Notes
to Consolidated Financial Statements
|
1.
|
DESCRIPTION
OF THE BUSINESS AND BASIS OF
PRESENTATION
|
Business
TheStreet.com,
Inc., together with its wholly owned subsidiaries (collectively, the “Company,”
“our,” “we” or “us”), is a leading financial media company. We distribute our
content through proprietary properties, including our network of Web sites,
email services, mobile devices, podcasts and video programming. We also
syndicate our content for distribution by other media companies and print
publications. Our goal is to provide information and services that empower
a
growing audience of investors and consumers, through our expanding network
of
properties to become the leading online destination where issues and topics
related to life and money intersect.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and for quarterly reports
on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management,
all
adjustments (consisting of normal recurring accruals) considered necessary
for a
fair presentation have been included. Operating results for the three-month
and
nine-month periods ended September 30, 2008 are not necessarily indicative
of
the results that may be expected for the year ending December 31,
2008.
The
consolidated balance sheet at December 31, 2007 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by U.S. generally accepted accounting principles
for complete financial statements.
In
June
2005, the Company committed to a plan to discontinue the operations of its
wholly owned subsidiary, Independent Research Group LLC, which operated the
Company’s securities research and brokerage segment. Accordingly, the operating
results relating to this segment have been segregated from continuing operations
and reported as a separate line item on the consolidated statements of
operations and cash flows.
For
further information, refer to the consolidated financial statements and
accompanying notes included in the Company’s annual report on Form 10-K for the
year ended December 31, 2007, filed with the Securities and Exchange Commission
(“SEC”) on March 14, 2008.
Recent
Accounting Pronouncements
In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159's objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS No. 159 requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the company's
choice to use fair value on its earnings. It also requires entities to display
the fair value of those assets and liabilities for which the company has chosen
to use fair value on the face of the balance sheet. SFAS No. 159 is effective
as
of the beginning of an entity's first fiscal year beginning after November
15,
2007.
The
implementation of SFAS No. 159 did not have a material effect on the Company’s
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. SFAS
No.
157 applies under other accounting pronouncements that require or permit fair
value measurements and accordingly, does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007.
The
implementation of SFAS No. 157 did not have a material effect on the Company’s
consolidated financial statements.
In
October 2008, The FASB issued FSP 157-3 “Determining Fair Value of a Financial
Asset in a Market That is Not Active” (FSP 157-3). FSP 157-3 classified the
application of SFAS No. 157 in an inactive market. It demonstrated how the
fair
value of a financial asset is determined when the market for that financial
asset is inactive. FSP 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued. The implementation
of FSP 157-3 did not have a material effect on the Company’s consolidated
financial statements.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current year
presentation.
Current
asset
In
accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity
Securities”, the Company classifies each investment into one of three
categories, with different accounting for each category. Securities which the
Company has the intent and ability to hold to maturity are classified as
held-to-maturity securities and recorded at amortized cost in current or
noncurrent marketable securities, as appropriate. The effects of amortizing
these securities are recorded in current earnings. Should the Company sell
a
security prior to maturity, any realized gains or losses would be recorded
in
income in the period of sale. The securities purchased by the Company, which
are
U.S. Treasury Bills, mature in less than one year, and are therefore classified
as current on the Company’s Consolidated Balance Sheet as of September 30,
2008.
The
following is a summary of the Company’s held-to-maturity securities at September
30, 2008:
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
Balance
at January 1, 2008
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
U.S.
Government Securities
|
|
|
24,671,292
|
|
|
73,042
|
|
|
24,598,250
|
|
|
Balance
at September 30, 2008
|
|
$
|
24,671,292
|
|
$
|
73,042
|
|
$
|
24,598,250
|
|
Noncurrent
asset
The
Company holds investments in two municipal auction rate securities (“ARS”)
issued by the District of Columbia with a par value of $1.9 million. These
securities pay interest in accordance with their terms at each respective
auction date, typically every 35 days, and mature in the year 2038. The Company
has the ability to hold to maturity these securities and has determined that
these securities are not impaired as of September 30, 2008.
|
3.
|
CAPITALIZED
SOFTWARE AND WEB SITE DEVELOPMENT COSTS
|
The
Company expenses all costs incurred in the preliminary project stage for
software developed for internal use and capitalizes all external direct costs
of
materials and services consumed in developing or obtaining internal-use computer
software in accordance with Statement of Position (“SOP”) 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.” In
addition, for employees who are directly associated with and who devote time
to
internal-use computer software projects, to the extent of the time spent
directly on the project, the Company capitalizes payroll and payroll-related
costs of such employees incurred once the development has reached the
applications development stage. For the three- and nine-month periods ended
September 30, 2008, the Company capitalized software development costs totaling
$123,689 and $483,567, respectively, as compared to $63,589 and $287,827,
respectively, for the three- and nine-month periods ended September 30, 2007.
All costs incurred for upgrades, maintenance and enhancements that do not result
in additional functionality are expensed.
In
December 1999, the Company adopted Emerging Issues Task Force Abstract (“EITF”)
Issue number 00-2, “Accounting for Web Site Development Costs.” EITF 00-2
provides guidance on the accounting for the costs of development of company
Web
sites, dividing the Web site development costs into five stages: (1) the
planning stage, during which the business and/or project plan is formulated
and
functionalities, necessary hardware and technology are determined, (2) the
Web
site application and infrastructure development stage, which involves acquiring
or developing hardware and software to operate the Web site, (3) the graphics
development stage, during which the initial graphics and layout of each page
are
designed and coded, (4) the content development stage, during which the
information to be presented on the Web site, which may be either textual or
graphical in nature, is developed, and (5) the operating stage, during which
training, administration, maintenance and other costs to operate the existing
Web site are incurred. The costs incurred in the Web site application and
infrastructure stage, the graphics development stage and the content development
stage are capitalized; all other costs are expensed as incurred. Amortization
of
capitalized costs will not commence until the project is completed and placed
into service. For the three- and nine-month periods ended September 30, 2008,
the Company capitalized Web site development costs totaling $671,239 and
$1,933,539, respectively, as compared to $512,578 and $1,572,857, respectively,
for the three- and nine-month periods ended September 30, 2007.
Capitalized
software and Web site development costs are amortized using the straight-line
method over the estimated useful life of the software or Web site. Total
amortization expense for the three- and nine-month periods ended September
30,
2008 was $230,791, and $621,655, respectively, as compared to $11,072 and
$34,622, respectively, for the three- and nine-month periods ended September
30,
2007.
Stockpickr
LLC
On
January 3, 2007, the Company formed a joint venture with A.R. Partners, a New
York-based media holding company, to operate a Web site called
Stockpickr - “The Stock Idea Network.” Stockpickr, located at
www.stockpickr.com, allows its members to compare their portfolios to others
in
the network, scan portfolios for investment ideas and open a dialogue with
like-minded investors in a secure environment. A.R. Partners owned 50.1% and
the
Company 49.9% of the venture. On April 25, 2007, the Company announced the
acquisition of the remaining 50.1% stake in the Stockpickr.com business that
it
did not already own. The purchase price of the acquisition was $1.5 million
in
cash and 329,567 unregistered shares of the Company’s common stock, having a
value on the closing date of approximately $3.5 million.
Corsis
Technology Group II LLC
(renamed Promotions.com LLC)
On
August
2, 2007, the Company acquired, through a newly created subsidiary, 100% of
the
membership interests of Corsis Technology Group II LLC (“Corsis”), a leading
provider of custom solutions for advertisers, marketers and content publishers.
The acquisition of Corsis also included the Promotions.com business, which
is a
full-service online promotions agency that implements interactive promotions
campaigns for some of the largest brands in the world. The purchase price of
the
acquisition was approximately $20.7 million. Subsequent to the acquisition,
the
entity was renamed Promotions.com LLC.
Bankers
Financial Products Corporation
On
November 2, 2007, the Company acquired, through a newly created subsidiary,
all
of the outstanding shares of Bankers Financial Products Corporation (“Bankers”).
Bankers, using its trade name RateWatch, offers pricing information (such as
certificates of deposit, IRAs, money market accounts, savings accounts, checking
accounts, home mortgages, home equity loans, credit cards, and auto loans)
to
more than 5,500 financial institutions (including banks, credit unions, internet
banks and mortgage companies). The purchase price of the acquisition was
approximately $25.4 million.
Proforma
Information for all Acquisitions
Unaudited
pro forma consolidated financial information is presented below as if all of
the
acquisitions had occurred as of the first day of the period presented. The
results have been adjusted to account for the amortization of acquired
intangible assets. The pro forma information presented below does not purport
to
present what actual results would have been if the acquisitions had occurred
at
the beginning of such period, nor does the information project results for
any
future period. The unaudited pro forma consolidated financial information should
be read in conjunction with the historical financial information of the Company
included in this report, as well as the historical financial information
included in other reports and documents filed with the Securities and Exchange
Commission. The unaudited pro forma consolidated financial information for
the
three- and nine-month periods ended September 30, 2007 is as
follows:
|
|
|
For the Three Months
Ended September 30, 2007
|
|
For the Nine Months
Ended September 30, 2007
|
|
|
Total
revenue
|
|
$
|
18,550,583
|
|
$
|
56,741,529
|
|
|
Net
income
|
|
$
|
19,641,663
|
|
$
|
26,031,751
|
|
|
Basic
net income per share
|
|
$
|
0.66
|
|
$
|
0.89
|
|
|
Diluted
net income per share
|
|
$
|
0.65
|
|
$
|
0.88
|
|
|
Weighted
average basic shares outstanding
|
|
|
29,721,781
|
|
|
29,124,396
|
|
|
Weighted
average diluted shares outstanding
|
|
|
30,180,404
|
|
|
29,572,124
|
|
|
5.
|
STOCK-BASED
COMPENSATION
|
Under
the
terms of the Company’s 1998 Stock Incentive Plan, as amended (the “1998 Plan”),
8,900,000 shares of common stock of the Company were reserved for awards of
incentive stock options, nonqualified stock options (incentive and nonqualified
stock options are collectively referred to as “Options”), restricted stock,
deferred stock (also referred to as restricted stock units, or RSUs), or any
combination thereof. At the Company’s annual stockholders’ meeting in May 2007,
stockholders of the Company approved TheStreet.com, Inc. 2007 Performance
Incentive Plan (the “2007 Plan”). Under the terms of the 2007 Plan, 1,250,000
shares of common stock of the Company were reserved for awards of incentive
stock options, nonqualified stock options, stock appreciation rights (SARs),
restricted stock, restricted stock units (RSUs) or other stock-based awards.
The
plan also authorized cash performance awards. Additionally, under the terms
of
the 2007 Plan, unused shares authorized for award under the 1998 Plan are
available for issuance under the 2007 Plan. No further awards will be made
under
the 1998 Plan. At the Company’s annual stockholders’ meeting in May 2008,
stockholders of the Company approved an amendment to the 2007 Plan to increase
the number of shares of common stock available for awards by 1,000,000, to
a
total of 2,250,000. Awards may be granted to such directors, employees and
consultants of the Company as the Compensation Committee of the Board of
Directors shall in its discretion select. Only employees of the Company are
eligible to receive grants of equity incentives. Awards that have been granted
under the 1998 Plan and the 2007 Plan generally vest over a three-year period
(except the grant to Mr. Cramer pursuant to his Employment Agreement which
vests
over a five year period) and stock options generally have terms of five years.
As of September 30, 2008, there remained 1,405,864 shares available for future
awards under the 2007 Plan. In connection with awards under both the 1998 and
2007 Plans, the Company recorded $986,076 and $2,639,208 of non-cash
compensation for the three- and nine-month periods ended September 30, 2008,
respectively, as compared to $536,898 and $1,608,479, respectively, for the
three- and nine-month periods ended September 30, 2007.
A
stock
option represents the right, once the option has vested and become exercisable,
to purchase a share of the Company’s common stock at a particular exercise price
set at the time of the grant. An RSU represents the right to receive one share
of the Company’s common stock (or, if provided in the award, the fair market
value of a share in cash) on the applicable vesting date for such RSU. Until
the
stock certificate for a share of common stock represented by an RSU is
delivered, the holder of an RSU does not have any of the rights of a stockholder
with respect to the common stock. The grant of an RSU includes the grant of
dividend equivalents with respect to such RSU. The Company records cash
dividends for RSUs to be paid in the future at an amount equal to the rate
paid
on a share of common stock for each then-outstanding RSU granted. The
accumulated dividend equivalents related to outstanding grants vest on the
applicable vesting date for the RSU with respect to which such dividend
equivalents were credited, and are paid in cash at the time a stock certificate
evidencing the shares represented by such vested RSU is delivered.
