment advisors
and broker-dealers may result in the revocation of such licenses, the imposition
of censures or fines, the issuance of cease-and-desist orders, and the
suspension or expulsion of a firm, its officers, or its employees from the
securities business.
The Company and IRG's ability to comply with all applicable securities laws
and rules is largely dependent on its establishment and maintenance of
appropriate compliance systems (including proper supervisory procedures and
books and records requirements), as well as its ability to attract and retain
qualified compliance personnel.
24
Furthermore, because the Company and IRG operate in industries subject to
extensive regulation, new regulation, changes in existing regulation, or changes
in the interpretation or enforcement of existing laws and rules can have a
significant impact on the Company and IRG's ability to compete in the securities
industry. For example, the recent enactment of the Sarbanes-Oxley Act of 2002
and other actions by various regulatory authorities and industry organizations
impose significant new requirements on broker-dealers and securities analysts
issuing research reports on equity securities and their supervisors. The new
requirements include an obligation to disclose conflicts and prohibitions
designed to promote objectivity and independence of the securities analyst. The
Company does not expect these changes to materially adversely affect its
business plan for IRG. However, the Company cannot guarantee that the SEC or
other federal and state governmental regulatory authorities and self-regulatory
organizations regulating the actions of broker-dealers and investment advisors
will not further regulate, or change existing legislation affecting, the Company
and IRG's business in the future in a manner that could harm the Company and
IRG's business, results of operations and financial condition.
ANY FAILURE OF THE COMPANY'S INTERNAL SECURITY MEASURES OR BREACH OF ITS PRIVACY
PROTECTIONS COULD CAUSE THE COMPANY TO LOSE USERS AND SUBJECT IT TO LIABILITY
Users who subscribe to one of the Company's subscription-based products are
required to furnish certain personal information (including name, mailing
address, phone number, email address and credit card information), which the
Company uses to administer its services. Additionally, the Company has
implemented a registration system that collects certain information (although
not payment information) from users of its free flagship site who wish to gain
access to certain features of the Company's site. If the security measures that
the Company uses to protect personal information are ineffective, the Company
may lose users and the Company's business may be harmed. Additionally, the
Company relies on security and authentication technology licensed from third
parties to perform real-time credit card authorization and verification. The
Company cannot predict whether technological developments or human error could
allow these security measures to be circumvented. The Company may need to use
significant resources to prevent security breaches or to alleviate problems
caused by any security breaches. If the Company is not able to prevent all
security breaches, its business, results of operations and financial condition
could be materially adversely affected.
The Company's users depend on the Company to keep their personal
information private and to not disclose it to third parties. The Company
therefore maintains a privacy policy, under which, with certain limited
exceptions, it will not disclose to any third parties any personal information
about its subscribers or other users. The Company has retained the ability to
modify the privacy policy at any time. If the Company's users perceive that the
Company is not protecting their privacy, its business, results of operations and
financial condition could be materially adversely affected.
CONCERNS ABOUT WEB SECURITY COULD REDUCE THE COMPANY'S ADVERTISING REVENUES,
DECREASE ITS READER BASE AND INCREASE ITS WEB SECURITY EXPENDITURES
Concern about the transmission of confidential information over the
internet has been a significant barrier to electronic commerce and
communications over the web. Any well-publicized compromise of security could
deter more people from using the web or from using it to conduct transactions
that involve the transmission of confidential information, such as signing up
for a paid subscription, executing stock trades or purchasing goods or services.
Because many of the Company's advertisers seek to advertise on its web sites to
encourage people to use the web to purchase goods or services, the Company's
business, results of operations and financial condition could be materially
adversely affected if internet users significantly reduce their use of the web
because of security concerns. The Company may also incur significant costs to
protect it against the threat of security breaches or to alleviate problems
caused by these breaches.
25
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS COULD ADVERSELY AFFECT
THE COMPANY'S STOCKHOLDERS
The Company's officers, directors and greater-than-five-percent
stockholders (and their affiliates), acting together, have the ability to
control substantially all matters submitted to its stockholders for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and to control its
management and affairs. Accordingly, this concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of the
Company, impeding a merger, consolidation, takeover or other business
combination involving the Company or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the Company,
which in turn could materially adversely affect the market price of the common
stock.
