PINNACOR INC - 10-Q Quarterly Report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: September 30, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 0-30309

PINNACOR INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE		13-4042678
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

601 WEST 26TH ST., NEW YORK, NY 10001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 691-7900

(FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act)

Yes o No ý

As of November 6, 2003 there were 40,902,178 shares of the Registrant’s common stock outstanding.

PINNACOR INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets (unaudited) – September 30, 2003 and December 31, 2002

	Condensed Consolidated Statements of Operations – Three and nine months ended September 30, 2003 (unaudited) and 2002 (unaudited)

	Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2003 (unaudited) and 2002 (unaudited)

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Changes in Securities and Use of Proceeds

Item 3.	Defaults upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PINNACOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30, 2003			December 31, 2002

ASSETS

CURRENT ASSETS:

Cash and cash equivalents	$	29,040,526		$	15,098,184

Marketable securities	18,690,656			35,611,212

Accounts receivable, net of allowance for doubtful accounts of $570,000 and $620,000 as of September 30, 2003 and December 31, 2002, respectively	4,262,244			5,253,667

Prepaid expenses	1,865,368			1,142,691
Total current assets	53,858,794			57,105,754

PROPERTY AND EQUIPMENT-Net of accumulated depreciation and amortization	4,530,796			5,791,930

GOODWILL	34,887,862			34,874,692

OTHER INTANGIBLE ASSETS-Net of accumulated amortization	1,945,833			2,302,083

OTHER ASSETS	612,585			793,866
TOTAL ASSETS	$	95,835,870		$	100,868,325

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable and accrued expenses	$	5,445,409		$	4,610,897

Accrued restructuring and other expenses	550,413			765,292

Deferred revenue	4,869,331			8,333,593

Current portion of capital lease obligations	1,058,875			1,576,174
Total current liabilities	11,924,028			15,285,956

NONCURRENT LIABILITIES:

Capital lease obligations, less current portion	417,938			1,181,496
Total liabilities	12,341,966			16,467,452

STOCKHOLDERS’ EQUITY:

Common stock, $0.01 par value, 100,000,000 shares authorized and 45,310,095 and 44,848,386 issued and 40,885,316 and 40,539,207 outstanding at September 30, 2003 and December 31, 2002	453,101			448,484

Additional paid-in capital	225,591,769			225,121,104

Warrants	1,708,304			1,708,304

Deferred compensation	(315,799		)	(118,233		)

Treasury stock, 4,424,779 and 4,309,179 shares at September 30, 2003 and December 31, 2002, respectively, at cost	(4,301,299		)	(4,146,680		)

Accumulated deficit	(139,798,581		)	(138,962,620		)

Accumulated other comprehensive income	156,409			350,514
Total stockholders’ equity	83,493,904			84,400,873
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	95,835,870		$	100,868,325

See accompanying notes to condensed consolidated financial statements.

PINNACOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended September 30,								Nine months ended September 30,
	2003				2002				2003					2002
NET REVENUE	$	8,346,782				$	8,050,994			$	25,128,321				$	26,363,796

OPERATING EXPENSES:

Cost of services (excluding depreciation of $102,310, $164,354, $307,443 and $640,647 for the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, respectively, shown below)	2,801,918				2,719,283				8,689,643					8,558,395

Research and development (excluding stock-based compensation of $5,619, $(39,026), $5,977 and $(115,608) for the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, respectively, shown below)	1,850,813				1,760,370				5,425,367					5,737,187

Sales and marketing (excluding stock-based compensation of $(16,427), $(66,615), $(6,337) and $(662,332) for the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, respectively, shown below)	1,476,709				1,972,508				4,657,663					7,501,287

General and administrative (excluding stock-based compensation of $17,936, $139,083, $40,684 and $421,866 for the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, respectively, shown below)	2,542,173				1,511,281				5,541,586					5,397,298

Depreciation and amortization	702,756				906,287				2,389,292					3,234,014

Stock-based compensation	7,128				33,442				40,324					(356,075			)

Restructuring and asset abandonment charge	—				(2,182,600			)	—					2,462,744

Total operating expenses	9,381,497				6,720,571				26,743,875					32,534,850

OPERATING INCOME (LOSS)	(1,034,715		)		1,330,423				(1,615,554			)		(6,171,054			)

OTHER INCOME (EXPENSE):

Interest income	249,463				399,242				912,425					1,570,728

Interest expense	(32,306		)		(59,485			)	(132,832			)		(242,106			)

Total other income, net	217,157				339,757				779,593					1,328,622

NET INCOME (LOSS)	$	(817,558		)		$	1,670,180			$	(835,961		)		$	(4,842,432		)

Basic net income (loss) per common share	$	(0.02		)		$	0.04			$	(0.02		)		$	(0.11		)

Diluted net income (loss) per common share	$	(0.02		)		$	0.04			$	(0.02		)		$	(0.11		)

Basic weighted-average number of shares of common stock outstanding	40,584,120				42,754,640				40,533,744					42,528,508

Effect of dilutive stock options and restricted stock	—				71,566				—					—

Diluted weighted-average number of shares of common stock outstanding	40,584,120				42,826,206				40,533,744					42,528,508

See accompanying notes to condensed consolidated financial statements.

PINNACOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the nine months ended September 30,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(835,961	)	$	(4,842,432	)

Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:

Depreciation and amortization	2,389,292			3,234,014

Stock-based compensation	40,324			(356,075		)

Provision for bad debts	(49,762		)	—

Non-cash portion of restructuring charge	—			3,425,560

Changes in operating assets and liabilities:

Decrease in accounts receivable	1,038,016			2,196,879

(Increase) decrease in prepaid expenses and other assets	(541,396		)	658,257

Increase (decrease) in accounts payable and accrued expenses	1,173,867			(1,087,682		)

Decrease in deferred revenue	(3,464,261		)	(3,747,137		)

Decrease in accrued restructuring expenses	(214,879		)	(3,539,387		)

Net cash used in operating activities	(464,760		)	(4,058,003		)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment	(771,451		)	(493,680		)

Sale of investments and marketable securities	16,719,628			9,814,184

Payment for business acquired, net of cash received	—			(105,650		)
Payment of severance, transaction and other exit costs related to businesses acquired	(349,821		)	(338,586		)

Net cash provided by investing activities	15,598,356			8,876,268

CASH FLOWS FROM FINANCING ACTIVITIES:

Payment of capital lease obligations	(1,280,857		)	(1,890,667		)
Proceeds from exercise of stock options and stock issued under employee stock purchase plan	237,399			548,220

Payment for the repurchase of treasury stock	(154,618		)	(3,105,851		)

Net cash used in financing activities	(1,198,076		)	(4,448,298		)
Effect of exchange rate changes on cash and cash equivalents	6,822			119,911

NET INCREASE IN CASH AND CASH EQUIVALENTS	13,942,342			489,878

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	15,098,184			15,189,440

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	29,040,526		$	15,679,318

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes are as follows:

Interest	$	132,832		$	242,106
Income taxes	$	—		$	—
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Fixed assets acquired under capital lease arrangements	$	—		1,060,137
Issuance of restricted stock grant	$	330,900		$	—

See accompanying notes to condensed consolidated financial statements.

PINNACOR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)

1. BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements of which these notes are part have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, in the opinion of our management, the Condensed Consolidated Financial Statements include all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial information for such periods. These Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2002.

2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 as of January 1, 2003 has not had a material effect on our financial position and operating results.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN 46”). FIN 46 requires that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. The related disclosure requirements are effective immediately. The adoption of this interpretation has not had a significant impact on our consolidated financial position and results of operations.

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The EITF will be effective for fiscal years beginning after June 15, 2003. The Company is currently evaluating the effects of this change on their consolidated financial position and operating results.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods to account for the transition from the intrinsic value method of recognition of stock-based employee compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” to the fair value recognition provisions under SFAS No. 123. SFAS No. 148 provides two additional methods of transition and will no longer permit the SFAS No. 123 prospective method to be used for fiscal years beginning after December 15, 2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the pro-forma effects had the fair value recognition provisions of SFAS No. 123 been used for all periods presented. The Company has adopted the disclosure provisions of SFAS

No. 148 as of December 31, 2002 (see below). The adoption of SFAS No. 148 did not have a significant impact on the Company’s financial position and results of operations.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” and is effective for contracts entered into or modified after June 30, 2003. The adoption of this Statement did not have a material effect on our financial position and operating results.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement will become effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date of this Statement and still existing at the beginning of the interim period of adoption, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute required by this Statement. The adoption of this Statement did not have a material impact on the Company’s consolidated financial position or results of operations.

STOCK-BASED COMPENSATION

In connection with the grant of stock options and restricted stock to employees, we recognized (reversed) deferred stock-based compensation expense of approximately $7,000, $33,000, $40,000 and ($356,000) for the three and nine months ended September 30, 2003 and 2002, respectively. Stock-based compensation is a result of the issuance of stock options to employees, directors and affiliated parties with exercise prices per share determined for financial reporting purposes to be below the fair market value per share of our common stock at the date of the applicable grant. This difference is recorded as a reduction of stockholders’ equity and amortized as non-cash compensation expense on an accelerated basis over the vesting period of the related options. Stock-based compensation for restricted shares is recognized on a straight-line basis. The reversal for the nine months ended September 30, 2002 relates to previously recognized but unearned stock-based compensation of forfeited, unvested stock options granted to terminated employees. Grants of restricted stock are included in common stock outstanding.

At September 30, 2003, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Stock-based employee compensation cost is calculated when certain options were granted under those plans with exercise prices below the fair market value to the market value of the underlying common stock on the date of grant. Stock-based compensation for restricted shares is recognized on a straight-line basis. Stock- based compensation is deferred and amortized to expense generally over the vesting period of such option grants.