As
of
October 1, 2005, the Company elected early adoption of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment: An Amendment of
FASB Statements 123 and 95.” This statement requires that the cost resulting
from all share-based payment transactions be recognized in the financial
statements based upon estimated fair values. SFAS No. 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(“SAB 107”) relating to SFAS No. 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS No. 123(R).
The
Company adopted SFAS No. 123(R) using the modified prospective transition
method. The accompanying consolidated statements of operations for the three-
and nine-month periods ended September 30, 2008 and 2007 reflect the impact
of
SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No.
123(R) for the three- and nine-month periods ended September 30, 2008 was
$986,076 and $2,639,208, respectively, as compared to $536,898 and $1,608,479,
respectively, for the three- and nine-month periods ended September 30, 2007.
As
of September 30, 2008, there was approximately $7.0 million of unrecognized
stock-based compensation expense remaining to be recognized over a
weighted-average period of 2.70 years.
SFAS
No.
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant. The value of stock options granted to employees
and
directors is estimated using an option-pricing model. The value of each
restricted stock unit under the 1998 Plan is equal to the closing price per
share of the Company’s common stock on the trading day immediately prior to the
date of grant. The value of each restricted stock unit under the 2007 Plan
is
equal to the closing price per share of the Company’s common stock on the date
of grant. The value of the portion of the award that is ultimately expected
to
vest is recognized as expense over the requisite service periods. Prior to
the
adoption of SFAS No. 123(R), the Company accounted for stock-based awards to
employees and directors using the intrinsic value method in accordance with
APB
25 as allowed under Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation.” Under the intrinsic value method, no
stock-based compensation expense had been recognized, as the exercise price
of
the Company’s stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
Stock-based
compensation expense recognized in the Company’s Consolidated Statements of
Operations for the three- and nine-month periods ended September 30, 2008 and
2007 includes compensation expense for all share-based payment awards granted
prior to, but not yet vested as of January 1, 2006, based upon the grant date
fair value estimated in accordance with the pro forma provision of SFAS No.
123,
and compensation expense for the share-based payment awards granted subsequent
to January 1, 2006, based upon the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). The Company recognizes compensation
expense for share-based payment awards on a straight-line basis over the
requisite service period of the award. As stock-based compensation expense
recognized in the three- and nine-month periods ended September 30, 2008 and
2007 is based upon awards ultimately expected to vest, it has been reduced
for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated
at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Upon
adoption of SFAS No. 123(R), the Company continued its practice of estimating
the value of employee stock options on the date of grant using the Black-Scholes
option-pricing model. This determination is affected by the Company’s stock
price as well as assumptions regarding expected volatility, risk-free interest
rate, and expected dividends. The weighted-average fair value of employee stock
options granted during the nine months ended September 30, 2008 and 2007 was
$3.56 and $4.06, respectively, using the Black-Scholes model with the
weighted-average assumptions presented below. Because option-pricing models
require the use of subjective assumptions, changes in these assumptions can
materially affect the fair value of the options. The assumptions presented
below
represent the weighted-average value of the applicable assumption used to value
stock options at their grant date. In determining the volatility assumption,
the
Company used a historical analysis of the volatility of the Company’s share
price for the preceding period equal to the expected option lives. The expected
option lives, which represent the period of time that options granted are
expected to be outstanding, were estimated based upon the “simplified” method
for “plain-vanilla” options. The risk-free interest rate assumption is based
upon observed interest rates appropriate for the term of the Company’s employee
stock options. The dividend yield assumption is based on the history and
expectation of future dividend payouts. The periodic expense is determined
based
on the valuation of the options, and at that time an estimated forfeiture rate
is used to reduce the expense recorded. The Company’s estimate of pre-vesting
forfeitures is primarily based on the Company’s historical experience and is
adjusted to reflect actual forfeitures as the options vest.
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Expected
option lives
|
|
|
3.5
years
|
|
|
3.5
years
|
|
|
Expected
volatility
|
|
|
47.57
|
%
|
|
46.67
|
%
|
|
Risk-free
interest rate
|
|
|
2.37
|
%
|
|
4.64
|
%
|
|
Expected
dividend yield
|
|
|
0.83
|
%
|
|
0.94
|
%
|
On
November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. 123(R)-3 “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards.” The Company has elected to adopt the
alternative transition method provided in the FASB Staff Position for
calculating the tax effects of stock-based compensation pursuant to SFAS
No. 123(R). The alternative transition method includes simplified methods
to establish the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and cash flows of the tax
effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS 123(R).
A
summary
of the activity of the 1998 and 2007 Stock Incentive Plans is as
follows:
|
|
|
Shares
Underlying
Awards
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Weighted
Average
Remaining
Contractual
Life
(In
Years)
|
|
|
Awards
outstanding at December 31, 2007
|
|
|
1,926,354
|
|
$
|
6.45
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
399,478
|
|
$
|
11.24
|
|
|
|
|
|
|
|
|
Restricted
stock units granted
|
|
|
148,261
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(107,268
|
)
|
$
|
4.19
|
|
|
|
|
|
|
|
|
Shares
issued under restricted stock units
|
|
|
(118,041
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(5,000
|
)
|
$
|
10.24
|
|
|
|
|
|
|
|
|
Restricted
stock units forfeited
|
|
|
(13,335
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
Awards
outstanding at March 31, 2008
|
|
|
2,230,449
|
|
$
|
7.36
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
172,628
|
|
$
|
8.65
|
|
|
|
|
|
|
|
|
Restricted
stock units granted
|
|
|
310,110
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(31,100
|
)
|
$
|
4.48
|
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(46,835
|
)
|
$
|
10.42
|
|
|
|
|
|
|
|
|
Awards
outstanding at June 30, 2008
|
|
|
2,635,252
|
|
$
|
6.56
|
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(65,367
|
)
|
$
|
9.18
|
|
|
|
|
|
|
|
|
Restricted
stock units forfeited
|
|
|
(5,000
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
Awards
outstanding at September 30, 2008
|
|
|
2,564,885
|
|
$
|
6.50
|
|
$
|
5,516
|
|
|
2.80
|
|
|
Awards
vested and expected to vest at September 30, 2008
|
|
|
2,434,975
|
|
$
|
6.40
|
|
$
|
5,350
|
|
|
2.02
|
|
|
Options
exercisable at September 30, 2008
|
|
|
1,016,664
|
|
$
|
6.21
|
|
$
|
2,005
|
|
|
1.50
|
|
|
Restricted
stock units eligible to be issued at September 30, 2008
|
|
|
0
|
|
$
|
0.00
|
|
$
|
0
|
|
|
3.15
|
|
A
summary
of the status of the Company’s unvested share-based payment awards as of
September 30, 2008 and changes in the nine-month period then ended, is as
follows:
|
Unvested Awards
|
|
Number of
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Shares
underlying awards unvested at December 31, 2007
|
|
|
1,203,127
|
|
$
|
4.66
|
|
|
Shares
underlying options granted
|
|
|
572,106
|
|
$
|
3.56
|
|
|
Shares
underlying restricted stock units granted
|
|
|
458,371
|
|
$
|
9.81
|
|
|
Shares
underlying options vested
|
|
|
(444,671
|
)
|
$
|
3.08
|
|
|
Shares
underlying restricted stock units vested
|
|
|
(118,041
|
)
|
$
|
8.59
|
|
|
Shares
underlying options cancelled
|
|
|
(104,336
|
)
|
$
|
3.61
|
|
|
Shares
underlying restricted stock units forfeited
|
|
|
(18,335
|
)
|
$
|
9.19
|
|
|
Shares
underlying awards unvested at September 30, 2008
|
|
|
1,548,221
|
|
$
|
5.95
|
|
For
the
nine months ended September 30, 2008 and 2007, the total fair value of
share-based awards vested was $2,382,064 and $1,819,444, respectively. For
the
nine months ended September 30, 2008 and 2007, the total intrinsic value of
options exercised was $1,152,566 and $3,507,994, respectively.
Preferred
Stock
Securities
Purchase Agreement
On
November 15, 2007, the Company entered into a Securities Purchase Agreement
(the
“Purchase Agreement”) with TCV VI, L.P., a Delaware limited partnership, and TCV
Member Fund, L.P., a Delaware limited partnership (the
“Purchasers”).
Pursuant
to the Purchase Agreement, the Company sold the Purchasers for aggregate
consideration of $55 million 5,500 shares of its newly-created Series B
Preferred Stock, par value $0.01 per share (“Series B Preferred Stock”), which
are immediately convertible into an aggregate of 3,856,942 shares of the
Company’s Common Stock, par value $0.01 per share (“Common Stock”) at a
conversion price of $14.26 per share, and warrants (the “Warrants”) to purchase
an aggregate of 1,157,083 shares of Common Stock for $15.69 per share.
The
issuance of the Series B Preferred Stock and Warrants to the Purchasers was
completed through a private placement to accredited investors and is exempt
from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the “Securities Act”). The shares of the Series B Preferred Stock, the shares
of the Common Stock issuable upon the conversion of the Series B Preferred
Stock, the Warrants and the shares of the Common Stock issuable upon the
exercise of the Warrants have not been registered under the Securities Act
or
any state securities laws.
Investor
Rights Agreement
On
November 15, 2007, the Company also entered into an Investor Rights Agreement
with the Purchasers pursuant to which, among other things, the Company agreed
to
grant the Purchasers certain rights including the right to require the Company
to file a registration statement within 30 days to register the Common Stock
issuable upon conversion of the Series B Preferred Stock and upon exercise
of
the Warrants and to use its reasonable best efforts to cause the registration
to
be declared effective within 90 days after the date the registration statement
is filed.
Certificate
of Designation
On
November 15, 2007, the Company also filed a Certificate of Designation for
the
Series B Preferred Stock (the “Certificate of Designation”) with the Secretary
of State of the State of Delaware. The Certificate of Designation authorizes
the
Company to issue 5,500 of its 10,000,000 authorized shares of preferred stock
as
shares of Series B Preferred Stock.
The
Series B Preferred Stock was purchased for $10,000 per share (the “Original
Issue Price”). In the event of any Liquidation Event (as defined in the
Certificate of Designation), the holders of Series B Preferred Stock are
entitled to receive, prior to any distribution to the holders of Common Stock,
an amount per share equal to the Original Issue Price, plus any declared and
unpaid dividends.
The
holders of Series B Preferred Stock have the right to vote on any matter
submitted to a vote of the stockholders of the Company and are entitled to
that
number of votes equal to the aggregate number of shares of Common Stock issuable
upon the conversion of such holders’ shares of Series B Preferred Stock. For so
long as 40% of the shares of Series B Preferred Stock remain outstanding, the
holders of a majority of such shares will have the right to elect one person
to
the Company’s board of directors.
The
Series B Preferred Stock automatically converts into an aggregate of 3,856,942
shares of Common Stock in the event that the Common Stock trades on a trading
market at or above a closing price equal to $28.52 per share for 90 consecutive
trading days and any demand registration previously requested by the holders
of
the Series B Preferred Stock has become effective.
Warrants
As
discussed above, the Warrants entitle the Purchasers to purchase an aggregate
of
1,157,083 shares of Common Stock for $15.69 per share. The Warrants expire
on
the fifth anniversary of the date they were first issued, or earlier in certain
circumstances.
Treasury
Stock
In
December 2000 the Company’s Board of Directors authorized the repurchase of up
to $10 million worth of the Company’s common stock, from time to time, in
private purchases or in the open market. In February 2004, the Company’s Board
of Directors approved the resumption of the stock repurchase program under
new
price and volume parameters, leaving unchanged the maximum amount available
for
repurchase under the program. However, the affirmative vote of the holders
of a
majority of the outstanding shares of Series B Preferred Stock, voting
separately as a single class, is necessary for the Company to repurchase its
stock. During the nine-month periods ended September 30, 2008 and 2007, the
Company did not purchase any shares of common stock under the program. Since
inception of the program, the Company has purchased a total of 5,453,416 shares
of common stock at an aggregate cost of $7,321,122. In addition, pursuant to
the
terms of the Company’s 1998 Stock Incentive Plan, as amended (the “1998 Plan”)
and certain additional stock option exercise procedures adopted by the
Compensation Committee of the Board of Directors, in connection with the
exercise of stock options by certain of the Company’s executive officers in
November 2005 and February 2006, and the issuance of restricted stock units
in
January 2008 to Company employees, the Company withheld 231,602, 66,982 and
27,597 shares, respectively, in lieu of payment of the exercise price and/or
the
minimum amount of applicable withholding taxes then due. These shares have
been
recorded as treasury stock.