VOLATILITY OF THE COMPANY'S STOCK PRICE COULD ADVERSELY AFFECT THE COMPANY'S
STOCKHOLDERS
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
internet-related companies, have been highly volatile. The trading price of the
Company's stock has been and may continue to be subject to wide fluctuations.
From January 1 through March 31, 2003, the closing sale price of the Company's
common stock on the Nasdaq National Market ranged from $2.42 to $3.26. As of May
13, 2003, the closing sale price was $4.58. The Company's stock price may
fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of technological innovations or
new products and media properties by the Company or its competitors, changes in
financial estimates and recommendations by securities analysts, the operating
and stock price performance of other companies that investors may deem
comparable, and news reports relating to trends in the Company's markets. In
addition, the stock market in general, and the market prices for
internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price of
the Company's common stock, regardless of its operating performance.
ANTI-TAKEOVER PROVISIONS COULD PREVENT OR DELAY A CHANGE OF CONTROL
Provisions of the Company's amended and restated certificate of
incorporation and amended and restated bylaws and Delaware law could make it
more difficult for a third party to acquire the Company, even if doing so would
be beneficial to the Company's stockholders.
THE COMPANY DOES NOT INTEND TO PAY DIVIDENDS
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any future earnings for funding
growth and, therefore, does not expect to pay any dividends in the foreseeable
future.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 5, 2001, a class action complaint alleging violations of the
federal securities laws was filed in the United States District Court for the
Southern District of New York naming as defendants TheStreet.com, Inc., certain
of its former officers and directors and a current director, and certain
underwriters of the Company's initial public offering (The Goldman Sachs Group,
Inc., Chase H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and
Merrill Lynch Pierce Fenner & Smith, Inc.). The complaint alleges, among other
things, that the underwriters of TheStreet.com's initial public offering
violated the securities laws by failing to disclose certain alleged compensation
arrangements (such as undisclosed commissions or stock stabilization practices)
in the offering's registration statement. TheStreet.com and certain of its
former officers and directors and a current director are named in the complaint
pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"). The plaintiffs seek
damages and statutory compensation against each defendant in an amount to be
determined at trial, plus pre-judgment interest thereon, together with costs and
expenses, including attorneys' fees. Similar complaints have been filed against
over 300 other issuers that have had initial public offerings since 1998 and all
such actions have been included in a single coordinated proceeding. Pursuant to
a Court Order dated October 9, 2002, each of the individual defendants to the
action has been dismissed without prejudice. Additionally, pursuant to a Court
Opinion and Order dated February 19, 2003, the claims against TheStreet.com for
violations of Section 10(b) of the Exchange Act have been dismissed with
prejudice. TheStreet.com remains a party to the action and intends to defend
itself vigorously. However, due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of the litigation. Any
unfavorable outcome of this litigation could have an adverse impact on the
Company's business, financial condition and results of operations.
On February 21, 2003, a complaint alleging defamation PER SE was filed by
Jonathan Hoenig, a hedge fund manager and financial commentator, in the Circuit
Court of Cook County, Illinois, naming as defendants TheStreet.com and James J.
Cramer, its columnist and director. Mr. Hoenig's complaint alleges that Mr.
Cramer and TheStreet.com knowingly made false statements intended to harm his
reputation as a financial advisor and commentator. TheStreet.com believes that
the accusations are without merit and filed a motion to dismiss the complaint on
March 26, 2003. Due to the inherent uncertainties of litigation, TheStreet.com
cannot currently predict with any accuracy its ultimate outcome. An unfavorable
outcome of this litigation could have an adverse impact on TheStreet.com's
business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*3.1 Amended and Restated Certificate of Incorporation
**3.2 Amended and Restated Bylaws
*4.1 Amended and Restated Registration Rights Agreement, dated as of
December 21, 1998, among TheStreet.com and the stockholders named
therein
*4.2 TheStreet.com Rights Agreement
+4.3 Amendment No. 1, dated as of August 7, 2000, to Rights Agreement
++4.4 Specimen Certificate for TheStreet.com's common stock
o10.1 Amended and Restated 1998 Stock Incentive Plan, dated as of May
29, 2002
oo10.2 Annual Incentive Plan
oo10.3(a) Amended and Restated Employment Agreement, dated January 1, 2002,
between James Cramer and TheStreet.com, Inc.
oo10.3(b) Employment Agreement, dated February 22, 2003, between James
Cramer and TheStreet.com, Inc.
oo10.4 Employment Agreement, dated January 1, 2002, between Thomas J.