SFAS No. 123, “Accounting for Stock-Based Compensation,” provides for a fair value based method of accounting for employee options and options granted to non-employees and measures compensation expense using an option valuation model that takes into account, as of the grant date, the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the options.

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
Net income (loss) applicable to common stockholders as reported	$	(817,558	)	$	1,670,180		$	(835,961	)	$	(4,842,432	)

Add (deduct): Stock-based employee compensation expenses included in reported net income (loss), less stock-based compensation expense related to restricted stock of $27,575, $0, $74,892 and $0 for the three and nine months ended September 30, 2003 and 2002, respectively	(20,447		)	33,442			(34,568		)	(356,075		)

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(586,937		)	(431,985		)	(969,113		)	(1,379,271		)

Net income (loss) applicable to common stockholders, pro forma	$	(1,406,942	)	$	1,271,637		$	(1,839,642	)	$	(6,577,778	)
Earnings per share:
Net income (loss) per common share as reported	$	(0.02	)	$	0.04		$	(0.02	)	$	(0.11	)
Net income (loss) per common share, pro-forma	$	(0.03	)	$	0.03		$	(0.05	)	$	(0.15	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:

	Three months ended September 30,				Nine months ended September 30,
	2003		2002		2003		2002

Risk-free interest rate	1.99	%	3.82	%	2.83	%	3.82	%
Expected lives	3		5		3		5
Expected Volatility	57	%	100	%	47	%	100	%
Expected Dividend Yield	0	%	0	%	2.87	%	0	%

3. OTHER COMPREHENSIVE INCOME (LOSS)

The Company reports other comprehensive income (loss) in accordance with SFAS No. 130, “Reporting Comprehensive Income” which requires the disclosure of comprehensive income (loss). SFAS No. 130 requires that in addition to net income (loss), a Company should report other comprehensive income (loss) consisting of gains and losses that bypass the traditional income statement and are recorded directly into stockholders’ equity on the balance sheet. The components of other comprehensive income (loss) for the Company consist of unrealized gains and losses relating to the translation of foreign currency and unrealized gains and losses relating to the Company’s investments in available-for-sale marketable securities. Comprehensive income (loss) was approximately $(900,000), $1.7 million, $(1.0) million and $(4.8) million for the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002, respectively.

4. ACQUISITIONS

On November 20, 2002, (the “Acquisition Date”) the Company’s wholly-owned subsidiary, Broad Acquisition Corp. completed the acquisition of the operating assets of Inlumen, Inc., (“Inlumen”) a Delaware corporation. The Company has accounted for the combination with Inlumen as a purchase business combination in accordance with SFAS No. 141. Inlumen is a provider of online financial applications, investment analysis tools and market information.

The results of Inlumen’s operations have been included in the Company’s consolidated statement of operations since the Acquisition Date.

The total purchase price was approximately $2.6 million that consisted of approximately $2.4 million cash paid, net of cash received of approximately $66,000 and $198,000 in acquisition expenses. Included in the $2.6 million of cash paid and pursuant to the purchase agreement, approximately $500,000 was placed in escrow for possible future purchase price adjustments. The escrow amount will be released on the anniversary date of the acquisition, pending any purchase price adjustments. The Company funded the acquisition through the use of its cash and cash equivalents.

The Company is in the process of obtaining an independent valuation of the assets and liabilities it has acquired as well as identifying the intangible assets it has acquired in order to finalize its allocation of the purchase price of the transaction. The Company will finalize its valuation as soon as possible or within one year of the acquisition date. The Company’s preliminary allocation of the purchase price is subject to refinement based on the final determination of fair value. The following table summarizes management’s preliminary estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date.

Current assets	$	470,541
Property and equipment	414,087
Goodwill and other intangible assets	2,278,116
Total assets acquired	3,162,744
Liabilities assumed	(537,667		)
Total purchase price	$	2,625,077

The unaudited pro forma information below represents the consolidated results of operations as if the acquisition of Inlumen occurred on January 1, 2002. The unaudited pro forma information has been included for comparative purposes and is not indicative of the results of operations of the consolidated Company had the acquisition of Inlumen occurred as of January 1, 2002, nor is it necessarily indicative of future results.

	Three Months Ended September 30, 2002		Nine Months Ended September 30, 2002
	(in thousands except per share data)		(in thousands except per share data)

Net revenue	$	9,259	$	30,281

Net income (loss) applicable to common stockholders	$	535	$	(9,391	)

Pro forma basic net income (loss) per common share	$	0.01	$	(0.22	)
Pro forma diluted net income (loss) per common share	$	0.01	$	(0.22	)
Basic weighted-average number of shares of common stock outstanding	42,755		42,529
Diluted weighted average number of shares of common stock outstanding	42,826		42,529

5. RESTRUCTURING AND ASSET ABANDONMENT

During the year ended December 31, 2002, the Company recorded a restructuring and asset abandonment charge of $2.4 million. This charge consisted of two components (1) the reversal of accrued lease payments of $2.2 million upon settlement of a property previously restructured in 2001 and (2) a $4.6 million restructuring and asset abandonment charge related to management’s 2002 restructuring plan.

The following table summarizes the components of the Company’s 2002 restructuring and asset abandonment charge:

	Cost		Cash Payments Made		Non-cash Charges Utilized		Balance Remaining at September 30, 2003

Facility shutdowns	$	520,430	$	269,771	$	7,796	$	242,863
Workforce reductions	699,354		699,354		—		—
Asset abandonment charges	3,425,560		—		3,425,560		—
	$	4,645,344	$	969,125	$	3,433,356	$	242,863

The Company recorded charges (reversals) of approximately $0, $(2.2) million, $0 and $2.4 million for the three and nine months ended September 30, 2003 and 2002, respectively.

In September 2002, management of the Company negotiated an early termination of a lease related to a facility previously restructured in 2001. The negotiated terms included a cash payment of approximately $690,000, paid during 2002, and the forfeiture of a $128,000 security deposit. This resulted in a reversal of previously recognized restructuring expense of approximately $2.2 million.

During the quarter ended June 30, 2002, the Company recorded a $4.6 million restructuring and asset abandonment charge. This charge consisted of $3.4 million of asset abandonment charges, workforce reduction costs of approximately $700,000, and the shutdown or other rationalization of certain sales facilities and a data center of approximately $520,000. The 2002 Plan was materially completed as of December 31, 2002.

Rationalization entails the consolidation, shutdown or movement of facilities to achieve more efficient operations. Two locations, a sales office in Europe and a data center in the United States, were affected by these actions. Facility shutdown charges consisted of approximately $520,000 of lease cancellation payments through June 2005.

The workforce reduction charge of $700,000 included involuntary employee separation costs for 34 employees worldwide. The Company reduced headcount in sales and marketing, research and development and general and administrative areas. The affected employees received severance benefits pursuant to established severance policies or by governmentally mandated labor regulations.

As of December 31, 2002, all of the planned employee eliminations were completed. Cash severance payments of approximately $700,000 were made during the fiscal year ended December 31, 2002.

The $3.4 million asset abandonment charge consists of approximately $2.0 million for the abandonment of software modules and related professional services incurred in the design of our computing infrastructure and MIS systems as well as $1.4 million for the abandonment of leasehold improvements, furniture and fixtures, and computer and network equipment in conjunction with our facility and data center closures.

The following table summarizes the components of the Company’s 2001 restructuring charge:

	Cost		Cash Payments Made		Non-cash Charges Utilized		Balance Remaining at September 30, 2003

Facility shutdowns	$	6,028,201	$	3,290,856	$	2,429,795	$	307,550
Workforce reductions	1,297,019		1,297,019		—		—
Asset abandonment charges	4,913,982		—		4,913,982		—
	$	12,239,202	$	4,587,875	$	7,343,777	$	307,550

During fiscal year 2001, we recorded a $12.2 million restructuring charge. This charge consisted of $6.0 million for the shutdown or other rationalization of certain sales facilities, workforce reduction costs of $1.3 million and asset impairment charges of $4.9 million. The 2001 Plan was materially completed at the end of fiscal year 2001.

Rationalization entails the consolidation, shutdown or movement of facilities to achieve more efficient operations. Six locations, located in both the United States and Europe, were affected by these actions. Facility shutdown charges consisted of $4.8 million of lease cancellation payments and $1.2 million for expense recognition related to the termination of warrants issued to lessors.

The workforce reduction charge of $1.3 million included involuntary employee separation costs for 74 employees worldwide. The Company reduced headcount in sales and marketing, research and development and general and administrative areas. The affected employees received severance benefits pursuant to established severance policies or by governmentally mandated labor regulations. All of the planned employee eliminations were completed as of December 31, 2002. Cash severance payments of approximately $975,000 and $322,000 were made during the years ended December 31, 2001 and 2002, respectively.

The $4.9 million asset abandonment charge consists of $3.4 million for the abandonment of software modules and related professional services incurred in the design of our computing infrastructure and MIS systems as well as $1.5 million for the

abandonment of leasehold improvements, furniture and fixtures and computer equipment in conjunction with our facility shutdowns.