Stock
Options
Under
the
1998 Plan, 8,900,000 shares of common stock of the Company were reserved for
awards of incentive stock options, nonqualified stock options (incentive and
nonqualified stock options are collectively referred to as “Options”),
restricted stock, deferred stock (also referred to as restricted stock units,
or
RSUs), or any combination thereof. At the Company’s annual stockholders’ meeting
in May 2007, stockholders of the Company approved TheStreet.com, Inc. 2007
Performance Incentive Plan (the “2007 Plan”). Under the terms of the 2007 Plan,
1,250,000 shares of common stock of the Company were reserved for awards of
incentive stock options, nonqualified stock options, stock appreciation rights
(SARs), restricted stock, restricted stock units (RSUs) or other stock-based
awards. The plan also authorized cash performance awards. Additionally, under
the terms of the 2007 Plan, unused shares authorized for award under the 1998
Plan are available for issuance under the 2007 Plan. No further awards will
be
made under the 1998 Plan. At the Company’s annual stockholders’ meeting in May
2008, stockholders of the Company approved an amendment to the 2007 Plan to
increase the number of shares of common stock available for awards by 1,000,000,
to a total of 2,250,000. Awards may be granted to such directors, employees
and
consultants of the Company as the Compensation Committee of the Board of
Directors shall in its discretion select. Only employees of the Company are
eligible to receive grants of equity incentives. Awards that have been granted
under the 1998 Plan and the 2007 Plan generally vest over a three-year period
(except the grant to Mr. Cramer pursuant to his Employment Agreement which
vests
over a five year period) and stock options generally have terms of five years.
As of September 30, 2008, there remained 1,405,864 shares available for future
awards under the 2007 Plan. In connection with awards under both the 1998 and
2007 Plans, the Company recorded $986,076 and $2,639,208 of non-cash
compensation for the three- and nine-month periods ended September 30, 2008,
respectively, as compared to $536,898 and $1,608,479, respectively, for the
three- and nine-month periods ended September 30, 2007.
For
the
three- and nine-month periods ended September 30, 2008, zero and 572,106
options, respectively, and zero and 458,371 restricted stock units,
respectively, were granted to employees of the Company. For the three- and
nine-month periods ended September 30, 2007, 180,000 and 492,500 options,
respectively, and zero and 247,210 restricted stock units, respectively, were
granted to employees of the Company. Additionally, for the three- and nine-month
periods ended September 30, 2008, zero and 138,368 stock options, respectively,
were exercised, and zero and 118,041 shares were issued under restricted stock
unit grants, respectively, yielding approximately zero dollars and $0.6 million,
respectively, to the Company. For the three- and nine-month periods ended
September 30, 2007, 132,032 and 513,365 stock options, respectively, were
exercised, and zero and 46,996 shares were issued under restricted stock unit
grants, respectively, yielding approximately $0.6 million and $2.0 million,
respectively, to the Company.
Issuance
of Common Stock for Acquisitions
On
April
25, 2007, the Company
announced
the acquisition of the remaining 50.1% stake in Stockpickr LLC that it did
not
already own (See Note 4 to the Consolidated Financial Statements).
In
connection with this acquisition, the Company issued 329,567 unregistered shares
of the Company’s common stock.
On
August
2, 2007, the Company
announced
the acquisition of Corsis Technology Group II LLC (renamed Promotions.com LLC)
(See Note 4 to the Consolidated Financial Statements).
In
connection with this acquisition, the Company issued 694,230 unregistered shares
of the Company’s common stock.
On
November 2, 2007, the Company announced the acquisition of Bankers Financial
Products Corporation
(See
Note
4 to the Consolidated Financial Statements).
In
connection with this acquisition, the Company issued 636,081 unregistered shares
of the Company’s common stock.
Dividends
On
September 30, 2008, the Company paid its quarterly cash dividend of $0.025
per
share on its common stock and its convertible preferred stock on a converted
common share basis, to stockholders of record at the close of business on
September 15, 2008. These dividends totaled approximately $0.9
million.
In
December 2001, the Company was named as a defendant in a securities class action
filed in the United States District Court for the Southern District of New
York
related to its initial public offering (“IPO”) in May 1999. The lawsuit also
named as individual defendants certain of its former officers and directors,
James J. Cramer, the Chairman of the Board of the Company, and certain of the
underwriters of the IPO, including The Goldman Sachs Group, Inc., Hambrecht
& Quist LLC (now part of JP Morgan Chase & Co.), Thomas Weisel Partners
LLC, Robertson Stephens Inc. (an investment banking subsidiary of BankBoston
Corp., later FleetBoston Corp., which ceased operations in 2002), and Merrill
Lynch Pierce Fenner & Smith, Inc. Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which are
included in a single coordinated proceeding in the district court (the “IPO
Litigations”). The complaints allege that the prospectus and the registration
statement for the IPO failed to disclose that the underwriters allegedly
solicited and received “excessive” commissions from investors and that some
investors in the IPO allegedly agreed with the underwriters to buy additional
shares in the aftermarket in order to inflate the price of the Company’s stock.
An amended complaint was filed April 19, 2002. The Company and the officers
and
directors were named in the suits pursuant to Section 11 of the Securities
Act
of 1933, Section 10(b) of the Exchange Act of 1934, and other related
provisions. The complaints seek unspecified damages, attorney and expert fees,
and other unspecified litigation costs.
On
July
1, 2002, the underwriter defendants in the consolidated actions moved to dismiss
all of the IPO Litigations, including the action involving the Company. On
July
15, 2002, the Company, along with other non-underwriter defendants in the
coordinated cases, also moved to dismiss the litigation. On February 19, 2003,
the district court ruled on the motions. The district court granted the
Company’s motion to dismiss the claims against it under Rule 10b-5, due to the
insufficiency of the allegations against the Company. The motions to dismiss
the
claims under Section 11 of the Securities Act were denied as to virtually all
of
the defendants in the consolidated cases, including the Company. In addition,
some of the individual defendants in the IPO Litigations, including Mr. Cramer,
signed a tolling agreement and were dismissed from the action without prejudice
on October 9, 2002.
In
June
2003, a proposed collective partial settlement of this litigation was structured
between the plaintiffs, the issuer defendants in the consolidated actions,
the
issuer officers and directors named as defendants, and the issuers’ insurance
companies. On or about June 25, 2003, a committee of the Company’s Board of
Directors conditionally approved the proposed settlement. In June 2004, an
agreement of partial settlement was submitted to the court for preliminary
approval. The court granted the preliminary approval motion on February 15,
2005, subject to certain modifications. On August 31, 2005, the court issued
a
preliminary order further approving the modifications to the settlement and
certifying the settlement classes. The court also appointed the notice
administrator for the settlement and ordered that notice of the settlement
be
distributed to all settlement class members by January 15, 2006. The settlement
fairness hearing occurred on April 24, 2006, and the court reserved decision
at
that time.
While
the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. The Company’s case is not one of these
focus cases. On October 13, 2004, the district court certified the focus cases
as class actions. The underwriter defendants appealed that ruling, and on
December 5, 2006, the Court of Appeals for the Second Circuit reversed the
district court’s class certification decision. On April 6, 2007, the Second
Circuit denied plaintiffs’ petition for rehearing. In light of the Second
Circuit opinion, counsel to the issuers informed the district court that the
settlement with the plaintiffs could not be approved because the defined
settlement class, like the litigation class, could not be certified. The
settlement was terminated pursuant to a Stipulation and Order dated June 25,
2007.
On
August
14, 2007, plaintiffs filed their second consolidated amended class action
complaints against the focus cases and, on September 27, 2007, again moved
for
class certification. On November 12, 2007, certain of the defendants in the
focus cases moved to dismiss plaintiffs’ second amended consolidated class
action complaints. On March 26, 2008, the district court denied the motions
to
dismiss except as to Section 11 claims raised by those plaintiffs who sold
their
securities for a price in excess of the initial offering price and those who
purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008.
We
are
presently defending the action vigorously. Any unfavorable outcome of this
litigation could have an adverse impact on the Company’s business, financial
condition, results of operations, and cash flows.
|
8.
|
NET
INCOME (LOSS) PER SHARE OF COMMON
STOCK
|
Basic
net
income per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average number of common shares and, if dilutive, potential common
shares outstanding during the period. Potential common shares consist of
restricted stock units (using the treasury stock method), the incremental common
shares issuable upon the exercise of stock options (using the treasury stock
method), and the conversion of the Company’s convertible preferred stock and
warrants (using the if-converted method). For the three month period ended
September 30, 2008, no potential common shares were included in the calculation,
as the result was anti-dilutive. For the three months ended September 30, 2007,
approximately 0.4 million options and warrants to purchase common stock were
excluded from the calculation, as the exercise prices were greater than the
average market price of the common stock during the respective periods. For
the
nine month periods ended September 30, 2008 and 2007, approximately 2.4 million
and 0.4 million options and warrants to purchase common stock, respectively,
were excluded from the calculation, as the exercise prices were greater than
the
average market price of the common stock during the respective
periods.
The
following table reconciles the numerator and denominator for the
calculation.
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Basic
net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(1,064,996
|
)
|
$
|
19,765,086
|
|
$
|
3,687,713
|
|
$
|
26,318,901
|
|
|
Loss
on disposal of discontinued operations
|
|
|
(3,079
|
)
|
|
(569
|
)
|
|
(7,895
|
)
|
|
(1,692
|
)
|
|
Preferred
stock cash dividends
|
|
|
(96,424
|
)
|
|
-
|
|
|
(289,272
|
)
|
|
-
|
|
|
Numerator
for basic earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common stockholders
|
|
$
|
(1,164,499
|
)
|
$
|
19,764,517
|
|
$
|
3,390,546
|
|
$
|
26,317,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
30,482,949
|
|
|
29,085,700
|
|
|
30,442,955
|
|
|
28,488,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(0.04
|
)
|
$
|
0.68
|
|
$
|
0.12
|
|
$
|
0.92
|
|
|
Loss
on disposal of discontinued operations
|
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
Preferred
stock cash dividends
|
|
|
(0.00
|
)
|
|
-
|
|
|
(0.01
|
)
|
|
-
|
|
|
Net
(loss) income available to common stockholders
|
|
$
|
(0.04
|
)
|
$
|
0.68
|
|
$
|
0.11
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(1,064,996
|
)
|
$
|
19,765,086
|
|
$
|
3,687,713
|
|
$
|
26,318,901
|
|
|
Loss
on disposal of discontinued operations
|
|
|
(3,079
|
)
|
|
(569
|
)
|
|
(7,895
|
)
|
|
(1,692
|
)
|
|
Preferred
stock cash dividends
|
|
|
(96,424
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Numerator
for diluted earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common stockholders
|
|
$
|
(1,164,499
|
)
|
$
|
19,764,517
|
|
$
|
3,679,818
|
|
$
|
26,317,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
30,482,949
|
|
|
29,085,700
|
|
|
30,442,955
|
|
|
28,488,315
|
|
|
Weighted
average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options and restricted stock units
|
|
|
-
|
|
|
458,623
|
|
|
413,164
|
|
|
447,728
|
|
|
Convertible
preferred stock
|
|
|
-
|
|
|
-
|
|
|
3,856,942
|
|
|
-
|
|
|
Weighted
average diluted shares outstanding
|
|
|
30,482,949
|
|
|
29,544,323
|
|
|
34,713,061
|
|
|
28,936,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(0.04
|
)
|
$
|
0.67
|
|
$
|
0.11
|
|
$
|
0.91
|
|
|
Loss
on disposal of discontinued operations
|
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
Preferred
stock cash dividends
|
|
|
(0.00
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net
(loss) income available to common stockholders
|
|
$
|
(0.04
|
)
|
$
|
0.67
|
|
$
|
0.11
|
|
$
|
0.91
|
|
Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes.
For
the
year ended December 31, 2006, the Company recorded a full valuation allowance
against the deferred tax asset. During the year ended December 31, 2007, the
valuation allowance was reduced by $16 million, as management concluded that
it
was more likely than not that the Company would realize the benefits of this
portion of its deferred tax asset through taxable income to be generated in
future years. Due to the reversal of the valuation allowance, this amount was
reflected as a benefit to that year’s tax provision.
The
Company recognized a deferred tax asset of approximately $44 million and $53
million as of September 30, 2008 and 2007, respectively, primarily relating
to
net operating loss carryforwards of approximately $125 million and $132 million
as of September 30, 2008 and 2007, respectively, available to offset future
taxable income through 2025.
In
accordance with Section 382 of the Internal Revenue Code, the usage of the
Company’s net operating loss carryforward could be limited in the event of a
change in ownership. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. As of September 30, 2008,
the Company recorded a valuation allowance of $28 million against the deferred
tax asset. Based upon a study that analyzed the Company’s stock ownership
activity from inception to December 31, 2007, a change of ownership was deemed
to have occurred in August, 2000 and again in November, 2007. These changes
of
ownership created an annual limitation on the usage of the Company’s losses
which will become available over the years of 2008 to 2025.