Clarke, Jr. and TheStreet.com, Inc.
oo10.5 Employment Agreement, dated March 1, 2003, between James Lonergan
and TheStreet.com, Inc.
99.1 Section 1350 Certification of CEO
99.2 Section 1350 Certification of CFO
* Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1 filed February 23, 1999 (File No. 333-72799).
** Incorporated by reference to Exhibits to the Company's 1999 Annual Report
on Form 10-K filed March 30, 2000.
+ Incorporated by reference to Exhibits to the Company's 2000 Annual Report
on Form 10-K filed April 2, 2001.
++ Incorporated by reference to Exhibits to Amendment 3 to the Company's
Registration Statement on Form S-1 filed April 19, 1999.
o Incorporated by reference to Exhibits to the Company's Quarterly Report on
Form 10-Q filed August 14, 2002.
oo Incorporated by reference to Exhibits to the Company's 2002 Annual Report
on Form 10-K filed March 31, 2003.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2003.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THESTREET.COM, INC.
Date: May 15, 2003 By: /s/ Thomas J. Clarke, Jr.
--------------------------
Thomas J. Clarke, Jr.
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2003 By: /s/ Lisa A. Mogensen
-------------------------
Lisa A. Mogensen
Chief Financial Officer
29
CERTIFICATIONS
I, Thomas J. Clarke, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TheStreet.com, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 By: /s/ Thomas J. Carke, Jr.
--------------------------
Thomas J. Clarke, Jr.
Chairman of the Board and
Chief Executive Officer
30
CERTIFICATIONS
I, Lisa A. Mogensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TheStreet.com, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 By: /s/ Lisa A. Mogensen
--------------------------
Lisa A. Mogensen
Chief Financial Officer
31
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*3.1 Amended and Restated Certificate of Incorporation
**3.2 Amended and Restated Bylaws
*4.1 Amended and Restated Registration Rights Agreement, dated as of
December 21, 1998, among TheStreet.com and the stockholders named
therein
*4.2 TheStreet.com Rights Agreement
+4.3 Amendment No. 1, dated as of August 7, 2000, to Rights Agreement
++4.4 Specimen Certificate for TheStreet.com's common stock
o10.1 Amended and Restated 1998 Stock Incentive Plan, dated as of May
29, 2002
oo10.2 Annual Incentive Plan
oo10.3(a) Amended and Restated Employment Agreement, dated January 1, 2002,
between James Cramer and TheStreet.com, Inc.
oo10.3(b) Employment Agreement, dated February 22, 2003, between James
Cramer and TheStreet.com, Inc.
oo10.4 Employment Agreement, dated January 1, 2002, between Thomas J.
Clarke, Jr. and TheStreet.com, Inc.
oo10.5 Employment Agreement, dated March 1, 2003, between James Lonergan
and TheStreet.com, Inc.
99.1 Section 1350 Certification of CEO
99.2 Section 1350 Certification of CFO
* Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1 filed February 23, 1999 (File No. 333-72799).
** Incorporated by reference to Exhibits to the Company's 1999 Annual Report
on Form 10-K filed March 30, 2000.
+ Incorporated by reference to Exhibits to the Company's 2000 Annual Report
on Form 10-K filed April 2, 2001.
++ Incorporated by reference to Exhibits to Amendment 3 to the Company's
Registration Statement on Form S-1 filed April 19, 1999.
o Incorporated by reference to Exhibits to the Company's Quarterly Report on
Form 10-Q filed August 14, 2002.
oo Incorporated by reference to Exhibits to the Company's 2002 Annual Report
on Form 10-K filed March 31, 2003.