6. MARKETABLE SECURITIES

Marketable securities investments as of September 30, 2003 consist of the following:

	COST		UNREALIZED HOLDING GAINS		FAIR VALUE
Corporate Notes and Bonds	$	18,646,146	$	44,510	$	18,690,656

	COST		FAIR VALUE
Due within one year	$	8,531,689	$	8,569,178
Due after one year through five years	10,114,457		10,121,478
Total marketable securities	$	18,646,146	$	18,690,656

Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity as of September 30, 2003. The Company does not hold these securities for speculative or trading purposes.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company operates in two reporting units, Financial Services and Business Information, under one principal business segment, for purposes of evaluating the recoverability of goodwill and indefinite lived intangibles.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 is as follows:

Balance as of January 1, 2003	$	34,874,692
Additional transaction costs related to the Inlumen acquisition	13,170
Balance as of September 30, 2003	$	34,887,862

Goodwill at September 30, 2003 consisted of the following:

Stockpoint acquisition	$	32,609,746
Inlumen acquisition	2,278,116
	$	34,887,862

At September 30, 2003 other intangible assets identified from the acquisition of Stockpoint consisted of the Customer List, which is being amortized over four years with amortization expense being recorded in depreciation and amortization. In addition, the Trade Name, which has an indefinite life is not being amortized, but instead will be assessed for impairment at least annually. The Company had no other intangible assets as of September 30, 2003. The Company is in the process of obtaining an independent valuation and identifying the intangible assets it has acquired from the acquisition of the operating assets of Inlumen. The Company will finalize its valuation as soon as possible or within one year of the acquisition date.

The Company’s intangible assets and accumulated amortization consist of the following as of September 30, 2003:

	As of September 30, 2003				As of September 30, 2002
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization

Amortized Intangible Assets

Customer List	$	1,900,000	$	554,167	$	1,900,000	$	79,197

Unamortized Intangible Assets

Trade Name	$	600,000	$	—	$	600,000	$	—

Amortization charged to expense was approximately $119,000 and $356,000 for the three and nine months ended September 30, 2003. Amortization charged to expense was approximately $79,000 for the three and nine months ended September 30, 2002.

At September 30, 2003, estimated amortization expense for other intangible assets for the next five years is as follows

Year ending December 31,	Estimated Amortization Expense:

2003	$	475,000
2004	$	475,000
2005	$	475,000
2006	$	277,000

The Company’s annual impairment test of goodwill and indefinite lived intangible assets under SFAS No. 142 was conducted as of April 1, 2003. The result of this impairment test determined that these assets were not impaired.

8. BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per share was computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the assumption that options and warrants are included in the calculation of diluted net income per share, except when their effect would be anti-dilutive. Dilution is computed by applying the “treasury stock” method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Additionally, diluted net income per share also includes the unvested shares of restricted stock.

The conversion of 4,877,622 and 4,164,106 outstanding options and warrants outstanding as of September 30, 2003 and 2002 were not considered in the calculation of diluted net loss per share during the three and nine months ended September 30, 2003 and the nine months ended September 30, 2002 as the effect would be anti-dilutive.

9. TREASURY STOCK

During the fiscal year 2002, the Board of Directors authorized a stock buy-back program to repurchase up to 2.0 million shares of the Company’s common stock. During the nine months ended September 30, 2003 the Company repurchased 115,600 shares of common stock at a cost of approximately $150,000. No shares were repurchased for the three months ended September 30, 2003 and the three and six months ended September 30, 2002.

10. RESTRICTED STOCK

The Company granted a total of 30,000 and 225,000 shares of restricted common stock (“Restricted Stock”) to executives of the Company, pursuant to the 2000 Plan, in June 2003 and January 2003, respectively. The Restricted Stock was issued under the terms and conditions set forth in the 2000 Plan. The Company did not receive proceeds from the issuance of the Restricted Stock. One-third of the Restricted Stock vests on the first anniversary of the grant date, and the remaining shares vest in eight equal quarterly installments thereafter, as long as the Company employs the executive. The value of restricted stock issued was $331,000 for the nine months ended September 30, 2003. The amount of stock-based compensation expense recognized was approximately $28,000 and $75,000 for the three and nine months ended September 30, 2003. There was no restricted stock issued, or expensed during the three months ended September 30, 2003 and the three and nine months ended September 30, 2002.

11. PENDING DISPOSITION

On July 22, 2003 the Company entered into a definitive agreement whereby MarketWatch.com will acquire Pinnacor Inc. Under the terms of the agreement, a new company will be formed to combine the businesses of MarketWatch.com and Pinnacor. Each Pinnacor shareholder will have the right to elect either $2.42 in cash or 0.2659 shares of the stock of the combined company for each share of Pinnacor stock, subject to pro-ration. Each MarketWatch.com shareholder will receive one share of stock in the combined company for each share of MarketWatch.com stock. The aggregate consideration paid to Pinnacor shareholders will be $44 million of cash and 6.5 million shares of the stock of the combined company. Based on the closing price and the number of outstanding shares of MarketWatch.com’s common stock on July 22, 2003, the aggregate purchase price for Pinnacor would be $103.2 million and Pinnacor stockholders would own approximately 27 percent of the combined company’s equity. In addition, upon the closing, Pinnacor will nominate two representatives to the new Company’s board of directors. The acquisition is subject to customary closing conditions, including regulatory approval and the approval of the MarketWatch.com and Pinnacor stockholders. The transaction is expected to be completed in the fourth quarter of 2003. See Footnote 12 for pending litigation related to this matter.

12. LITIGATION

There are no material pending legal proceedings to which we are a party, except that on July 24, 2003, a shareholder class action lawsuit, entitled Leifer v. Clark, et al., C.A. No. 20448-NC, was filed against Pinnacor Inc., Pinnacor’s current directors, a Pinnacor officer and MarketWatch.com in the Delaware Chancery Court. The plaintiffs filed an amended complaint on September 17, 2003, which named Holdco, Pine Merger Sub and Maple Merger Sub as defendants to the action. The lawsuit purports to be a class action filed on behalf of holders of Pinnacor’s common stock who allegedly are or will be threatened with injury arising from actions by the defendants in connection with the merger. The lawsuit alleges that Pinnacor’s directors breached their fiduciary duties in proceeding with the merger by agreeing to a proposed purchase price that fails to adequately compensate Pinnacor shareholders for the loss of control of the company. The lawsuit alleges that MarketWatch knowingly aided and abetted these breaches of fiduciary duty in some unspecified way. The lawsuit also alleges that the registration statement on Form S-4, which includes the joint

proxy statement-prospectus, contains material misrepresentations and omissions which render it defective. The lawsuit seeks an unspecified amount of damages and also an injunction against consummation of the proposed transaction. The plaintiff has moved for expedited discovery and has requested the production of documents from Pinnacor and MarketWatch. Pinnacor and MarketWatch have begun producing documents responsive to the plaintiff’s request.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations (MD&A) should be read together with our Condensed Consolidated Financial Statements and related notes contained herein and the information contained in our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the SEC on March 31, 2003. This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.

Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “intends,” “plans,” “will result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projection” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions, and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.

The Company cautions that actual results or outcomes could differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management

cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

THE COMPANY

Pinnacor Inc. is an outsourced provider of information and analytical applications to financial services companies and global corporations.

The Company delivers information-based applications and tools as well as customized data and news packages that help businesses cost-effectively serve their external or internal clients. Pinnacor’s solutions include market data and investment analysis tools for financial services firms; critical business information for the enterprise; and personalized portal applications and messaging services for wireless carriers and ISPs.

RECENT DEVELOPMENTS

There are no material pending legal proceedings to which we are a party, except that on July 24, 2003, a shareholder class action lawsuit, entitled Leifer v. Clark, et al., C.A. No. 20448-NC, was filed against Pinnacor Inc., Pinnacor’s current directors, a Pinnacor officer and MarketWatch.com in the Delaware Chancery Court. The plaintiffs filed an amended complaint on September 17, 2003, which named Holdco, Pine Merger Sub and Maple Merger Sub as defendants to the action. The lawsuit purports to be a class action filed on behalf of holders of Pinnacor’s common stock who allegedly are or will be threatened with injury arising from actions by the defendants in connection with the merger. The lawsuit alleges that Pinnacor’s directors breached their fiduciary duties in proceeding with the merger by agreeing to a proposed purchase price that fails to adequately compensate Pinnacor shareholders for the loss of control of the company. The lawsuit alleges that MarketWatch knowingly aided and abetted these breaches of fiduciary duty in some unspecified way. The lawsuit also alleges that the registration statement on Form S-4, which includes the joint proxy statement-prospectus, contains material misrepresentations and omissions which render it defective. The lawsuit seeks an unspecified amount of damages and also an injunction against consummation of the proposed transaction. The plaintiff has moved for expedited discovery and have requested the production of documents from Pinnacor and MarketWatch. Pinnacor and MarketWatch have begun producing documents responsive to the plaintiff’s request.

CRITICAL ACCOUNTING POLICIES

The SEC has issued disclosure guidance for “critical accounting policies”. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following listing is not intended to be a comprehensive list of all of our accounting policies. The Company’s significant accounting policies are more fully described in Note 2 of the Notes to the Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the SEC on March 31, 2003. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

We have identified the following items as critical accounting policies to our Company:

Revenue recognition: Our revenue recognition policy is significant as our revenue is a key component of our results of operations. The Company principally recognizes revenue pursuant to Staff Accounting Bulletin (SAB) 101, “Revenue Recognition in Financial Statements” as it relates to revenue derived from our Application Service Provider (ASP) model. In accordance with SAB 101, we recognize revenue when a signed contract exists, the fee is fixed and determinable, delivery has occurred and collection of the resulting receivable is probable. Generally, revenue is recognized ratably over the life of the applicable contract.

Goodwill and Other Intangible Assets: The Company’s intangibles consist primarily of goodwill from the acquisitions of Stockpoint, Inc. and Inlumen, Inc. accounted for under the purchase method and other intangible assets identified in the acquisition of Stockpoint. The other intangible assets acquired from Stockpoint were its Trade Name valued at $600,000 and Customer List valued at $1,900,000. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, the goodwill and indefinite lived Trade Name related to the Company’s Stockpoint acquisition have not been periodically amortized during the three and nine months ended September 30, 2003, but instead are assessed for impairment at least annually. The Customer List is carried at cost less accumulated amortization and the Customer List is being amortized on a straight-line basis over its expected life, which is estimated to be four years.