In
evaluating the reasonableness of the valuation allowance, management assessed
whether it is more likely than not that some portion, or all, of the deferred
tax asset will not be realized. Ultimately, the realization of deferred tax
assets is dependant upon the generation of future taxable income during those
periods in which the temporary differences become deductible and/or credits
can
be utilized. To this end, management considered that the Company had taxable
income in 2007 and anticipates continued taxable income through the year ended
December 31, 2010. Based on these considerations management believes it is
more
likely than not that the Company will realize the benefit of its deferred tax
asset, net of the September 30, 2008 valuation allowance.
Accrued
expenses as of September 30, 2008 and December 31, 2007 consists of the
following:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Other
liabilities
|
|
$
|
975,236
|
|
$
|
940,170
|
|
|
Professional
fees
|
|
|
419,221
|
|
|
830,831
|
|
|
Payroll
and related costs
|
|
|
419,095
|
|
|
821,529
|
|
|
Advertising
fees
|
|
|
272,018
|
|
|
242,242
|
|
|
Insurance
|
|
|
249,075
|
|
|
222,207
|
|
|
Third
party content and data costs
|
|
|
219,185
|
|
|
197,319
|
|
|
Consulting
fees
|
|
|
173,222
|
|
|
39,232
|
|
|
Tax
related costs
|
|
|
169,690
|
|
|
331,198
|
|
|
Bonuses
|
|
|
92,255
|
|
|
1,001,885
|
|
|
Distribution
fees
|
|
|
47,917
|
|
|
270,378
|
|
|
Statistical
services fees
|
|
|
13,959
|
|
|
109,644
|
|
|
Total
accrued expenses
|
|
$
|
3,050,873
|
|
$
|
5,006,635
|
|
|
11.
|
BUSINESS
CONCENTRATIONS AND CREDIT RISK
|
Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash, cash equivalents, marketable securities, restricted cash
and
accounts receivable. The Company maintains all of its cash, cash equivalents,
marketable securities and restricted cash in six financial institutions,
although substantially all of the balance is within one institution. The Company
performs periodic evaluations of the relative credit standing of the six
institutions. The cash balances are insured by either the FDIC, up to $250,000
per depositor, or the U.S. Department of Treasury’s Temporary Guarantee Program
for Money Market Funds. The Company has cash balances on deposit with two
financial institutions at September 30, 2008 that exceed the insured limit
in
the amount of $1.3 million. In addition, the Company holds investments in
two municipal auction rate securities issued by the District of Columbia with
a
par value of $1.9 million. The Company’s customers are primarily concentrated in
the United States. The Company performs ongoing credit evaluations, generally
does not require collateral, and establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of customers, historical trends
and other information. To date, actual losses have been within management’s
expectations.
For
the
nine months ended September 30, 2008 and 2007, the Company’s top five
advertisers accounted for approximately 26% and 31%, respectively, of its total
advertising revenue. For the nine months ended September 30, 2008 and 2007,
no
advertiser accounted for 10% or more of total advertising revenue.
On
April
23, 2008, the Company made an investment in Debtfolio, Inc., doing business
as
Geezeo, a Web-based personal finance site. Geezeo combines online personal
finance tools in a social networking environment to assist consumers in
achieving their financial goals. Geezeo allows users to track bank accounts
and
credit card balances, as well as investments, mortgages, student loans and
auto
loans. The Company’s initial investment in Geezeo included an investment of $1.2
million for an approximate 13% interest in Geezeo. On October 23, 2008,
the
Company invested $650,000 in additional funds to increase to an 18.5% ownership.
The Company also retains
the
option to purchase the company based on an equity value of $12 million at any
point prior to April 23, 2009. Promotions.com has agreed to provide software
development services to Geezeo on an arm’s length basis.
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Statements
contained in this quarterly report on Form 10-Q relating to plans, strategies,
objectives, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Forward-looking information is inherently subject
to risks and uncertainties, and actual results could differ materially from
those currently anticipated due to a number of factors, which include, but
are
not limited to, the factors set forth under the heading “Risk Factors” and
elsewhere in this quarterly report, and in other documents filed by the Company
with the Securities and Exchange Commission from time to time, including,
without limitation, the Company’s annual report on Form 10-K for the year ended
December 31, 2007. Forward-looking statements may be identified by terms such
as
“may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”,
“believes”, “estimates”, “predicts”, “forecasts”, “potential”, or “continue” or
similar terms or the negative of these terms. Although the Company believes
that
the expectations reflected in the forward-looking statements are reasonable,
the
Company cannot guarantee future results, levels of activity, performance or
achievements. The Company has no obligation to update these forward-looking
statements.
The
following discussion and analysis should be read in conjunction with the
Company’s unaudited consolidated financial statements and notes
thereto.
Overview
TheStreet.com,
Inc., together with its wholly owned subsidiaries (collectively, the “Company,”
“our,” “we” or “us”), is a leading financial media company. We distribute our
content through proprietary properties, including our network of Web sites,
email services, mobile devices, podcasts and video programming. We also
syndicate our content for distribution by other media companies and print
publications. Our goal is to provide information and services that empower
a
growing audience of investors and consumers, through our expanding network
of
properties to become the leading online destination where issues and topics
related to life and money intersect.
The
Company pioneered the electronic publishing of business and investment
information on the Internet through our creation of
TheStreet.com
,
which
launched in 1996 as a paid subscription news and commentary Web site. The
Company generates its revenue from (i) paid services, which includes
subscription revenue, syndication and licensing fees, and information services
revenue, and (ii) marketing services, which includes advertising and interactive
marketing services revenue. In the third quarter of 2008, the Company’s revenue
from paid services and marketing services comprised 61% and 39%, respectively,
of total revenue, compared to 57% and 43%, respectively, in the third quarter
of
2007.
Paid
services revenue includes revenue from our subscription Web sites and
newsletters (“Subscriptions Services”), which are generally targeted at more
experienced investors, as well as syndication, licensing and information
services revenue.
Syndication
and licensing fees include revenue from the licensing and syndication of content
from TheStreet.com Ratings, which tracks the risk adjusted performance of more
than 16,000 mutual funds and more than 6,000 stocks. In addition, TheStreet.com
Ratings uses proprietary quantitative computer models to evaluate the financial
strength of more than 13,000 financial institutions, including life, health
and
annuity insurers, property and casualty insurers, HMOs, Blue Cross Blue Shield
plans, banks and savings and loans. In addition to generating revenue from
the
licensing and syndication of content from TheStreet.com Ratings, the stock,
ETF
and mutual fund ratings have been incorporated into our network of Web sites,
including on the stock quote pages of TheStreet.com, as well as through online
screening tools and regularly published stories.
Paid
services also includes information services revenue from RateWatch,which offers
competitive rate and financial data (including data about certificates of
deposit, IRAs, money market accounts, savings accounts, checking accounts,
home
mortgages, home equity loans, credit cards and auto loans) to more than 5,500
financial institutions. The information is obtained from more than 70,000
financial institutions (including branches), providing a comprehensive
collection of rate information that also serves as the foundation for the data
available on BankingMyWay.com, a free advertising supported web site that
enables consumers to search for the most competitive local and national rates
from the RateWatch data.
We
seek
to grow our paid services business through ongoing tailoring and enhancement
of
our product offerings, external marketing and promotion, and promotion on our
expanding network of Web sites.
Marketing
services revenue includes advertising revenue and interactive marketing services
revenue from our Promotions.com business. We believe that the growth opportunity
of our marketing services business is greater than that of our paid services
business. Through our growing network of online Web sites -- which include
TheStreet.com, Stockpickr.com, MainStreet.com and BankingMyWay.com, along with
our recent minority interest in Geezeo.com -- our goal is to meet our audience
and advertiser demands while becoming the leading independent online network
where issues and topics related to life and money intersect. We plan to
accomplish this goal by providing:
|
|
•
|
A
broader range of content to our audience, including personal finance,
real
estate, politics, entrepreneurship, small business, and luxury living
across a growing network of Web sites;
and
|
|
|
•
|
Innovative,
interactive solutions for our advertisers, across our full range
of
distribution platforms.
|
As
a
result of expanded content offerings and implementation of marketing
relationships with other high-traffic Web sites, we experienced increases in
unique visitors to our network of Web sites. In the third quarter of 2008,
our
network attracted an average of 8.0 million unique visitors per month, an
increase of 27% over the same period in the prior year. The growth in our unique
audience attracted new advertisers to the site and allowed us to expand our
relationships with a number of our existing advertisers. See “Risk
Factors — We May Have Difficulty Increasing Our Advertising Revenue, a
Significant Portion of Which Is Concentrated Among Our Top
Advertisers.”
We
generate advertising revenue from our content through the sale of the following
types of advertising placements:
|
|
•
|
Banner,
tile and interactive advertisement and sponsorship placements in
our
advertising-supported Web sites,
TheStreet.com
,
Stockpickr.com
,
BankingMyWay.com
and
MainStreet.com
,
as well as on our paid subscription site,
RealMoney.com
;
|
|
|
•
|
Advertisement
placements in our free email
newsletters;
|
|
|
•
|
Stand-alone
emails sent on behalf of our advertisers to our registered users;
and
|
|
|
•
|
Advertisements
in
TheStreet.com
TV
and in our Podcasts.
|
We
generate interactive marketing services revenue from Promotions.com, which
we
acquired in August, 2007. Promotions.com implements online and mobile
interactive promotions -- including sweepstakes, instant win games and customer
loyalty programs -- for some of the world’s largest brands, and provides the
Company with the capabilities to deliver these promotions for our advertisers
on
campaigns that run across our network of Web sites.
The
free,
advertising supported content on our network of Web sites, and paid content
offerings through our
RealMoney
Web site
and subscription services, has earned recognition from our audience and our
professional peers, which attracts a growing audience and draws in advertisers
seeking to associate their brands with our content. During 2008, we have
received the following awards and distinctions:
|
|
•
|
New
York Press Club Journalism Award in the Business Internet
category;
|
|
|
|
|
|
|
•
|
New
York Press Club Journalism Award in the Political Coverage Internet
category;
|
|
|
|
|
|
|
•
|
Webby
Award nomination for the Company's recently launched personal finance
Web
site
MainStreet.com
(www.mainstreet.com) for the Best Business Blog of
2008;
|
|
|
•
|
Society
of American Editors and Writers Award for Enterprise Reporting;
and
|
|
|
•
|
Society
of American Editors and Writers Award for
Commentary.
|
Our
goal
is to be a trusted resource to our audience, helping our readers to understand
financial alternatives and providing them with the tools necessary for sound
and
informed financial decision-making. Our strategy is to continue to expand our
network, content offerings and distribution channels to attract a wider consumer
audience to our online network where issues and topics related to life and
money
intersect.
Critical
Accounting Estimates
General
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have
been
prepared in accordance with U.S. generally accepted accounting principles.
The
preparation of these financial statements requires management to make estimates
and assumptions, specifically for the allowance for doubtful accounts
receivable, the useful lives of fixed assets, the valuation of goodwill and
intangible assets, as well as accrued expense estimates that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue
Recognition
The
Company generates its revenue primarily from paid and marketing
services.
Paid
services include subscription fees paid by customers for access to particular
services for the term of the subscription as well as syndication and licensing
revenue. Subscriptions are generally charged to customers’ credit cards or are
directly billed to corporate subscribers. These are generally billed in advance
on a monthly or annual basis. The Company calculates net subscription revenue
by
deducting from gross revenue an estimate of potential refunds from cancelled
subscriptions as well as chargebacks of disputed credit card charges. Net
subscription revenue is recognized ratably over the subscription periods.
Deferred revenue relates to subscription fees for which amounts have been
collected but for which revenue has not been recognized.
Subscription
revenue is subject to estimation and variability due to the fact that, in the
normal course of business, subscribers may for various reasons contact us or
their credit card companies to request a refund or other adjustment for a
previously purchased subscription. Accordingly, we maintain a provision for
estimated future revenue reductions resulting from expected refunds and
chargebacks related to subscriptions for which revenue was recognized in a
prior
period. The calculation of this provision is based upon historical trends and
is
reevaluated each quarter.
Marketing
services include advertising revenue, which is derived from the sale of Internet
sponsorship arrangements and from the delivery of banner, video and email
advertisements on the Company’s Web sites, and is recognized ratably over the
period the advertising is displayed, provided that collection of the resulting
receivable is reasonably assured. Although infrequent, Company obligations
could
include guarantees of a minimum number of times that users of the Company’s Web
sites “click-through” to the advertisers’ Web site, or take additional specified
action, such as opening an account. In such cases, revenue is recognized as
the
guaranteed “click-throughs” or other relevant delivery criteria are
fulfilled.
Marketing
services also include revenue associated with Promotions.com. Promotions.com
revenue is derived principally from management contracts in which Promotions.com
typically provides custom online and mobile interactive solutions for
advertisers, marketers and content publishers. Promotions.com recognizes revenue
related to its services as the services are provided or ratably over the period
of the contract, provided that no significant obligations remain and collection
of the resulting receivable is reasonably assured.
Marketing
services revenue is subject to estimation and variability due to our policy
of
recognizing revenue only for arrangements with customers in which, among other
things, management believes that collectibility of amounts due is reasonably
assured. Promotions.com revenue, specifically, is subject to estimation and
variability due to the judgment involved in estimating the percentage of
completion of a particular contract in determining the amount of revenue to
be
recognized. Accordingly, we estimate and record a provision for doubtful
accounts for estimated losses resulting from the failure of our marketing
services customers to make required payments. This provision is recorded as
a
bad debt expense. A considerable amount of judgment is required in assessing
the
ultimate realization of these receivables, including the current
credit-worthiness of each customer.
Capitalized
Software and Web Site Development Costs
The
Company expenses all costs incurred in the preliminary project stage for
software developed for internal use and capitalizes all external direct costs
of
materials and services consumed in developing or obtaining internal-use computer
software in accordance with Statement of Position (“SOP”) 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.” In
addition, for employees who are directly associated with and who devote time
to
internal-use computer software projects, to the extent of the time spent
directly on the project, the Company capitalizes payroll and payroll-related
costs of such employees incurred once the development has reached the
applications development stage. For the three- and nine-month periods ended
September 30, 2008, the Company capitalized software development costs totaling
$123,689 and $483,567, respectively, as compared to $63,589 and $287,827,
respectively, for the three- and nine-month periods ended September 30, 2007.
All costs incurred for upgrades, maintenance and enhancements that do not result
in additional functionality are expensed.
In
December 1999, the Company adopted Emerging Issues Task Force Abstract (“EITF”)
Issue number 00-2, “Accounting for Web Site Development Costs.” EITF 00-2
provides guidance on the accounting for the costs of development of company
Web
sites, dividing the Web site development costs into five stages: (1) the
planning stage, during which the business and/or project plan is formulated
and
functionalities, necessary hardware and technology are determined, (2) the
Web
site application and infrastructure development stage, which involves acquiring
or developing hardware and software to operate the Web site, (3) the graphics
development stage, during which the initial graphics and layout of each page
are
designed and coded, (4) the content development stage, during which the
information to be presented on the Web site, which may be either textual or
graphical in nature, is developed, and (5) the operating stage, during which
training, administration, maintenance and other costs to operate the existing
Web site are incurred. The costs incurred in the Web site application and
infrastructure stage, the graphics development stage and the content development
stage are capitalized; all other costs are expensed as incurred. Amortization
of
capitalized costs will not commence until the project is completed and placed
into service. For the three- and nine-month periods ended September 30, 2008,
the Company capitalized Web site development costs totaling $671,239 and
$1,933,539 respectively, as compared to $512,578 and $1,572,857, respectively,
for the three- and nine-month periods ended September 30, 2007.
Capitalized
software and Web site development costs are amortized using the straight-line
method over the estimated useful life of the software or Web site. Total
amortization expense for the three- and nine-month periods ended September
30,
2008 was $230,791, and $621,655, respectively, as compared to $11,072 and
$34,622, respectively, for the three- and nine-month periods ended September
30,
2007.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets. The estimated useful life of
computer equipment, computer software and telephone equipment is three years;
of
furniture and fixtures is five years; and of capitalized software and Web site
development costs is variable based upon the applicable project. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
respective lease term or the estimated useful life of the asset. If the useful
lives of the assets differ materially from the estimates contained herein,
additional costs could be incurred, which could have an adverse impact on the
Company’s expenses.
Goodwill
and Other Intangible Assets
In
July
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets.” SFAS No. 142 requires companies to stop amortizing goodwill and certain
other intangible assets with indefinite useful lives. Instead, goodwill and
other intangible assets deemed to have an indefinite useful life will be subject
to an annual review for impairment. Separable intangible assets that are not
deemed to have indefinite useful lives will continue to be amortized over their
estimated useful lives (but with no maximum life).
Upon
the
adoption of SFAS No. 142 in the first quarter of 2002, the Company stopped
the
amortization of goodwill and certain other intangible assets with indefinite
useful lives, and completed the required transitional fair value impairment
test
on its goodwill and certain other intangible assets, the results of which had
no
impact on the Company’s financial statements. The Company’s goodwill and
intangible assets with indefinite useful lives is tested for impairment between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
Based upon annual impairment tests as of October 31, 2007 and September 30,
2006, no impairment was indicated for the Company’s goodwill and intangible
assets with indefinite lives.
Investment
of the Company’s Cash
Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash, cash equivalents, marketable securities and restricted cash.
The Company maintains all of its cash, cash equivalents, marketable securities
and restricted cash in six financial institutions, although substantially all
of
the balance is within one institution. The Company performs periodic evaluations
of the relative credit standing of the six institutions. As of September 30,
2008, the Company’s cash, cash equivalents, marketable securities and restricted
cash are primarily invested directly in U.S. Treasury Bills, or indirectly
in
U.S. Treasury backed securities with a focus on asset protection rather than
yield maximization. The cash balances are insured by either the FDIC, up to
$250,000 per depositor, or the U.S. Department of Treasury’s Temporary Guarantee
Program for Money Market Funds. The Company has cash balances on deposit
with two financial institutions at September 30, 2008 that exceed the insured
limit in the amount of $1.3 million.
The
Company also holds investments in two municipal auction rate securities ("ARS")
issued by the District of Columbia with a par value of $1.9 million. Due to
recent events in credit markets, the auction events, which historically have
provided liquidity for these securities, began failing during the first quarter
of 2008, and there have been no successful auction events for these ARS since
that time. The result of a failed auction is that these ARS holdings will
continue to pay interest in accordance with their terms at each respective
auction date; however, liquidity of the securities will be limited until there
is a successful auction, the issuer redeems the securities, the securities
mature or until such time as other markets for these ARS holdings
develop.
Credit
Risks of Customers and Business Concentrations
The
Company’s customers are primarily concentrated in the United States and the
Company carries accounts receivable balances. The Company performs ongoing
credit evaluations, generally does not require collateral, and establishes
an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, actual losses
have been within management’s expectations.
For
the
three- and nine-month periods ended September 30, 2008, the Company’s top five
advertisers accounted for approximately 33% and 26%, respectively, of its total
advertising revenue as compared to approximately 29% and 31%, respectively,
for
the three- and nine-month periods ended September 30, 2007. For the three-
and
nine-month periods ended September 30, 2008 and 2007, no advertiser accounted
for 10% or more of total advertising revenue.
Stock-based
Compensation
As
of
October 1, 2005, the Company elected early adoption of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment: An Amendment of
FASB Statements 123 and 95.” This statement requires that the cost resulting
from all share-based payment transactions be recognized in the financial
statements based upon estimated fair values. SFAS No. 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(“SAB 107”) relating to SFAS No. 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS No. 123(R).
The
Company adopted SFAS No. 123(R) using the modified prospective transition
method. Stock-based compensation expense recognized under SFAS No. 123(R) for
the three- and nine-month periods ended September 30, 2008 was $986,076 and
$2,639,208, respectively, as compared to $536,898 and $1,608,479, respectively,
for the three- and nine-month periods ended September 30, 2007. As of September
30, 2008, there was approximately $7.0 million of unrecognized stock-based
compensation expense remaining to be recognized over a weighted-average period
of 2.70 years.
Upon
adoption of SFAS No. 123(R), the Company continued its practice of estimating
the value of employee stock options on the date of grant using the Black-Scholes
option-pricing model. This determination is affected by the Company’s stock
price as well as assumptions regarding expected volatility, risk-free interest
rate, and expected dividends. The weighted-average fair value of employee stock
options granted during the nine months ended September 30, 2008 and 2007 was
$3.56 and $4.06, respectively, using the Black-Scholes model with the following
weighted-average assumptions. Because option-pricing models require the use
of
subjective assumptions, changes in these assumptions can materially affect
the
fair value of the options. The assumptions presented in the table below
represent the weighted-average value of the applicable assumption used to value
stock options at their grant date. In determining the volatility assumption,
the
Company used a historical analysis of the volatility of the Company’s share
price for the preceding period equal to the expected option lives. The expected
option lives, which represent the period of time that options granted are
expected to be outstanding, were estimated based upon the “simplified” method
for “plain-vanilla” options. The risk-free interest rate assumption is based
upon observed interest rates appropriate for the term of the Company’s employee
stock options. The dividend yield assumption is based on the history and
expectation of future dividend payouts.
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Expected
option lives
|
|
|
3.5
years
|
|
|
3.5
years
|
|
|
Expected
volatility
|
|
|
47.57
|
%
|
|
46.67
|
%
|
|
Risk-free
interest rate
|
|
|
2.37
|
%
|
|
4.64
|
%
|
|
Expected
dividend yield
|
|
|
0.83
|
%
|
|
0.94
|
%
|
As
stock-based compensation expense recognized in the Consolidated Statements
of
Operations is based on awards that are ultimately expected to vest, it has
been
reduced for expected forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures were estimated
based on historical experience.
If
factors change and the Company employs different assumptions in the application
of SFAS No. 123(R) in future periods, the compensation expense that the Company
records under SFAS No. 123(R) may differ significantly from what it has recorded
in the current period.
Income
Taxes
The
Company accounts for its income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets or liabilities of a change in tax
rates is recognized in the period that the tax change occurs. SFAS No. 109
also
requires that deferred tax assets be reduced by a valuation allowance if it
is
more likely than not that some or all of the deferred tax asset will not be
realized.
Deferred
tax assets pertaining to windfall tax benefits on exercise of share
based awards and the corresponding credit to additional paid-in capital are
recorded if the related tax deduction reduces tax payable. The Company has
elected the “with-and -without approach” regarding ordering of windfall tax
benefits to determine whether the windfall tax benefit did reduce taxes payable
in the current year. Under this approach, the windfall tax benefits would be
recognized in additional paid-in capital only if an incremental tax benefit
is
realized after considering all other tax benefits presently available to the
Company.
Results
of Operations
Comparison
of Three Months Ended September 30, 2008 and September 30,
2007
Revenue
|
|
|
For the Three Months Ended September 30,
|
|
|
|
|
|
|
|
2008
|
|
|
Percent
of
Total
Revenue
|
|
|
2007
|
|
|
Percent
of
Total
Revenue
|
|
|
Percent
Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
services
|
|
$
|
10,244,212
|
|
|
61
|
%
|
$
|
9,188,329
|
|
|
57
|
%
|
|
11
|
%
|
|
Marketing
services
|
|
|
6,478,367
|
|
|
39
|
%
|
|
6,930,030
|
|
|
43
|
%
|
|
-7
|
%
|
|
Total
revenue
|
|
$
|
16,722,579
|
|
|
100
|
%
|
$
|
16,118,359
|
|
|
100
|
%
|
|
4
|
%
|
Paid
services
.
Paid
services revenue is derived from annual and monthly subscriptions to the
Company’s 15 subscription newsletter services and our paid Web site
RealMoney.com, through the syndication and licensing of our content to third
parties, and information services revenue attributable to RateWatch.
Subscription revenue is recognized ratably over the subscription period, while
syndication, licensing and information services revenue is recognized over
the
contract period.
|
|
|
For the Three Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Paid
services:
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
7,432,481
|
|
$
|
8,339,087
|
|
|
-11
|
%
|
|
Syndication,
licensing
and
information services
|
|
|
2,811,731
|
|
|
849,242
|
|
|
231
|
%
|
|
Total
|
|
$
|
10,244,212
|
|
$
|
9,188,329
|
|
|
11
|
%
|
Subscription
revenue for the three months ended September 30, 2008 decreased by 11% when
compared to the three months ended September 30, 2007. The decrease is partially
attributable to the outsourcing of TheStreet.com Ratings business to Grey House
Publishing in the second quarter of 2007. Prior to the outsourcing of this
business, subscription revenue included the full sales price of the product.
Revenue now reflects a fee based upon a percentage of the sales price, which
is
recorded as licensing revenue. Subscription revenue from TheStreet.com Ratings
totaled approximately $260,000 in the three months ended September 30, 2007,
as
compared to approximately $12,000 in the three months ended September 30, 2008.
Excluding the impact of the Ratings outsourcing, revenue specifically from
our
Subscription Services business decreased 8%, which was primarily related to
an
8% decrease in subscribers to our Subscription Services from approximately
85,700 as of September 30, 2007 to approximately 79,200 as of September 30,
2008. The performance of the subscription business is impacted by the
performance of the stock market. Prolonged declines in the stock market reduce
the size of the potential market for subscribers as more investors turn away
from the stock market in their search for investment growth and preservation
of
principal. While the retention rates across our subscription products remain
strong, with renewal rates during the current quarter of 65% and 90% for annual
and monthly subscribers, respectively, our lower acquisition rates across our
subscriber marketing channels resulted in lower year over year subscribers
and
subscription revenue.