The Company is in the process of obtaining an independent valuation of the operating assets and liabilities it has acquired from Inlumen as well as identifying the intangible assets it has acquired in order to finalize the allocation of the purchase price of the transaction. The Company will finalize its valuation as soon as possible or within one year of the acquisition date. The Company’s preliminary allocation of the purchase price is subject to refinement based on the final determination of fair value. Goodwill from the Company’s Inlumen acquisition has not been periodically amortized.

Costs of Computer Software Developed or Obtained for Internal Use: Costs of computer software developed or obtained for internal use are capitalized while in the application development stage and are expensed while in the preliminary stage and post-implementation stage. The Company amortizes these capitalized costs over the life of the systems, which is estimated to be two years. As of September 30, 2003, the Company had capitalized a total of approximately $2,227,000 of internal development and software purchase costs relating to web-site development and the Company’s proprietary content engine which were incurred during the application development stage. These costs were fully depreciated as of September 30, 2003.

Software Capitalization for Software Sold Externally: Prior to 2002, the Company had developed internal use software to provide their products to customers through our ASP model. During 2002, management decided to market its internal use software as “Actrellis”, a standalone product. The Company sold an insignificant amount of Actrellis software during 2002 and for the nine months ended September 30, 2003.

Use of Estimates: The Company’s preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

REVENUE

We derive our revenue from the sale of hosted applications, customized information, processing and delivery of information as well as set-up, professional services, and maintenance.

Hosted Applications: We sell and host end-user applications that enable our customers to present and analyze information. We sell individual applications such as stock quotes or charts and bundle many of our applications into business solutions that include the Financial Services, Business Information and Access Solutions Product Suites. Our contracts are fixed price and include a variable component if the customer exceeds the minimum page view, per article, real-time stock quote, short messaging services (SMS) or downloadable limit. We recognize the fixed component of revenue on a subscription basis, ratably over the contract term. Any variable component of revenue is recognized in the period the service was rendered.

Customized Information: We provide clients with information, which is provided as either customized data feeds or presented in our applications. We charge clients based on the type and volume of information and recognize this revenue on a subscription basis, ratably over the contract term.

Processing and Delivery: For clients that have direct relationships with information providers and for media clients with direct relationships to their customers, we provide a technology platform for the delivery and integration of information. We charge a processing and delivery fee based on the amount of data delivered. This revenue is recognized on a subscription basis ratably over the contract term.

Set-Up Fees: From time to time, we may charge our customers an explicit one-time set-up fee, or this set-up fee may be bundled within the recurring hosted applications fee. This set-up fee includes charges for the implementation of the client website and building custom filters that enable the customer to receive customized information. Set-up revenue is recognized ratably over the term of the related contract once the product has been implemented.

Professional Services: From time to time, we offer more sophisticated professional services, which include customization of products, systems integration services, the build-out of customized portals and platforms to allow our customers and partners to deliver real time alerts, personalized information including short messaging services (SMS) and other critical information to their subscribers and employees and other special projects including editorial services and consulting. Depending on the nature of the customization, this revenue is generally recognized as the service is performed or over the life of the related contract.

Maintenance: Revenue for technical product support is recognized on a subscription basis, ratably over the contract term.

We record billed amounts due from clients in excess of revenue recognized as deferred revenue on our balance sheet. Our contracts typically have lengths of one or two years. We report our revenue net of allowances and rebates.

COST OF SERVICES

Cost of services consists of royalties to information providers as well as costs for bandwidth, storage of our servers in third-party network data centers, and certain costs associated with the maintenance of our infrastructure. We also include certain payroll and related expenses pertaining to staff and outsourced development associated with client implementation, developing custom applications, performing editorial and quality assurance services, and maintaining our network operations.

We have several different arrangements with information providers. The majority of our contracts are based on royalty fees that are calculated monthly, based on the volume of a provider’s information relayed to our customers or on a per client basis. In certain cases, the contractual agreement is based on fixed fees or subject to a minimum charge. Certain fixed fee arrangements include additional fees at a variable rate once our clients exceed a specified usage volume.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist primarily of salaries and related personnel costs associated with the research, design and development of software applications and services supporting our business. These include engineers that are developing and maintaining our software and infrastructure and our product managers.

Research and development costs are expensed as incurred until technological feasibility has been established for software to be sold in accordance with SFAS No. 86. To date, we believe under our current software engineering processes that the establishment of technological feasibility and general release have substantially coincided. As a result, no software development costs have been capitalized to date for software developed for external sales. For software developed for internal use, expenses are capitalized while in the application development stage and expensed while in the preliminary and post implementation stages in accordance with SOP 98-1.

SALES AND MARKETING EXPENSES

Sales and marketing expenses include costs of sales and marketing personnel, as well as business development and customer support personnel, related overhead, commissions, advertising and promotion expenses, travel and entertainment expenses and other selling and marketing costs.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of personnel and related costs for general corporate functions including accounting, finance, human resources, legal and other administrative functions, as well as provisions for doubtful accounts and bad debt expense.

STOCK-BASED COMPENSATION

In connection with the grant of stock options and restricted stock to employees, we recognized deferred stock-based compensation (income) expense of approximately $7,000, $33,000, $40,000 and ($356,000) for the three and nine months ended September 30, 2003 and 2002, respectively. Stock-based compensation is a result of the issuance of stock options to employees, directors and affiliated parties with exercise prices per share determined for financial reporting purposes to be below the fair market value per share of our common stock at the date of the applicable grant. This difference is recorded as a reduction of stockholders’ equity and amortized as non-cash compensation expense on an accelerated basis over the vesting period of the related options. The income for the nine months ended September 30, 2002 relates to previously recognized but unearned stock-based compensation of forfeited, unvested stock options granted to terminated employees.

In connection with the granting of restricted stock to employees, we recorded deferred stock-based compensation of $331,000, for the nine months ended September 30, 2003. There was no deferred stock-based compensation recorded in connection with the granting of stock options during the three months ended September 30, 2003 and the three and nine months ended September 30, 2002.

RESULTS OF OPERATIONS

The following table sets forth our unaudited results of operations as a percentage of revenue for the periods indicated.

	FOR THE THREE MONTHS ENDED September 30,				FOR THE NINE MONTHS ENDED September 30,
	2003		2002		2003		2002
Revenue	100	%	100	%	100	%	100	%

Operating expenses:

Cost of services (excluding depreciation of 1%, 2%, 1% and 2% for the three and nine months ended September 30, 2003 and 2002 respectively, shown below)	34	%	34	%	35	%	32	%
Research and development (excluding stock-based compensation of 0%, 0%, 0%, and 0% for the three and nine months ended September 30, 2003 and 2002, respectively, shown below)	22		22		21		22

Sales and marketing (excluding stock-based compensation of 0%, (1)%, 0%, and (3)% for the three and nine months ended September 30, 2003 and 2002, respectively, shown below)	18		24		18		28
General and administrative (excluding stock-based compensation of 0%, 1%, 0% and 2% for the three and nine months ended September 30, 2003 and 2002, respectively, shown below)	30		19		22		20
Depreciation and amortization	8		11		10		12
Stock-based compensation	—		—		—		(1	)
Restructuring and asset abandonment charge	—		(27	)	—		10
Total operating expenses	112		83		106		123
Operating loss	(12	)	17		(6	)	(23	)
Other income (expense), net	3		4		3		5
Net income (loss)	(9	)%	21	%	(3	)%	(18	)%

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002

REVENUE. Revenue totaled approximately $8.3 million for the three months ended September 30, 2003, an increase of approximately $200,000 or 2% from $8.1 million for the three months ended September 30, 2002. This increase was primarily due to an 8% increase in the average contract value per customer and the acquisition of Inlumen in November 2002 that accounted for approximately $1.0 million of revenue partially offset by a decrease in the total number of customers for the three months ended September 30, 2003.

COST OF SERVICES. Cost of services increased slightly to approximately $2.8 million for the three months ended September 30, 2003, an increase of approximately $100,000 or 4% from approximately $2.7 million for the three months ended September 30, 2002. As a percentage of revenue, and including Inlumen from its acquisition date, cost of services remained at approximately 34% for the three months ended September 30, 2003 and 2002. This net increase is due to an increase in personnel costs related to client customization allocated from research and development. This was partially offset by cost savings including renegotiated content fee contracts, monthly fees for housing our servers in third-party network data centers and other telecom costs.

RESEARCH AND DEVELOPMENT. Research and development expenses increased slightly to $1.9 million for the three months ended September 30, 2003, an increase of approximately $100,000 or 6% from $1.8 million for the three months ended September 30, 2002. This was due to a decrease in certain personnel costs related to client customization allocated to cost of services. As a percentage of revenue, and including Inlumen from its acquisition date, research and development expenses remained at approximately 22% during the three months ended September 30, 2003 and 2002.