For
the
three months ended September 30, 2008, approximately 78% of the Company’s net
subscription revenue was derived from annual subscriptions, as compared to
approximately 70% for the three months ended September 30, 2007. The Company
calculates net subscription revenue by deducting from gross revenue an estimate
of potential refunds from cancelled subscriptions as well as chargebacks of
disputed credit card charges. Refunds and chargebacks totaled less than 1%
of
gross subscription revenue during each of the three months ended September
30,
2008 and 2007.
Syndication,
licensing and information services revenue for the three months ended September
30, 2008 increased by 231% when compared to the three months ended September
30,
2007. The increase is primarily the result of the information services revenue
from the operations of RateWatch, which was acquired on November 2, 2007 and
thus did not contribute revenue during the earlier period. Additional licensing
revenue is derived from the TheStreet.com Ratings license agreement with Grey
House Publishing as noted above and other syndication of TheStreet.com Ratings
data.
Marketing
services
.
Marketing services revenue is derived from the placement of advertisements
on
the Company’s Web sites, email newsletters, video content and podcasts, as well
as interactive marketing services for which the Company develops online and
mobile interactive solutions for advertisers, marketers and content
publishers.
|
|
|
For the Three Months Ended
September
30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Marketing
services:
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
5,436,633
|
|
$
|
4,610,579
|
|
|
18
|
%
|
|
Interactive
marketing services
|
|
|
1,041,734
|
|
|
2,319,451
|
|
|
-55
|
%
|
|
Total
|
|
$
|
6,478,367
|
|
$
|
6,930,030
|
|
|
-7
|
%
|
Advertising
revenue for the three months ended September 30, 2008 increased by 18% when
compared to the three months ended September 30, 2007. The increase is primarily
attributable to the effective monetization of a 27% increase in the average
number of monthly unique visitors to the Company’s Web sites, when compared to
the three months ended September 30, 2007. The increase in reach, combined
with
continued strength in our audience demographics, and the ability to create
new
and unique customized advertising solutions enabled us to expand relationships
with existing advertisers, acquire new financial advertisers and attract
increasing numbers of non-endemic advertisers.
Interactive
marketing services revenue for the three months ended September 30, 2008
decreased by 55% when compared to the three months ended September 30, 2007.
Our
Promotions.com business was negatively impacted in the quarter, as current
and
prospective clients delayed promotions and interactive marketing initiatives
beyond the third quarter.
Operating
Expense
|
|
|
For the Three Months Ended September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
(*)
|
|
2007
|
|
(*)
|
|
Change
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
$
|
8,405,002
|
|
|
50.3
|
%
|
$
|
6,509,157
|
|
|
40.4
|
%
|
|
29
|
%
|
|
Sales
and marketing
|
|
|
3,550,363
|
|
|
21.2
|
%
|
|
2,619,286
|
|
|
16.3
|
%
|
|
36
|
%
|
|
General
and administrative
|
|
|
4,589,851
|
|
|
27.4
|
%
|
|
3,064,728
|
|
|
19.0
|
%
|
|
50
|
%
|
|
Depreciation
and amortization
|
|
|
1,481,670
|
|
|
8.9
|
%
|
|
654,397
|
|
|
4.1
|
%
|
|
126
|
%
|
|
Total
operating expense
|
|
$
|
18,026,886
|
|
|
|
|
$
|
12,847,568
|
|
|
|
|
|
40
|
%
|
Cost
of services.
Cost of
services expense includes compensation and benefits for the Company’s editorial,
technology, marketing services, ratings analyst and video staff, as well as
fees
paid to non-employee content providers, expenses for contract programmers and
developers, communication lines and other technology costs.
The
increase in cost of services over the periods was largely the result of
increased compensation costs totaling approximately $1.3 million. These
increased compensation costs are primarily attributable to incremental costs
associated with the operations of Promotions.com and Bankers Financial Products
since the dates of their acquisitions, as well as compensation expense
associated with BankingMyWay.com and MainStreet.com, which were launched in
the
quarters ended December 31, 2007 and March 31, 2008, respectively. The Company
also experienced increased costs related to hosting, data and consulting, the
sum of which increased by approximately $0.5 million over the
periods.
Sales
and marketing.
Sales
and marketing expense consists primarily of advertising and promotion,
promotional materials, content distribution fees, and compensation expense
for
the direct sales force and customer service departments.
The
increase in sales and marketing expense was largely the result of increased
compensation and online marketing costs totaling approximately $0.7 million
year
over year. This increase included an investment in a larger ad sales team to
deliver advertising revenue growth across an expanding network of Web sites,
as
well as an increase in our search engine marketing and online marketing spend
to
support the launch of BankingMyWay.com and MainStreet.com. The increased expense
also reflects incremental costs associated with the operations of Promotions.com
and Bankers Financial Products since the dates of their
acquisitions.
General
and administrative
.
General
and administrative expense consists primarily of compensation for general
management, finance and administrative personnel, occupancy costs, professional
fees, equipment rental and other office expenses.
The
increase in general and administrative expense over the periods was partially
the result of higher compensation costs totaling approximately $0.7 million,
including an increase in noncash compensation costs of approximately $0.2
million. In addition, the increase in general and administrative expense was
the
result of increased costs related to occupancy totaling approximately $0.3
million, an increase to our bad debt reserve in the amount of approximately
$0.3 million in the quarter and a non-recurring charge for professional fees
in
the amount of approximately $0.3 million.
Depreciation
and amortization.
The
increase in depreciation and amortization expense is largely attributable to
the
amortization of intangible assets related to the Promotions.com, Bankers
Financial Products and Stockpickr acquisitions, resulting in approximately
$0.4
million of additional amortization cost over the periods, depreciation of
capitalized costs associated with the redesign of
TheStreet.com
and
development of the
MainStreet
.
com
Web
sites, and higher depreciation costs due to increased capital
expenditures.
Net
Interest Income
|
|
|
For the Three Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Net
interest income
|
|
$
|
345,675
|
|
$
|
571,121
|
|
|
-39
|
%
|
The
decrease in net interest income is primarily the result of reduced interest
rates as a result of our decision to invest our cash balances, directly in
U.S.
Treasury Bills, or indirectly in U.S. Treasury backed securities with a focus
on
asset protection rather than yield maximization. The lower yield in the quarter
was partially offset by a higher cash balance.
Discontinued
Operations
|
|
|
For the Three Months Ended
September
30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Loss
on disposal of discontinued operations
|
|
$
|
3,079
|
|
$
|
569
|
|
|
441
|
%
|
In
June
2005, the Company committed to a plan to discontinue the operations of the
Company’s securities research and brokerage segment. Accordingly, the operating
results relating to this segment have been segregated from continuing operations
and reported as a separate line item on the consolidated statements of
operations.
For
the
three-month periods ended September 30, 2008 and 2007, loss on disposal of
discontinued operations
represents additional costs incurred with the liquidation process.
The
fair
market values of the remaining liabilities of the discontinued operation are
as
follows:
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
Current
liabilities
|
|
$
|
227,003
|
|
$
|
232,242
|
|
Net
(Loss) Income
Net
loss
for the three-month period ended September 30, 2008 totaled $1,068,075, or
$0.04
per basic and diluted share, compared to net income totaling $19,764,517, or
$0.68 per basic and $0.67 per diluted share for the three-month period ended
September 30, 2007. The decrease over the periods was largely the result of
a
$16 million reduction to the Company’s deferred tax asset valuation allowance,
which was recorded as a benefit to the income tax provision in the previous
year period.
Earnings
Before Interest, Taxes, Depreciation and Amortization
Earnings
before interest, taxes, depreciation and amortization (“EBITDA”) for the
three-month period ended September 30, 2008 totaled $174,284 as compared to
EBITDA of $3,970,595 for the three-month period ended September 30, 2007. The
Company utilizes EBITDA to evaluate the performance of its businesses. EBITDA
is
considered an important indicator of the operational strength of the Company’s
business and it provides an indication of the Company’s ability to service debt
and fund capital expenditures. EBITDA eliminates the uneven effect of
considerable amounts of noncash depreciation of tangible assets and amortization
of certain intangible assets that were recognized in business combinations.
A
limitation of this measure, however, is that it does not reflect the periodic
costs of certain capitalized tangible and intangible assets used in generating
revenues in the Company’s businesses. Management evaluates the investments in
such tangible and intangible assets through other financial measures, such
as
capital expenditure budgets and investment spending levels.
EBITDA
should be considered in addition to, not as a substitute for, the Company’s net
income and various cash flow measures (e.g., cash provided by operations) as
well as other measures of financial performance reported in accordance with
U.S.
generally accepted accounting principles (“GAAP”).
EBITDA
is
calculated as follows:
|
|
|
For the Three Months Ended
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Net
(loss) income
|
|
$
|
(1,068,075
|
)
|
$
|
19,764,517
|
|
|
Less
net interest income
|
|
|
(345,675
|
)
|
|
(571,121
|
)
|
|
Add
taxes
|
|
|
106,364
|
|
|
(15,877,198
|
)
|
|
Add
depreciation and amortization
|
|
|
1,481,670
|
|
|
654,397
|
|
|
EBITDA
|
|
$
|
174,284
|
|
$
|
3,970,595
|
|
Comparison
of Nine Months Ended September 30, 2008 and September 30,
2007
Revenue
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
2008
|
|
|
Percent
of
Total
Revenue
|
|
|
2007
|
|
|
Percent
of
Total
Revenue
|
|
|
Percent
Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
services
|
|
$
|
31,293,620
|
|
|
57
|
%
|
$
|
28,031,229
|
|
|
62
|
%
|
|
12
|
%
|
|
Marketing
services
|
|
|
24,065,875
|
|
|
43
|
%
|
|
17,493,982
|
|
|
38
|
%
|
|
38
|
%
|
|
Total
revenue
|
|
$
|
55,359,495
|
|
|
100
|
%
|
$
|
45,525,211
|
|
|
100
|
%
|
|
22
|
%
|
Paid
services
.
|
|
|
For the Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Paid
services:
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
23,114,062
|
|
$
|
25,649,904
|
|
|
-10
|
%
|
|
Syndication,
licensing
and
information services
|
|
|
8,179,558
|
|
|
2,381,325
|
|
|
243
|
%
|
|
Total
|
|
$
|
31,293,620
|
|
$
|
28,031,229
|
|
|
12
|
%
|
Subscription
revenue for the nine months ended September 30, 2008 decreased by 10% when
compared to the nine months ended September 30, 2007. The decrease is partially
attributable to the outsourcing of TheStreet.com Ratings business to Grey House
Publishing in the second quarter of 2007. Prior to the outsourcing of this
business, subscription revenue included the full sales price of the product.
Revenue now reflects a fee based upon a percentage of the sales price, which
is
recorded as licensing revenue. Subscription revenue from TheStreet.com Ratings
totaled approximately $1,480,000 in the nine months ended September 30, 2007,
as
compared to approximately $137,000 in the nine months ended September 30, 2008.
Excluding the impact of the Ratings outsourcing, revenue specifically from
our
Subscription Services business decreased by 5%, which was primarily related
to
an 8% decrease in subscribers to our subscription services from approximately
85,700 as of September 30, 2007 to approximately 79,200 as of September 30,
2008. The performance of the subscription business is impacted by the
performance of the stock market. Prolonged declines in the stock market reduce
the size of the potential market for subscribers as more investors turn away
from the stock market in their search for investment growth and preservation
of
principal. While the retention rates across our subscription products remain
strong, with renewal rates during the current year to date period of 65% and
90%
for annual and monthly subscribers respectively, our lower acquisition rates
across our subscriber marketing channels resulted in lower year over year
subscribers and subscription revenue.
For
the
nine months ended September 30, 2008, approximately 75% of the Company’s net
subscription revenue was derived from annual subscriptions, as compared to
approximately 70% for the nine months ended September 30, 2007. The Company
calculates net subscription revenue by deducting from gross revenue an estimate
of potential refunds from cancelled subscriptions as well as chargebacks of
disputed credit card charges. Refunds and chargebacks totaled less than 1%
of
gross subscription revenue during each of the nine months ended September 30,
2008 and 2007.
Syndication,
licensing and information services revenue for the nine months ended September
30, 2008 increased by 243% when compared to the nine months ended September
30,
2007. The increase is primarily the result of the information services revenue
from the operations of RateWatch, which was acquired on November 2, 2007 and
thus did not contribute revenue during the earlier period. Additional licensing
revenue is derived from the TheStreet.com Ratings license agreement with Grey
House Publishing noted above, and other syndication of TheStreet.com Ratings
data.