SALES AND MARKETING. Sales and marketing expenses decreased to approximately $1.5 million for the three months ended September 30, 2003, a decrease of approximately $500,000 or 25%, from $2.0 million for the three months ended September 30, 2002. This was due to a decrease in compensation expense and travel and entertainment costs associated with the reduction of our sales force and a decrease in marketing programs. As a percentage of revenue, and including Inlumen from its acquisition date, sales and marketing expenses decreased to approximately 18% for the three months ended September 30, 2003 from approximately 24% for the three months ended September 30, 2002. The decrease in sales and marketing expense as a percentage of revenue resulted primarily from the significant reductions in sales and marketing expenditures outpacing the increase in revenue.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to $2.5 million for the three months ended September 30, 2003, an increase of approximately $1.0 million or 67%, from approximately $1.5 million for the three months ended September 30, 2002. This increase was due to professional fees of approximately $1.1 million in relation to the MarketWatch.com acquisition, announced on July 22, 2003. As a percentage of revenue, and including Inlumen from its acquisition date, general and administrative expenses increased to approximately 30% for the three months ended September 30, 2003 from 19% for the three months ended September 30, 2002. The increase in general and administrative expense as a percentage of revenue resulted primarily from general and administrative expenditures related to deal costs outpacing the increase in revenue.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased to approximately $703,000 for the three months ended September 30, 2003, a decrease of approximately $200,000 or 22%, from approximately $906,000 for the three months ended September 30, 2002. As a percentage of revenue, and including Inlumen from its acquisition date, depreciation and amortization expense decreased to approximately 8% for the three months ended September 30, 2003 from approximately 11% for the three months ended September 30, 2002. The decrease in depreciation and amortization expense as a percentage of revenue was due the depreciation savings from the abandonment of $3.4 million of assets in our restructuring plan completed in June 2002, an overall decrease in the capital assets purchased and certain assets becoming fully depreciated. This was partially offset by the increase in the amortization of our customer list intangible from our Stockpoint acquisition of approximately $40,000 and approximately $69,000 of depreciation expense from capital assets acquired from Inlumen in the statement of operations for the three months ended September 30, 2003.

In connection with the acquisition of Inlumen, we are in the process of obtaining an independent valuation of the assets and liabilities acquired, as well as identifying the intangible assets acquired in order to finalize the allocation of the purchase price of the transaction. The valuation will be finalized as soon as possible or within one year of the acquisition date.

STOCK-BASED COMPENSATION. In connection with the granting of stock options to employees, the Company has recognized deferred stock-based compensation expense of approximately $7,000 and $33,000 for the three months ended September 30, 2003 and 2002, respectively. Included in stock-based compensation expense for the three months ended September 30, 2003 and 2002, the Company has reversed previously recognized deferred stock-based compensation expense of approximately $20,000 and $60,000, respectively. This reversal relates to previously recognized but unearned stock-based compensation of forfeited, unvested stock options granted to terminated employees. In addition, due to the forfeiture of these options during the period, the Company reversed future amortization expense of approximately $28,000 and $339,000, included in the balance sheet as deferred compensation, against paid-in capital for the three months ended September 30, 2003 and 2002, respectively. As a percentage of revenue, stock based compensation was 0% for the three months ended September 30, 2003 and 2002.

RESTRUCTURING AND ASSET ABANDONMENT CHARGE. In September 2002, management negotiated an early termination of a lease related to a facility previously restructured in 2001. This resulted in a reversal of previously recognized restructuring expense of approximately $2.4 million. This was offset by approximately $200,000 of certain other non-recurring expenses related to our name change.

We incurred no such restructuring or asset abandonment charges for the three months ended September 30, 2003.

OTHER INCOME, NET. Other income, net includes interest income from cash and cash equivalents and marketable securities offset by interest expense on capital leases. Other income, net, decreased to approximately $217,000 for the three months ended September 30, 2003, from approximately $340,000 for the three months ended September 30, 2002. This decrease was due to a reduction in overall interest rates and the interest income earned on lower cash balances, cash equivalents and investments in marketable securities.

NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002

REVENUE. Total revenue decreased to $25.1 million for the nine months ended September 30, 2003, a decrease of $1.3 million or 5% from $26.4 million for the nine months ended September 30, 2002. This decrease was primarily due to a decrease in the total number of customers partially offset by a 15% increase in the average contract value per customer and the acquisition of Inlumen in November 2002 that accounted for approximately $3.1 million of revenue for the nine months ended September 30, 2003.

COST OF SERVICES. Cost of services increased to approximately $8.7 million for the nine months ended September 30, 2003, an increase of approximately $100,000 or 1%, from $8.6 million for the nine months ended September 30, 2002. As a percentage of revenue, and including Inlumen from its acquisition date, cost of services increased to 35% for the nine months ended September 30, 2003 from 32% for the nine months ended September 30, 2002. This increase as a percentage of revenue is due to higher cost of services as a percentage of revenues due to an increase in personnel costs related to client customization. This was partially offset by cost savings including renegotiated content fee contracts, monthly fees for housing our servers in third-party network data centers and other telecom costs.

RESEARCH AND DEVELOPMENT. Research and development costs decreased to approximately $5.4 million for the nine months ended September 30, 2003, a decrease of approximately $300,000 or 5%, from $5.7 million for the nine months ended September 30, 2002. This was primarily due to a net decrease in personnel costs as a result of fully realizing the savings from our restructuring plans and a greater allocation of salaries into cost of services related to client customization. As a percentage of revenue, and including Inlumen from its acquisition date, research and development expenses decreased to approximately 21% during the nine months ended September 30, 2003 from approximately 22% for the nine months ended September 30, 2002. This decrease in research and development expense as a percentage of revenue resulted from the reduction in research and development outpacing the decrease in revenue.

SALES AND MARKETING. Sales and marketing expenses decreased to $4.7 million for the nine months ended September 30, 2003, a decrease of approximately $2.8 million or 37%, from $7.5 million for the nine months ended September 30, 2002. This was due to a decrease in marketing programs and a decrease in compensation, travel and entertainment costs associated with the reduction of our sales force. As a percentage of revenue, and including Inlumen from the acquisition date, sales and marketing expenses decreased to approximately 18% for the nine months ended September 30, 2003 from approximately 28% for the nine months ended September 30, 2002. The decrease in sales and marketing expense as a percentage of revenue resulted primarily from the significant reductions in sales and marketing expenditures outpacing the decrease in revenue.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to $5.5 million for the nine months ended September 30, 2003, an increase of approximately $100,000 or 2%, from $5.4 million for the nine months ended September 30, 2002. This was due to a significant decrease in bad debt expense, a decrease in facilities, personnel costs and professional fees, offset by an increase in certain professional fees incurred in relation to the MarketWatch.com acquisition. As a percentage of revenue, and including Inlumen from the acquisition date, general and administrative expenses increased to approximately 22% for the nine months ended September 30, 2003 from approximately 20% for the nine months ended September 30, 2002. The net increase in general and administrative expense as a percentage of revenue resulted primarily from the significant reductions in general and administrative expenditures offset by deal costs in relation to the MarketWatch.com acquisition outpacing the decrease in revenue.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased to approximately $2.4 million for the nine months ended September 30, 2003, a decrease of approximately $800,000 or 25%, from $3.2 million for the nine months ended September 30, 2002. As a percentage of revenue, and including Inlumen from its acquisition date, depreciation and amortization expense decreased to approximately 10% for the nine months ended September 30, 2003 from approximately 12% for the nine months ended September 30, 2002. The decrease in depreciation and amortization expense as a percentage of revenue was due to the depreciation savings from the abandonment of $3.4 million of assets in our restructuring plan completed in June 2002, an overall decrease in the capital assets purchased and certain assets becoming fully depreciated. This was partially offset by the increase in the amortization of our customer list intangible from our Stockpoint acquisition of approximately $277,000 and approximately $207,000 of depreciation expense from capital assets acquired from Inlumen included in the statement of operations for the nine months ended September 30, 2003.

STOCK-BASED COMPENSATION. In connection with the granting of stock options to employees, the Company has recognized deferred stock-based compensation (income) expense of approximately $40,000 and ($356,000) for the nine months ended September 30, 2003 and 2002, respectively. Included in stock-based compensation expense for the nine months ended September 30, 2003 and 2002, the Company has reversed previously recognized deferred stock-based compensation expense of approximately $56,000 and $812,000, respectively. This reversal relates to previously recognized but unearned stock-based compensation of forfeited, unvested stock options granted to terminated employees. In addition, due to the forfeiture of these options during the period, the Company reversed future amortization expense of approximately $93,000 and $1.8 million, included in the balance sheet as deferred compensation, against paid-in capital for the nine months ended September 30, 2003 and 2002, respectively. As a percentage of revenue, stock based compensation increased to 0% for the nine months ended September 30, 2003 from approximately (1)% for the nine months ended September 30, 2002.

RESTRUCTURING AND ASSET ABANDONMENT CHARGE. The Company recognized approximately $0 and $2.5 million in restructuring charges for the nine months ended September 30, 2003 and 2002, respectively. In June 2002 our management took certain actions to further increase operational efficiencies and bring costs in line with revenues. These measures included asset impairment and abandonment charges, the involuntary terminations of 34 employees, from sales and marketing, research and development and general and administrative areas, and the closure of our UK satellite office. As a consequence, we recorded a $4.6 million charge to operations during the second quarter of 2002 for severance-related payments to terminated employees, the accrual of future lease costs (net of estimated sublease income) and the write-off of fixed assets for office locations that were closed or consolidated and assets that were abandoned or impaired. In September 2002, the Company’s management negotiated an early termination of a lease related to a facility previously restructured. This resulted in a reversal of previously recognized restructuring expense of approximately $2.4 million. This was offset by approximately $200,000 of certain other non-recurring expenses related to our name change.

OTHER INCOME, NET. Other income, net includes interest income from cash and cash equivalents and marketable securities offset by interest expense on capital leases. Other income, net, decreased to approximately $780,000 for the nine months ended September 30, 2003, from approximately $1.3 million for the nine months ended September 30, 2002. This decrease was due to a reduction in overall interest rates and the interest income earned on lower cash balances, cash equivalents and investments in marketable securities.

QUARTERLY OPERATING RESULTS

The following table sets forth our unaudited quarterly operating results (in thousands) for each of our last eight quarters. This

information has been derived from our unaudited interim financial statements. In our opinion, this unaudited information has been prepared on a basis consistent with our audited consolidated financial statements elsewhere contained herein and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. Historical results for any quarter are not necessarily indicative of the results to be expected for any future period.

QUARTERLY OPERATING RESULTS

(In thousands except per share data)

	December 31, 2001			March 31, 2002			June 30, 2002			September 30, 2002			December 31, 2002			March 31, 2003			June 30, 2003			September 30, 2003

Total revenue	$	9,405		$	9,411		$	8,902		$	8,051		$	8,203		$	8,341		$	8,440		$	8,347

Operating expenses:

Cost of services (excluding depreciation of $227, $247, $229, $164, $132, $102, $103 and $102 in the fourth quarter of 2001 through the third quarter of 2003, respectively, as shown below)	2,866			2,988			2,851			2,719			2,922			2,958			2,930			2,802

Research and development (excluding stock-based compensation of $236, $23, $(99), $(39), $187, $3, $(3) and $5 in the fourth quarter of 2001 through the third quarter of 2003, respectively, as shown below)	1,893			2,128			1,849			1,760			1,676			1,783			1,792			1,851

Sales and marketing (excludes stock-based compensation of $(196), $(734), $139, $(67), $(266), $17, $(7) and $(16) in the fourth quarter of 2001 through the third quarter of 2003, respectively, as shown below)	3,377			3,116			2,413			1,973			1,551			1,558			1,623			1,477

General and administrative (excludes stock-based compensation of $(296), $141, $141, $139, $246, $24, $(1) and $18 in the fourth quarter of 2001 through the third quarter of 2003, respectively, as shown below)	2,671			2,120			1,766			1,513			1,804			1,608			1,391			2,542
Depreciation and amortization	1,353			1,236			1,091			906			901			878			808			703

Stock-based compensation	(256		)	(570		)	181			33			167			44			(11		)	7

Restructuring and asset abandonment	—			—			4,645			(2,183		)	—			—			—			—
Total operating expenses	11,904			11,018			14,796			6,721			9,021			8,829			8,533			9,382

Operating income (loss)	(2,499		)	(1,607		)	(5,894		)	1,330			(818		)	(488		)	(93		)	(1,035		)

Other income	607			604			385			340			328			327			235			217

Income (loss) attributable to common stockholders	$	(1,892	)	$	(1,003	)	$	(5,509	)	$	1,670		$	(490	)	$	(161	)	$	142		$	(818	)

Basic net income (loss) per common share	$	(0.04	)	$	(0.02	)	$	(0.13	)	$	0.04		$	(0.01	)	$	0.00		$	0.00		$	(0.02	)

Diluted net income (loss) per common share	$	(0.04	)	$	(0.02	)	$	(0.13	)	$	0.04		$	(0.01	)	$	0.00		$	0.00		$	(0.02	)

Weighted-average number of shares used in computation of basic net loss per share	42,256			42,377			42,454			42,755			40,483			40,762			40,470			40,584

Weighted-average number of shares used in computation of diluted net loss per share	42,256			42,377			42,454			42,826			40,483			40,762			41,351			40,584

* Certain reclassifications have been made to the 2001 financial statements to conform with the 2002 and 2003 presentation

BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per share was computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the assumption that options and warrants are included in the calculation of diluted net income per share, except when their effect would be anti-dilutive. Dilution is computed by applying the “treasury stock” method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations through private sales of equity and debt securities and through our initial public offering. Sales of equity securities included $57.9 million of net proceeds from our August 2000 initial public offering of common stock and $46.2 million of net proceeds received from the July 2000 private placement of convertible preferred stock, which converted into common stock upon the completion of our initial public offering. As of September 30, 2003, we had cash and cash equivalents and marketable securities of approximately $47.7 million.

We have commitments to make future payments under various lease agreements for computer and networking equipment and our facilities leases. Future commitments under these leases are as follows:

Contractual Cash Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years

Capital lease obligations	$	1,476,813	$	1,058,875	$	417,938	$	—	$	—
Operating leases	$	4,326,117	$	1,248,362	$	1,505,935	$	1,257,456	$	314,364

We operate from leased premises in New York and satellite offices in San Francisco, Iowa, and Israel. Our current aggregate annual rental obligations under these leases, including our abandoned UK office, are approximately $1.4 million for the year ended December 31, 2003. For the year ended December 31, 2002, we negotiated a favorable buyout of one of our real estate leases for approximately $2.2 million. As a result of this buyout, we reduced our expected future minimum lease payment obligation by approximately $3.3 million. For the nine months ended September 30, 2003 and 2002, our capital expenditures were approximately $771,000 and $494,000, respectively. Capital expenditures were primarily for computers, hardware, software and networking equipment.

As of September 30, 2003, our principal commitments consisted of obligations outstanding under a series of capital leases for computer and networking equipment and our facilities leases. In prior years, we entered into other capital leases for the design and implementation of our financial systems. A leasing company is the beneficiary of a $1.6 million standby letter of credit with a bank securing our lease arrangement with them. At the end of each capital lease term, we have the option to purchase the equipment, typically at the lesser of fair market value or approximately 10% of gross asset value. We presently intend to exercise the purchase option for the majority of the leases. Our landlord is the beneficiary of a $175,000 irrevocable standby letter of credit with a financial institution securing our New York office lease arrangement with them.

For the nine months ended September 30, 2003 and 2002, the net cash used in operating activities was approximately $465,000 and $4.1 million, respectively. The net cash used in operating activities for the nine months ended September 30, 2003 resulted primarily from a net loss of approximately $836,000 an increase in prepaid expenses and other assets of approximately $541,000, a decrease in non-cash deferred revenue of approximately $3.5 million and a decrease in accrued restructuring expenses of approximately $215,000. This was offset by non-cash charges of approximately $2.4 million, a decrease in accounts receivable of approximately $1.0 million and an increase in accounts payable and accrued expenses of $1.2 million. The net cash used in operating activities for the nine months ended September 30, 2002 resulted primarily from net losses of $4.8 million, a decrease in accounts payable and accrued expenses of approximately $1.1 million, a non-cash decrease in deferred revenue of $3.7 million and a decrease in accrued restructuring expenses of approximately $3.5. This was offset by non-cash charges of approximately $6.3 million, a decrease in accounts receivable of approximately $2.2 million and a decrease in prepaid expenses and other current assets of approximately $658,000.

For the nine months ended September 30, 2003 and 2002, the net cash provided by investing activities was approximately $15.6 million and $8.9 million, respectively. The net cash provided by investing activities for the nine months ended September 30, 2003 resulted principally from the proceeds of matured long-term marketable securities reinvested into cash equivalents of approximately $16.7 million, offset by approximately $350,000 for the payments of exit costs associated with the acquisitions of Stockpoint and Inlumen, and approximately $771,000 for the purchase of property and equipment. The net cash provided by investing activities for the nine months ended September 30, 2002 was principally from the sale of marketable securities reclassified into cash and cash equivalents of $9.8 million, offset by approximately $494,000 for the purchase of property and equipment and approximately $339,000 for the payment of severance and exit costs related to the Stockpoint acquisition and $106,000 for the payment of the withheld portion of the Stockpoint purchase price .

For the nine months ended September 30, 2003 and 2002, the net cash used in financing activities was approximately $1.2 million and 4.4 million, respectively. The net cash used in financing activities for the nine months ended September 30, 2003 was primarily from repayments of our capital lease obligations of approximately $1.3 million and approximately $155,000 used for the repurchase of treasury stock offset by proceeds of approximately $237,000 from the exercise of stock options and stock purchases by employees. Net cash used in financing activities for the nine months ended September 30, 2002 was primarily from repayments of our capital lease obligations of $1.9 million and $3.1 million used for the repurchase of treasury stock offset by proceeds of $548,000 from the exercise of stock options.

RISK FACTORS

An investment in our common stock involves a high degree of risk. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us may also impair our operations and business. If we do not successfully address any of the risks described below, there could be a material adverse effect on our financial condition, operating results and business. We cannot assure you that we will successfully address these risks.

You should carefully consider the risks described below before deciding to invest in shares of our common stock. The trading price of our common stock could decline due to any of these risks, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information in this and our other public filings, including our financial statements and the related notes.

RISKS RELATED TO OUR BUSINESS

THE RECENT ANNOUNCEMENT THAT MARKETWATCH.COM, INC. WILL ACQUIRE PINNACOR COULD ADVERSELY AFFECT OUR BUSINESS.

Our business and results of operations could be affected by the announced acquisition of Pinnacor by MarketWatch. On July 23, 2003, we entered into an agreement whereby MarketWatch will acquire Pinnacor. The announcement of the acquisition could have an adverse effect on our revenue if customers delay, defer, or cancel purchases pending consummation of the planned acquisition. While we are attempting to mitigate this risk through communications with our customers, current and prospective customers could be reluctant to purchase our services due to potential uncertainty about the direction of the combined company’s product offerings and its support and service of existing products. To the extent that our announcement of the acquisition creates uncertainty among customers such that one large customer, or a significant group of small customers, delays purchase decisions pending consummation of the planned acquisition, our results of operations and ability to operate profitably could be negatively affected. Decreased revenue and a failure to be profitable could have a variety of adverse effects, including negative consequences to our relationships, and ongoing obligations to, customers, suppliers, business partners, and others with whom we have business relationships.

We may suffer additional consequences if the acquisition by Marketwatch were not to be completed. If such transaction was not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

• We would not realize the benefits we expect from becoming a part of a combined company with MarketWatch, including the potentially enhanced financial and competitive position;

• Activities relating to the merger and related uncertainties may divert our management’s attention from our day-to-day business and cause disruptions among our employees and to our relationships with customers and business partners, thus detracting from our ability to grow revenue and minimize costs and possibly leading to a loss of revenue and market position that we may not be able to regain if the transaction does not occur;

• The market price of our common stock could decline following an announcement that the transaction has been abandoned, to the extent that the current market price reflects a market assumption that the transaction will be completed;

• We could be required to pay MarketWatch a termination fee and provide reimbursement to MarketWatch for certain costs incurred;

• We would remain liable for our costs related to the transaction, such as legal and accounting fees and the financial advisory fees;

• We may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.