Marketing
services
.
|
|
|
For the Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Marketing
services:
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
17,777,230
|
|
$
|
15,174,531
|
|
|
17
|
%
|
|
Interactive
marketing services
|
|
|
6,288,645
|
|
|
2,319,451
|
|
|
171
|
%
|
|
Total
|
|
$
|
24,065,875
|
|
$
|
17,493,982
|
|
|
38
|
%
|
Advertising
revenue for the nine months ended September 30, 2008, increased by 17% when
compared to the nine months ended September 30, 2007. The increase is primarily
attributable to the effective monetization of a 29% increase in the average
number of monthly unique visitors to the Company’s Web sites, when compared to
the nine months ended September 30, 2007. The increase in reach, combined with
continued strength in our audience demographics, and the ability to create
new
and unique customized advertising solutions enabled us to expand relationships
with existing advertisers, acquire new financial advertisers and attract
increasing numbers of non-endemic advertisers.
We
believe that we have particular appeal to a growing number of non-financial
advertisers, who comprised 41% of total advertising revenue in the nine months
ended September 30, 2008, as compared to 40% in the nine months ended September
30, 2007. Additionally, we believe that the continued shift of advertising
spending from traditional media to online advertising has led generally to
increased spending by the Company’s advertisers and to an increase in the number
of advertisers choosing to place their advertisements throughout the Company’s
network of Web sites and newsletters.
The
number of advertisers for the nine months ended September 30, 2008 was 172
as
compared to 150 for the nine months ended September 30, 2007. The Company’s top
five advertisers accounted for approximately 26% of its total advertising
revenue for the nine months ended September 30, 2008, as compared to
approximately 31% for the nine months ended September 30, 2007. For the
nine-month periods ended September 30, 2008 and 2007, no advertiser accounted
for 10% or more of total advertising revenue.
Interactive
marketing services revenue for the nine months ended September 30, 2008
increased by 171% when compared to the nine months ended September 30, 2007.
The
increase in revenue is primarily the result of a full nine months of interactive
marketing services revenue during the current period associated with
Promotions.com, which
was
acquired on August 2, 2007,
and thus
did not contribute a full nine months of revenue during the earlier
period.
Operating
Expense
|
|
|
For the Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
(*)
|
|
2007
|
|
(*)
|
|
Change
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
$
|
24,427,285
|
|
|
44.1
|
%
|
$
|
17,780,664
|
|
|
39.1
|
%
|
|
37
|
%
|
|
Sales
and marketing
|
|
|
10,944,352
|
|
|
19.8
|
%
|
|
9,004,490
|
|
|
19.8
|
%
|
|
22
|
%
|
|
General
and administrative
|
|
|
13,024,218
|
|
|
23.5
|
%
|
|
8,537,882
|
|
|
18.8
|
%
|
|
53
|
%
|
|
Depreciation
and amortization
|
|
|
4,330,054
|
|
|
7.8
|
%
|
|
1,469,539
|
|
|
3.2
|
%
|
|
195
|
%
|
|
Total
operating expense
|
|
$
|
52,725,909
|
|
|
|
|
$
|
36,792,575
|
|
|
|
|
|
43
|
%
|
(*)
Percent of revenue
Cost
of services
.
The
increase in cost of services over the periods was largely the result of
increased compensation costs totaling approximately $5.0 million. The increased
compensation costs are primarily attributable to incremental costs associated
with the operations of Promotions.com and Bankers Financial Products since
the
dates of their acquisitions, as well as compensation expense associated with
BankingMyWay.com and MainStreet.com, which were launched in the quarters ended
December 31, 2007 and March 31, 2008, respectively.
T
he
Company also experienced increased costs related to hosting, data, fulfillment
and computer maintenance, the sum of which increased by approximately $1.8
million over the periods.
Sales
and marketing
.
The
increase in sales and marketing expense was largely the result of increased
compensation and online marketing costs totaling approximately $1.3 million
year
over year. This increase included an investment in a larger ad sales team to
deliver advertising revenue growth across an expanding network of Web sites,
as
well as an increase in our search engine marketing and online marketing spend
to
support the launch of BankingMyWay.com and MainStreet.com. The increased expense
also reflects incremental costs associated with the operations of Promotions.com
and Bankers Financial Products since the dates of their acquisitions. These
increased costs were partially offset by decreases related to ad serving and
credit card processing, the sum of which decreased by approximately $0.2 million
over the periods.
General
and administrative
.
The
increase in general and administrative expense over the periods was partially
the result of higher compensation costs totaling approximately $2.3 million,
including an increase in noncash compensation costs of approximately $0.5
million. In addition, the increase in general and administrative expense was
the
result of increased costs related to occupancy of approximately $1.0 million,
an
increase to our bad debt reserve in the amount of approximately $0.4
million and a non-recurring charge for professional fees approximating $0.3
million.
Depreciation
and amortization.
The
increase in depreciation and amortization expense is largely attributable to
the
amortization of intangible assets related to the Promotions.com, Bankers
Financial Products and Stockpickr acquisitions, resulting in approximately
$1.5
million of additional amortization cost over the periods, depreciation of
capitalized costs associated with the redesign of
TheStreet.com
and
development of the
MainStreet
.
com
Web
sites, and higher depreciation costs due to increased capital
expenditures.
Net
Interest Income
|
|
|
For the Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Net
interest income
|
|
$
|
1,432,112
|
|
$
|
1,796,820
|
|
|
-20
|
%
|
The
increase in net interest income is primarily the result of reduced interest
rates as a result of our decision to invest our cash balances, directly in
U.S.
Treasury Bills, or indirectly in U.S. Treasury backed securities with a focus
on
asset protection rather than yield maximization. The lower yield in the period
was partially offset by a higher cash balance.
Discontinued
Operations
|
|
|
For the Nine Months Ended
September 30,
|
|
Percent
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
Loss
on disposal of discontinued operations
|
|
$
|
7,895
|
|
$
|
1,692
|
|
|
367
|
%
|
In
June
2005, the Company committed to a plan to discontinue the operations of the
Company’s securities research and brokerage segment. Accordingly, the operating
results relating to this segment have been segregated from continuing operations
and reported as a separate line item on the consolidated statements of
operations.
For
the
nine-month periods ended September 30, 2008 and 2007, loss on disposal of
discontinued operations
represents additional costs incurred with the liquidation process.
The
fair
market values of the remaining liabilities of the discontinued operation are
as
follows:
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
Current
liabilities
|
|
$
|
227,003
|
|
$
|
232,242
|
|
Net
(Loss) Income
Net
income for the nine-month period ended September 30, 2008 totaled $3,679,818,
or
$0.12 per basic and $0.11 per diluted share, compared to $26,317,209, or $0.92
per basic and $0.91 per diluted share for the nine-month period ended September
30, 2007. The decrease over the periods was largely the result of a $16 million
reduction to the Company’s deferred tax asset valuation allowance, which was
recorded as a benefit to the income tax provision in the previous
year period.
Earnings
Before Interest, Taxes, Depreciation and Amortization
Earnings
before interest, taxes, depreciation and amortization (“EBITDA”) for the
nine-month period ended September 30, 2008 totaled $6,955,745, as compared
to EBITDA of $10,326,326 for the nine-month period ended September 30, 2007.
The
Company utilizes EBITDA to evaluate the performance of its businesses. EBITDA
is
considered an important indicator of the operational strength of the Company’s
business and it provides an indication of the Company’s ability to service debt
and fund capital expenditures. EBITDA eliminates the uneven effect of
considerable amounts of noncash depreciation of tangible assets and amortization
of certain intangible assets that were recognized in business combinations.
A
limitation of this measure, however, is that it does not reflect the periodic
costs of certain capitalized tangible and intangible assets used in generating
revenues in the Company’s businesses. Management evaluates the investments in
such tangible and intangible assets through other financial measures, such
as
capital expenditure budgets and investment spending levels.
EBITDA
should be considered in addition to, not as a substitute for, the Company’s net
income and various cash flow measures (e.g., cash provided by operations) as
well as other measures of financial performance reported in accordance with
U.S.
generally accepted accounting principles (“GAAP”).
EBITDA
is
calculated as follows:
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Net
income
|
|
$
|
3,679,818
|
|
$
|
26,317,209
|
|
|
Less
net interest income
|
|
|
(1,432,112
|
)
|
|
(1,796,820
|
)
|
|
Add
taxes
|
|
|
377,985
|
|
|
(15,663,602
|
)
|
|
Add
depreciation and amortization
|
|
|
4,330,054
|
|
|
1,469,539
|
|
|
EBITDA
|
|
$
|
6,955,745
|
|
$
|
10,326,326
|
|
Liquidity
and Capital Resources
The
Company has generally invested in money market funds and other short-term,
investment grade instruments that are highly liquid and of high-quality, with
the intent that such funds could easily be made available for operating
purposes. Given the uncertainty surrounding the current macro-economic
environment, as of September 30, 2008, substantially all of the Company’s cash,
cash equivalents, marketable securities and restricted cash balances were
invested directly in U.S. Treasury Bills, or indirectly in U.S. Treasury backed
securities with a focus on asset protection rather than yield maximization.
As
of September 30, 2008, the Company’s cash, cash equivalents, marketable
securities and restricted cash amounted to $80,094,888, representing 45% of
total assets.
Cash
generated from operations was sufficient to cover expenses during the nine-month
period ended September 30, 2008. Net cash provided by operating activities
totaled $8,761,001 for the nine-month period ended September 30, 2008, as
compared to net cash provided by operating activities totaling $9,197,184 for
the nine-month period ended September 30, 2007. The decrease in net cash
provided by operating activities is primarily related to the
following:
|
|
·
|
A
decrease in income from continuing operations partially due to a
reduction
to the deferred tax asset valuation allowance recorded during 2007;
and
|
|
|
·
|
an
increase in the overall growth of receivables in the nine months
ended
September 30, 2008, as compared to the nine months ended September
30,
2007 primarily related to higher
revenue.
|
These
decreases were partially offset by increased noncash expenses, particularly
related to a reduction to the deferred tax asset valuation allowance recorded
during 2007, combined with amortization of intangible assets associated with
the
acquisitions of Stockpickr LLC, Corsis Technology Group II LLC (renamed
Promotions.com LLC) and Bankers Financial Products Corporation and an increase
in accounts payable as a result of higher operating expenses.
Net
cash
provided by operating activities of $8,761,001 for the nine-month period ended
September 30, 2008 was primarily the result of the Company’s net income combined
with noncash expenses and an increase in accounts payable (due primarily to
higher operating expenses), partially offset by a decrease in accrued expenses
(primarily the result of payments related to annual incentive compensation)
and
an increase in accounts receivable (primarily related to increased
revenue).
Net
cash
used in investing activities of $32,436,861 for the nine-month period ended
September 30, 2008 was primarily the result of the purchase of short term
marketable securities (invested in U.S. Treasury bills), capital expenditures
consisting of capitalized website and software development costs and purchases
of computer hardware, software, leasehold improvements and furniture and
fixtures, combined with the Company’s long-term investment in
Debtfolio,
Inc. (See Note 12 in the Notes to Consolidated Financial
Statements)
Net
cash
used in financing activities of $2,607,900 for the nine-month period ended
September 30, 2008 primarily consisted of cash dividends paid and the purchase
of treasury stock partially offset by the proceeds from the exercise of stock
options.
The
Company has a total of $618,660 of cash invested in certificates of deposit
that
serve as collateral for outstanding letters of credit, and is therefore
restricted. The letters of credit serve as security deposits for the Company’s
office space in New York City. The office leases do not expire within the next
12 months, and the restricted cash is therefore classified as a noncurrent
asset.
The
Company believes that its current cash and cash equivalents will be sufficient
to meet its anticipated cash needs for at least the next 12 months. The Company
is committed to cash expenditures in an aggregate amount of approximately $6.2
million through September 30, 2009, in respect of the contractual obligations
set forth below under “Commitments and Contingencies.” Additionally, the
Company’s Board of Directors declared a cash dividend in the amount of $0.025
per share of common stock during each of the first three quarters of 2008,
which
resulted in cash expenditures of approximately $0.9 million and $2.6 million
in
the three- and nine-month periods ended September 30, 2008, respectively. The
Company intends, although there can be no assurance, to maintain the dividend
at
the current annual level of $0.10 per share, and will review the dividend on
an
ongoing basis to ensure that it serves the best interests of stockholders by
most effectively utilizing cash balances.
For
the
year ended December 31, 2006, the Company recorded a full valuation allowance
against the deferred tax asset. During the year ended December 31, 2007, the
valuation allowance was reduced by $16 million, as management concluded that
it
was more likely than not that the Company would realize the benefits of this
portion of its deferred tax asset through taxable income to be generated in
future years. Due to the reversal of the valuation allowance, this amount was
reflected as a benefit to that year’s tax provision.
The
Company recognized a deferred tax asset of approximately $44 million and $53
million as of September 30, 2008 and 2007, respectively, primarily relating
to
net operating loss carryforwards of approximately $125 million and $132 million,
as of September 30, 2008 and 2007, respectively, available to offset future
taxable income through 2025.