In connection with the proposed transaction, we and MarketWatch expect to file a joint proxy statement/prospectus with the SEC. The joint proxy statement/prospectus will be mailed to all holders of our stock and will contain important information about us, MarketWatch and the proposed merger, risks relating to the transaction and the combined company, and related matters. We urge all of our stockholders to read the preliminary joint proxy statement/prospectus available www.pinnacor.com under “Investor Relations – SEC Filings”.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT WILL BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS.

It is difficult to value our business and evaluate our prospects because of our limited operating history. We began our current line of business at the end of 1998 and expanded our line of business with the acquisition of Stockpoint, Inc. in August of 2001 and again with the acquisition of the operating assets of Inlumen, Inc. in November of 2002. Accordingly, we have limited financial and operating data for evaluating our business. In addition, our business model is unproven, which creates a risk that our performance will not meet the expectations of investors.

WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES.

We have incurred operating losses (excluding non-recurring reversals of prior restructuring charges in the third quarter of 2002) in every quarter since we began our current line of business in 1998. While our operating losses have narrowed significantly in recent quarters, our ability to achieve profitability will depend on our ability to generate and sustain higher net sales while maintaining reasonable expense levels. We cannot be certain that if we were to achieve profitability, we would be able to sustain or increase that profitability.

OUR QUARTERLY FINANCIAL RESULTS MAY BE VOLATILE AND COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.

Our revenues and operating results may vary significantly from quarter to quarter. Because of these fluctuations, our results in any quarter may not be indicative of future performance and it may be difficult for investors to properly evaluate our results. It is possible that in some future periods our revenues or earnings may fall below the expectations of investors and result in the market price of our common stock to decline. The factors that may cause our financial results to vary from quarter to quarter include:

• the demand for our services;

• the value, timing and renewal of contracts with customers;

• the amount and timing of operating costs and capital expenditures;

• the performance of our technology;

• actions taken by our competitors, including new product introductions and enhancements; and

• adverse changes in the financial markets.

These factors, some of which are beyond our control, make it difficult to forecast our future revenues or results of operations accurately. A portion of our operating expenses are related to costs that cannot be adjusted quickly. Our operating expense levels reflect, in part, our expectations of future revenues. If actual revenues on a quarterly basis are below management’s expectations, or if our expenses exceed increased revenues, results of operations would be materially adversely affected.

WE DEPEND UPON FINANCIAL MARKETS.

The target clients for our products include a range of financial services organizations, including investment advisors, brokerage firms and banks. The success of many of our clients is intrinsically linked to the financial markets. We believe that demand for our products could be disproportionately affected by fluctuations, disruptions, instability or downturns in the financial markets which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for our products. In addition, a slowdown in formation of new financial services organizations could cause a decline in demand for our products. We believe that a continuing economic downturn in the financial markets would negatively impact the demand for our products, which could have a materially adverse effect on our business and results of operations.

WE FACE INTENSE COMPETITION THAT COULD IMPAIR OUR ABILITY TO RETAIN EXISTING CUSTOMERS, ATTRACT NEW CUSTOMERS AND ACHIEVE PROFITABILITY.

We face significant competition in our markets. We may experience greater competition in the future as we address a wider range of market segments, additional entrants join the market and existing competitors offer new or upgraded products. If we fail to compete successfully, we could lose market share, or be forced to lower our prices or spend more on marketing, which would reduce our margins.

We compete with:

• financial information providers and media companies, who often sell their own information directly to customers;

• application service providers and information aggregators, who aggregate information and either host private-label applications that use that data or deliver that data in the form of feeds to customers;

• financial software vendors, who have already, or may in the future, develop extensions to their software capabilities to be able to manage external information as efficiently as internal information;

• the in-house development staffs of many of our clients, who develop technology solutions often in conjunction with consulting and systems integration firms.

We expect all of these forms of competition to continue to intensify. Some of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than we do. These factors may provide them with significant advantages over us. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with our competitors. Increased competition from these or other competitors could adversely affect our business.

WE DO NOT HAVE A PROVEN TRACK RECORD OF SELLING OUR NEW TECHNOLOGY OFFERINGS.

We have developed and introduced new products and services that have a very limited track record. We cannot assure you whether there will be a significant demand for our new products and services by either our current clients or prospective clients. If the investment we have made in producing and selling these new products and services does not result in significant sales, our business may be materially adversely affected.

SOME OF OUR CUSTOMERS ARE STARTUP COMPANIES WHO POSE CREDIT RISKS. THE FAILURE OF THESE CUSTOMERS TO PAY THEIR BILLS HAS LED TO A LOSS OF REVENUE, A TREND WHICH MAY CONTINUE.

While the majority of our customers are large and mid-sized enterprise customers, a number of our customers are smaller startup companies. Many of these companies have limited operating histories, operate at a loss and have limited cash reserves and limited access to additional capital. With some of these customers, we have experienced difficulties collecting accounts receivable. As a result, our allowance for doubtful accounts as of September 30, 2003 was approximately $570,000. While our bad debt expense has narrowed significantly in recent quarters and, we believe, will continue to narrow, we may continue to encounter these difficulties in the future. If any significant part of our customer base is unable or unwilling to pay our fees for any reason, our business will suffer.

IF WE DO NOT CONTINUE TO DEVELOP OUR TECHNOLOGY, OUR SERVICES MAY QUICKLY BECOME OBSOLETE.

The market we compete in is characterized by rapidly changing technology, evolving industry standards and customer demands and frequent new product introductions and enhancements. To be successful, we will have to continually improve the performance, features and reliability of our products and services. We cannot assure you that our technological development will advance at the pace necessary to sustain our growth.

Additionally, new technologies may require us to alter our technology and products to avoid becoming obsolete. Improving our current products and developing and introducing new products will require additional research and development.

INTERNAL OR THIRD-PARTY SYSTEM OR EQUIPMENT FAILURES COULD ADVERSELY AFFECT OUR BUSINESS.

Our systems and operations are vulnerable to damage or interruption from a variety of factors, including human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage (physical or electronic), computer viruses, vandalism and similar unexpected adverse events. Moreover, while we presently have multiple data centers and have implemented internal redundancy measures, we presently do not have all functionality of all data centers available in multiple sites. We presently have a data center at our Iowa facility, and in addition, we have a data center operation located in facilities owned by third-parties in Carteret, NJ. Any failure of the computer equipment we use or the third-party telecommunications networks and data centers on which we rely for distribution could interrupt or delay our service. This could lead to customers canceling contracts and could damage our reputation, which could limit our ability to attract additional customers, decrease our revenue and lead to a drop in the value of our common stock.

UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS THAT COULD SERIOUSLY HARM OUR BUSINESS.

Our products may contain undetected software errors or failures when first introduced or as new versions are released. Despite testing by us and by current and potential customers, errors may not be found in new products until after delivery to our customers, resulting in loss of, or a delay in market acceptance, which could seriously harm our business.

LOSING MAJOR INFORMATION PROVIDERS MAY LEAVE US WITH INSUFFICIENT INFORMATION TO RETAIN AND ATTRACT CUSTOMERS.

We do not generate original content or data and are therefore highly dependent upon third-party information providers. If we were to lose several of our major information providers and were not able to obtain similar content or data from other sources our

services would be less attractive to customers. In addition, we cannot be certain that we will be able to license content or data from our current or new providers on favorable terms in the future, if at all.

PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED AND EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY BE INADEQUATE, TIME-CONSUMING AND EXPENSIVE.

We regard our trademarks, service marks, copyrights, trade secrets and similar intellectual property as critical to our success. The unauthorized reproduction or other misappropriation of our trademarks or other intellectual property could diminish the value of our proprietary rights or reputation. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. Moreover, potential competitors might be able to develop technologies or services similar to ours without infringing our patents. In addition, if our agreements with employees, consultants and others who participate in product and service development activities are breached, we may not have adequate remedies, and our trade secrets may become known or independently developed by competitors. If this were to occur, our business could be materially and adversely affected.

We rely upon a combination of trademark and copyright law, patent law, trade secret protection and confidentiality and license agreements with our employees, customers and others to protect our proprietary rights. We have received and have filed a number of trademarks and service marks, and have filed several patent applications with the United States Patent and Trademark Office. However, registrations and patents may only be granted in selected cases, and there can be no assurance that we will be able to secure these or additional registrations or patents. Furthermore, policing and enforcement against the unauthorized use of our intellectual property rights could entail significant expenses and could prove difficult or impossible.

THIRD-PARTIES MAY CLAIM THAT WE HAVE BREACHED THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD DIVERT MANAGEMENT’S ATTENTION AND RESULT IN EXPENSE TO DEFEND OR SETTLE CLAIMS.

Third-parties may bring claims of copyright or trademark infringement, patent violation or misappropriation of creative ideas or formats against us with respect to information that we distribute or our technology or marketing techniques and terminology. These claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management attention, require us to enter into costly royalty or licensing arrangements or limit our ability to distribute information or prevent us from utilizing important technologies, ideas or formats.

IF THE INFORMATION WE DISTRIBUTE IS UNLAWFUL OR CAUSES INJURY, WE MAY HAVE TO PAY FINES OR DAMAGES.

The publication or dissemination of information that we have distributed may give rise to liability for defamation, negligence, breach of copyright, patent, trade secret or trademark infringement or other claims or charges based on the nature of the information. As a licensor of this information, we may be directly or indirectly liable to claims or charges of this nature. In addition, we could be exposed to liability arising from the activities of our customers or their users with respect to the unauthorized duplication of, or insertion of inappropriate material into, the information we supply. Although we carry general liability insurance, our insurance may not cover claims of these types or may be inadequate to indemnify us for all liability that may be imposed on us.

IF WE DISTRIBUTE INFORMATION TO UNAUTHORIZED RECIPIENTS, WE MAY HAVE TO PAY DAMAGES TO OUR INFORMATION PROVIDERS.

Our proprietary software technologies enable us to deliver information we receive from participating information providers only to customers who have been authorized to access that information. We might inadvertently distribute information to a customer who is not authorized to receive it, which could subject us to a claim for damages from the information provider or harm our reputation in the marketplace.

LEGAL UNCERTAINTIES AND GOVERNMENT REGULATION OF THE INTERNET COULD INHIBIT GROWTH OF THE INTERNET.

Many legal questions relating to the Internet remain unclear and these areas of uncertainty may be resolved in ways that damage our business. It may take years to determine whether and how existing laws governing matters such as intellectual property, privacy, libel and taxation apply to the Internet. In addition, new laws and regulations that apply directly to Internet communications, commerce and advertising are becoming more prevalent. For example, the U.S. Congress has passed Internet-related legislation concerning copyrights, taxation, and the online privacy of children. As the use of the Internet grows, there may be calls for further regulation, such as more stringent consumer protection laws. Finally, our distribution arrangements and customer contracts could subject us to the laws of foreign jurisdictions in unpredictable ways.

These possibilities could affect us adversely in a number of ways. New regulations could make the Internet less attractive to users, resulting in slower growth in its use and acceptance than we expect. Complying with new regulations could result in additional cost to us, which could reduce our margins, or it could leave us at risk of potentially costly legal action. We may be affected indirectly by legislation that fundamentally alters the practicality or cost-effectiveness of utilizing the Internet, including the cost of transmitting over various forms of network architecture, such as telephone networks or cable systems, or the imposition of various forms of taxation on Internet-related activities. Regulators continue to evaluate the best telecommunications policy regarding the transmission of Internet traffic.

NEW LAWS AND REGULATIONS AFFECTING CORPORATE GOVERNANCE MAY IMPEDE OUR ABILITY TO RETAIN AND ATTRACT COMPETENT BOARD MEMBERS, A CHIEF EXECUTIVE OFFICER, AND A CHIEF FINANCIAL OFFICER.

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002. The Act is designed to enhance corporate responsibility through new corporate governance and disclosure obligations, increase auditor independence, and tougher penalties for securities fraud. In addition, the SEC and NASDAQ have adopted rules in furtherance of the Act and are considering adopting others. This Act and the related new rules and regulations will likely have the effect of increasing the complexity and cost of our company’s corporate governance and the time our executive officers spend on such issues, and this may increase the risk of personal liability for our Board members, chief executive officer, chief financial officer and other executives involved in the governance process. As a result, it may become more difficult to attract and retain Board members, a chief executive officer, a chief financial officer and/or other executives involved in corporate governance.

RISKS RELATED TO OUR SECURITIES

VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.

The stock market in general and the market for technology or Internet-related stocks in particular, has experienced extreme price fluctuations. At times, technology or Internet-related stocks have traded at prices and multiples that are substantially above the historical levels of the stock market in general. Since estimates of the value of technology or Internet-related companies have little historical basis and often vary widely, fluctuations in our stock price may not be correlated in a predictable way to our performance or operating results. Our stock price may also fluctuate as a result of factors that are beyond our control or unrelated to our operating results. We expect our stock price to fluctuate as a result of factors such as:

• variations in our actual or anticipated quarterly operating results or those of our competitors;

• announcements of technological innovations by us or our competitors;

• introduction of new products or services by us or our competitors;

• conditions or trends in the technology or Internet industry;

• changes in the market valuations of other technology or Internet companies;

• announcements by us or our competitors of significant acquisitions; and

• our entry into strategic partnerships or joint ventures.

WE DO NOT INTEND TO PAY DIVIDENDS.

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future.

WE ARE EFFECTIVELY CONTROLLED BY OUR EXECUTIVE OFFICERS AND DIRECTORS AND THE INTERESTS OF THESE STOCKHOLDERS COULD CONFLICT WITH YOUR INTERESTS.

Our executive officers and directors, in the aggregate, beneficially own approximately 32.8% of our outstanding common stock on a fully diluted basis. As a result, these stockholders, if acting together, would be able to exert considerable influence on any matters requiring approval by our stockholders, including the election of directors, amendments to our charter and by-laws and the approval of mergers or other business combination transactions. The ownership position of these stockholders could delay, deter or prevent a change in control of Pinnacor and could adversely affect the price that investors might be willing to pay in the future for shares of our common stock.

RECENT ACCOUNTING PRONOUNCEMENTS

No. 148 as of December 31, 2002 (see below). The adoption of SFAS No. 148 did not have a significant impact on the Company’s financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity - We do not enter into financial instrument transactions for trading purposes. Some of our investments may be subject to market risk which means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate.

Exchange Rate Sensitivity - We consider our exposure to foreign currency exchange rate fluctuations to be minimal as we currently do not have significant amount of revenue and assets denominated in a foreign currency and have minimal expenses paid in a foreign currency. Currently, the exposure is primarily related to revenue and operating expenses in the U.K. Accordingly, we may be subject to exposure from adverse movements in foreign currency exchange rates in relation to these revenues and expenses. We do not currently use derivative financial instruments. As of September 30, 2003 the effect of foreign exchange rate fluctuations was not material.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. Based upon, and as of the date of that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange act of 1934 are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

misrepresentations and omissions which render it defective. The lawsuit seeks an unspecified amount of damages and also an injunction against consummation of the proposed transaction. The plaintiff has moved for expedited discovery and has requested the production of documents from Pinnacor and MarketWatch. Pinnacor and MarketWatch have begun producing documents responsive to the plaintiff’s request.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

From the date of receipt of funds from our initial public offering through September 30, 2003, the net proceeds of the offering have been used to support our domestic sales and marketing activities, our international operations, product development and for general corporate purposes. We also may use a portion of the net proceeds to invest in complementary businesses or technologies. None of the net proceeds from the offering was paid directly or indirectly to any director, officer, general partner or their associates, or to any persons owning 10% or more of any class of equity securities. Pending application of the net proceeds towards one of the above uses, the net proceeds have been invested in interest-bearing, investment-grade securities.

We have never declared or paid any cash dividends on our common or preferred stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal and regulatory restrictions on the payment of dividends and other factors that our board of directors deems relevant.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

On July 22, 2003 the Company and MarketWatch.com, Inc. announced that they signed a definitive agreement whereby MarketWatch.com will acquire Pinnacor. Under the terms of the agreement, a new company will be formed to combine the businesses of MarketWatch.com and Pinnacor. Each Pinnacor stockholder will have the right to elect either $2.42 in cash or 0.2659 shares of the stock of the combined company for each share of Pinnacor stock, subject to proration. Each MarketWatch.com stockholder will receive one share of stock in the combined company for each share of MarketWatch.com stock. The aggregate consideration paid to Pinnacor stockholders will be $44 million in cash and 6.5 million shares of the stock of the combined company. Based on the closing price and the number of outstanding shares of MarketWatch.com’s common stock on July 22, 2003, the aggregate purchase price for Pinnacor would be $103.2 million and Pinnacor stockholders will own approximately 27 percent of the combined company’s equity. In addition, upon the closing, Pinnacor will nominate two representatives to the new company’s board of directors. The acquisition is subject to customary closing conditions, including regulatory approval and the approval of MarketWatch.com and Pinnacor stockholders. The transaction is expected to be completed during the fourth quarter of 2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

2.1 Agreement and Plan of Merger, dated July 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc., Pinnacor Inc., Maple Merger Sub, Inc. and Pine Merger Sub, Inc. (incorporated by reference to Form 8-K filed with the SEC on July 24, 2003).

10.1 Voting and Waiver Agreement, dated July 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc., Pinnacor Inc., CBS Broadcasting Inc. and Pearson International Finance Ltd. (incorporated by reference to Form 8-K filed with the SEC on July 24, 2003)

10.2 Form of Voting Agreement, dated as of July 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc. and each of certain individual stockholders of Pinnacor Inc. (incorporated by reference to Form 8-K filed with the SEC on July 24, 2003)

10.3 Form of Affiliate Agreement, dated as of July 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc. and each of certain individual stockholders of Pinnacor Inc. (incorporated by reference to Form 8-K filed with the SEC on July 24, 2003)

31.1 CEO Section 302 certification

31.2 CFO Section 302 certification

32.1 CEO Section 906 certification

32.2 CFO Section 906 certification

(b) Reports on Form 8-K

On July 24, 2003 the registrant submitted a report on Form 8-K under Item 5 to file a merger agreement, voting agreements, affiliate agreements and a press release in connection with the signing of a definitive merger agreement dated July 22, 2003 whereby MarketWatch.com will acquire the registrant

On July 29, 2003 the registrant submitted a report on Form 8-K under Item 12 to file a press release dated July 29, 2003 reporting its financial results for the second quarter of 2003.

On October 23, 2003 the registrant submitted a report on Form 8-K under Item 12 to file a press release dated October 23, 2003 reporting its financial results for the third quarter of 2003.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PINNACOR, INC.

(Registrant)

SIGNATURE	TITLE	DATE

/s/ KIRK LOEVNER	President, Chief Executive Officer and Chairman	November 14, 2003
Kirk Loevner

/s/ DAVID M. OBSTLER	Chief Financial Officer, Executive Vice President of Corporate Development & Strategy and Treasurer	November 14, 2003
David M. Obstler