In
accordance with Section 382 of the Internal Revenue Code, the usage of the
Company’s net operating loss carryforward could be limited in the event of a
change in ownership. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. As of September 30, 2008,
the Company recorded a valuation allowance of $28 million against the deferred
tax asset. Based upon a study that analyzed the Company’s stock ownership
activity from inception to December 31, 2007, a change of ownership was deemed
to have occurred in August, 2000 and again in November, 2007. These changes
of
ownership created an annual limitation on the usage of the Company’s losses,
which will become available over the years of 2008 to 2025.
In
evaluating the reasonableness of the valuation allowance, management assessed
whether it is more likely than not that some portion, or all, of the deferred
tax asset will not be realized. Ultimately, the realization of deferred tax
assets is dependant upon the generation of future taxable income during those
periods in which the temporary differences become deductible and/or credits
can
be utilized. To this end, management considered that the Company had taxable
income in 2007 and anticipates continued taxable income through the year ended
December 31, 2010. Based on these considerations management believes it is
more
likely than not that the Company will realize the benefit of its deferred tax
asset, net of the September 30, 2008 valuation allowance.
Commitments
and Contingencies
The
Company is committed under operating leases, principally for office space.
Certain leases are subject to rent reviews and require payment of expenses
under
escalation clauses. Rent and equipment rental expenses increased to $1,892,581
for the nine-month period ended September 30, 2008, as compared to $1,299,631
for the nine-month period ended September 30, 2007. The change in rent and
equipment rental expenses was primarily due to additional office space resulting
from the Promotions.com and Bankers Financial Products Corporation acquisitions,
increased headcount and changes in operating expense escalations. Additionally,
the Company has employment agreements with certain of its employees and outside
contributors, whose future minimum payments are dependent on the future
fulfillment of their services thereunder. As of September 30, 2008, total future
minimum cash payments are as follows:
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less
Than
|
|
|
|
|
|
After
|
|
|
Contractual obligations:
|
|
Total
|
|
1
Year
|
|
1
- 3 Years
|
|
4
- 5 Years
|
|
5
Years
|
|
|
Operating
leases
|
|
$
|
4,702,685
|
|
$
|
1,821,799
|
|
$
|
1,456,544
|
|
$
|
920,139
|
|
$
|
504,203
|
|
|
Employment
agreements
|
|
|
7,137,530
|
|
|
4,116,363
|
|
|
3,021,167
|
|
|
-
|
|
|
-
|
|
|
Outside
contributor agreements
|
|
|
201,933
|
|
|
201,933
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Leases
payable
|
|
|
112,050
|
|
|
72,626
|
|
|
39,424
|
|
|
-
|
|
|
-
|
|
|
Total
contractual cash obligations
|
|
$
|
12,154,198
|
|
$
|
6,212,721
|
|
$
|
4,517,135
|
|
$
|
920,139
|
|
$
|
504,203
|
|
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk.
The
Company believes that its market risk exposures are immaterial as the Company
does not have instruments for trading purposes, and reasonable possible
near-term changes in market rates or prices will not result in material
near-term losses in earnings, material changes in fair values or cash flows
for
all instruments.
Item
4.
Controls
and Procedures.
A
control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that misstatements due
to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also
be
circumvented by the individual acts of some persons, by collusion of two or
more
people, or by management override of the controls. The design of any system
of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions
or
deterioration in the degree of compliance with policies or
procedures.
The
Company carried out, under the supervision and with the participation of the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, an evaluation of the effectiveness of the design and operation of
the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the quarterly period
covered by this report. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of September 30, 2008, the design
and operation of these disclosure controls and procedures were effective. During
the three-month period covered by this report, there have been no changes in
the
Company’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II - OTHER INFORMATION
Item
1.
Legal
Proceedings.
In
December 2001, the Company was named as a defendant in a securities class action
filed in the United States District Court for the Southern District of New
York
related to its initial public offering (“IPO”) in May 1999. The lawsuit also
named as individual defendants certain of its former officers and directors,
James J. Cramer, the Chairman of the Board of the Company, and certain of the
underwriters of the IPO, including The Goldman Sachs Group, Inc., Hambrecht
& Quist LLC (now part of JP Morgan Chase & Co.), Thomas Weisel Partners
LLC, Robertson Stephens Inc. (an investment banking subsidiary of BankBoston
Corp., later FleetBoston Corp., which ceased operations in 2002), and Merrill
Lynch Pierce Fenner & Smith, Inc. Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which are
included in a single coordinated proceeding in the district court (the “IPO
Litigations”). The complaints allege that the prospectus and the registration
statement for the IPO failed to disclose that the underwriters allegedly
solicited and received “excessive” commissions from investors and that some
investors in the IPO allegedly agreed with the underwriters to buy additional
shares in the aftermarket in order to inflate the price of the Company’s stock.
An amended complaint was filed April 19, 2002. The Company and the officers
and
directors were named in the suits pursuant to Section 11 of the Securities
Act
of 1933, Section 10(b) of the Exchange Act of 1934, and other related
provisions. The complaints seek unspecified damages, attorney and expert fees,
and other unspecified litigation costs.
On
July
1, 2002, the underwriter defendants in the consolidated actions moved to dismiss
all of the IPO Litigations, including the action involving the Company. On
July
15, 2002, the Company, along with other non-underwriter defendants in the
coordinated cases, also moved to dismiss the litigation. On February 19, 2003,
the district court ruled on the motions. The district court granted the
Company’s motion to dismiss the claims against it under Rule 10b-5, due to the
insufficiency of the allegations against the Company. The motions to dismiss
the
claims under Section 11 of the Securities Act were denied as to virtually all
of
the defendants in the consolidated cases, including the Company. In addition,
some of the individual defendants in the IPO Litigations, including Mr. Cramer,
signed a tolling agreement and were dismissed from the action without prejudice
on October 9, 2002.
In
June
2003, a proposed collective partial settlement of this litigation was structured
between the plaintiffs, the issuer defendants in the consolidated actions,
the
issuer officers and directors named as defendants, and the issuers’ insurance
companies. On or about June 25, 2003, a committee of the Company’s Board of
Directors conditionally approved the proposed settlement. In June 2004, an
agreement of partial settlement was submitted to the court for preliminary
approval. The court granted the preliminary approval motion on February 15,
2005, subject to certain modifications. On August 31, 2005, the court issued
a
preliminary order further approving the modifications to the settlement and
certifying the settlement classes. The court also appointed the notice
administrator for the settlement and ordered that notice of the settlement
be
distributed to all settlement class members by January 15, 2006. The settlement
fairness hearing occurred on April 24, 2006, and the court reserved decision
at
that time.
While
the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. The Company’s case is not one of these
focus cases. On October 13, 2004, the district court certified the focus cases
as class actions. The underwriter defendants appealed that ruling, and on
December 5, 2006, the Court of Appeals for the Second Circuit reversed the
district court’s class certification decision. On April 6, 2007, the Second
Circuit denied plaintiffs’ petition for rehearing. In light of the Second
Circuit opinion, counsel to the issuers informed the district court that the
settlement with the plaintiffs could not be approved because the defined
settlement class, like the litigation class, could not be certified. The
settlement was terminated pursuant to a Stipulation and Order dated June 25,
2007.
On
August
14, 2007, plaintiffs filed their second consolidated amended class action
complaints against the focus cases and, on September 27, 2007, again moved
for
class certification. On November 12, 2007, certain of the defendants in the
focus cases moved to dismiss plaintiffs’ second amended consolidated class
action complaints. On March 26, 2008, the district court denied the motions
to
dismiss except as to Section 11 claims raised by those plaintiffs who sold
their
securities for a price in excess of the initial offering price and those who
purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008.
We
are
presently defending the action vigorously. Any unfavorable outcome of this
litigation could have an adverse impact on the Company’s business, financial
condition, results of operations, and cash flows.
In
addition to the other information set forth in this report, you should carefully
consider the material risks discussed in Part I, “Item 1A. Risk Factors” in our
Annual Report on Form 10-K for the year ended December 31, 2007, which could
materially affect our business, financial condition or future results.
A
significant portion of our subscription revenue is generated by James J. Cramer
and other key writers and the loss of the services of these writers, including
in particular Mr. Cramer, who recently entered into a new employment agreement,
would have a material adverse effect on the Company.
We
strive
to differentiate our services from those provided by other finance-focused
products available in the marketplace. In recent years, we have introduced
Web
sites featuring content from leading market commentators, user-generated
content, and newsletters containing a broad variety of features from a multitude
of contributors, as well as more narrowly targeted, trading-oriented
newsletters, some of which are the work of an individual writer. While we
believe that the success of our products is dependent in part upon our brands,
some of these products, particularly our newsletters, reflect the talents,
efforts, personalities and reputations of their respective writers. As a result,
the services of these key writers, particularly our co-founder and Chairman
of
the Board James J. Cramer, form an essential element of our subscription
revenue. Accordingly, we seek to compensate and provide incentives for these
key
writers through competitive salaries, stock ownership and bonus plans, and
have
entered into employment agreements with several of them, including Mr. Cramer.
On April 9, 2008, we entered into a new employment agreement with Mr. Cramer
under which he will provide services similar to those he previously provided.
As
amended to date, the new agreement has a term of three years and provides that
Mr. Cramer may terminate the agreement as of January 15, 2010 and any year
thereafter. The loss of Mr. Cramer’s services would have a material adverse
effect on us. We can make no assurances that we will be able to retain key
writers or, should we lose the services of one or more of our key writers to
death, disability, loss of reputation or other reason, to attract new writers
acceptable to readers of our network of Web sites and newsletters. The loss
of
services of one or more of our key writers could have a material adverse effect
on our business, results of operations and financial condition.
We
may have difficulty increasing our advertising revenue, a significant portion
of
which is concentrated among our top advertisers.
Our
ability to increase our advertising revenue depends on a variety of factors,
including general market conditions, seasonal fluctuations in financial news
consumption and overall online usage, our ability to increase our unique
visitors and page view inventory, and our ability to win our share of
advertisers’ total advertising budgets from other Web sites, television,
newspapers, magazines, newsletters or other new media. Advertising revenues
could be adversely affected by significant changes in the relationships we
have
with portals and other high-traffic Web sites. While we have recently
experienced increases in our online advertising revenue, there can be no
assurance that such increases will continue. If our advertising revenue
decreases, our business, results of operations and financial condition could
be
materially adversely affected.
For
the
three months ended September 30, 2008, our top five advertisers accounted for
approximately 33% of our total advertising revenue, as compared to approximately
29% for the three months ended September 30, 2007. Furthermore, although we
have
had success attracting advertisers from outside the financial services industry,
such as travel, automotive and technology, a large proportion of our top
advertisers are concentrated in financial services, particularly in the online
brokerage business. If these industries were to weaken significantly or to
consolidate, or if other factors caused us to lose a number of our top
advertisers, our business, results of operations and financial condition could
be materially adversely affected. As is typical in the advertising industry,
our
advertising contracts have short notice cancellation provisions.
Our
Revenues Could Be Adversely Affected If The Securities Markets
Decline
.
Our
results of operations, particularly related to subscription revenue, are
affected by certain economic factors, including the performance of the
securities markets. While we believe investors are seeking more information
related to the financial markets from trusted sources, the existence of adverse
or stagnant securities markets conditions and lack of investor confidence could
result in investors decreasing their interest in investor-related publications,
which could adversely affect the subscription revenue we derive from our
subscription based Web sites and newsletters.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
The
following table presents information related to repurchases of its common stock
made by the Company during the three months ended September 30, 2008.
|
Period
|
|
(a) Total
Number
of Shares
(or Units)
Purchased
|
|
(b)
Average
Price
Paid per
Share (or
Unit)
|
|
(c) Total Number
of Shares (or
Units) Purchased
as Part of Publicly
Announced Plans
or Programs
|
|
(d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs *
|
|
|
July
1 - 31, 2008
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
2,678,878
|
|
|
August
1 - 31, 2008
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
2,678,878
|
|
|
September
1 - 30, 2008
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
2,678,878
|
|
|
Total
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
2,678,878
|
|
*
In
December 2000, the Company's Board of Directors authorized the repurchase of
up
to $10 million worth of the Company's common stock, from time to time, in
private purchases or in the open market. In February 2004, the Company's Board
approved the resumption of this program under new price and volume parameters,
leaving unchanged the maximum amount available for repurchase under the program.
However, the affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock, voting seperately as a single class, is
necessary for the Company to repurchase its stock. The program does not have
a
specified expiration date. See Note 6 in Notes to Consolidated Financial
Statements.
Item
3.
Defaults
Upon Senior Securities.
Not
applicable.
Item
4.
Submission
of Matters to a Vote of Security Holders.
Not
applicable.
Item
5.
Other
Information.
Not
applicable.
Item
6.
Exhibits.
The
following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission: