UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission File Number 000-25779
THESTREET.COM,
INC.
(Exact name of Registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
06-1515824 (I.R.S. Employer Identification Number) |
14 Wall Street
New York, New York
10005
(Address of principal
executive offices, including zip code)
(212) 321-5000
(Registrant’s
telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
| (Title of Class) Common Stock, par value $0.01 per share |
(Number of Shares Outstanding as of May 6, 2005) 24,751,178 |
ii
Part I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements.
| March 31,
2005 |
December 31,
2004 |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| (unaudited) | (Note 1) | ||||||||
| ASSETS | |||||||||
| Current Assets: | |||||||||
| Cash and cash equivalents | $ | 26,197,585 | $ | 29,770,125 | |||||
| Restricted cash | 800,000 | 800,000 | |||||||
| Accounts
receivable, net of allowance for doubtful accounts of $104,873 as of March
31, 2005 and $107,794 as of December 31, 2004 |
2,206,959 | 1,631,949 | |||||||
| Other receivables | 88,967 | 99,916 | |||||||
| Prepaid expenses and other current assets | 1,087,176 | 1,186,044 | |||||||
| Total current assets | 30,380,687 | 33,488,034 | |||||||
| Property
and equipment, net of accumulated depreciation and amortization of $12,879,157 as of March 31, 2005 and $12,647,131 as of December 31, 2004 |
2,429,688 | 2,528,998 | |||||||
| Other assets | 70,637 | 71,460 | |||||||
| Goodwill | 1,990,312 | 1,990,312 | |||||||
| Other intangibles, net | 1,451,666 | 493,333 | |||||||
| Restricted cash | 1,505,000 | 1,505,000 | |||||||
| Total assets | $ | 37,827,990 | $ | 40,077,137 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| Current Liabilities: | |||||||||
| Accounts payable | $ | 1,045,921 | $ | 813,915 | |||||
| Accrued expenses | 3,019,151 | 6,099,473 | |||||||
| Deferred revenue | 7,905,686 | 7,310,757 | |||||||
| Current portion of note payable | 97,835 | 96,192 | |||||||
| Other current liabilities | 883,085 | 115,425 | |||||||
| Total current liabilities | 12,951,678 | 14,435,762 | |||||||
| Note payable | 99,993 | 125,077 | |||||||
| Other liabilities | 190,626 | 133,107 | |||||||
| Total liabilities | 13,242,297 | 14,693,946 | |||||||
| Stockholders' Equity: | |||||||||
| Preferred stock; $0.01 par value; 10,000,000 shares authorized; none issued and outstanding | — | — | |||||||
| Common
stock; $0.01 par value; 100,000,000 shares authorized; 30,181,178 shares
issued and 24,727,762 shares outstanding at March 31, 2005, and 30,153,144 shares issued and 24,699,728 shares outstanding at December 31, 2004 |
301,812 |
301,531 |
|||||||
| Additional paid-in capital | 186,242,038 | 186,185,339 | |||||||
| Treasury stock at cost; 5,453,416 shares at March 31, 2005 and December 31, 2004 | (7,321,122 | ) | (7,321,122 | ) | |||||
| Accumulated deficit | (154,637,035 | ) | (153,782,557 | ) | |||||
| Total stockholders' equity | 24,585,693 | 25,383,191 | |||||||
| Total liabilities and stockholders' equity | $ | 37,827,990 | $ | 40,077,137 | |||||
The accompanying notes to consolidated financial statements are an integral part of these statements
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| For the Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net revenue: | ||||||||
| Subscription | $ | 5,427,280 | $ | 5,409,495 | ||||
| Advertising | 2,106,274 | 1,427,974 | ||||||
| Commission | 1,136,524 | 776,790 | ||||||
| Other | 271,632 | 306,043 | ||||||
| Total net revenue | 8,941,710 | 7,920,302 | ||||||
| Operating expense: | ||||||||
| Cost of services | 4,018,193 | 4,077,360 | ||||||
| Sales and marketing | 3,253,932 | 3,081,195 | ||||||
| General and administrative | 2,453,759 | 2,189,161 | ||||||
| Depreciation and amortization | 232,939 | 211,905 | ||||||
| Total operating expense | 9,958,823 | 9,559,621 | ||||||
| Operating loss | (1,017,113 | ) | (1,639,319 | ) | ||||
| Net interest income | 162,635 | 71,403 | ||||||
| Net loss | $ | (854,478 | ) | $ | (1,567,916 | ) | ||
| Net loss per share - basic and diluted | $ | (0.03 | ) | $ | (0.06 | ) | ||
| Weighted average basic and diluted shares outstanding | 24,714,380 | 24,240,143 | ||||||
The accompanying notes to consolidated financial statements are an integral part of these statements
2
| For the Three
Months Ended March 31,
|
||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| (unaudited) | (unaudited) | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (854,478 | ) | $ | (1,567,916 | ) | ||
| Adjustments to reconcile net loss to cash (used in) | ||||||||
| provided by operating activities: | ||||||||
| Provision for (recovery of) doubtful accounts | 20,000 | (12,000 | ) | |||||
| Depreciation and amortization | 232,939 | 211,905 | ||||||
| Deferred rent | 116,832 | 59,510 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (595,010 | ) | 168,186 | |||||
| Other receivables | 10,949 | (18,944 | ) | |||||
| Receivables from related parties | — | 140,876 | ||||||
| Prepaid expenses and other current assets | 98,868 | 107,008 | ||||||
| Other intangibles, net | (250,000 | ) | — | |||||
| Accounts payable and accrued expenses | (2,848,316 | ) | 95,528 | |||||
| Deferred revenue | 594,929 | 1,308,517 | ||||||
| Other current liabilities | (76 | ) | 3,625 | |||||
| Net cash (used in) provided by operating activities | (3,473,363 | ) | 496,295 | |||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of short-term investments | — | (2,000,000 | ) | |||||
| Sale of short-term investments | — | 4,005,987 | ||||||
| Capital expenditures | (132,716 | ) | (233,293 | ) | ||||
| Net cash (used in) provided by investing activities | (132,716 | ) | 1,772,694 | |||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from the exercise of stock options | 56,980 | 1,243,007 | ||||||
| Repayment of note payable | (23,441 | ) | (21,906 | ) | ||||
| Purchase of treasury stock | — | (12,752 | ) | |||||
| Net cash provided by financing activities | 33,539 | 1,208,349 | ||||||
| Net (decrease) increase in cash and cash equivalents | (3,572,540 | ) | 3,477,338 | |||||
| Cash and cash equivalents, beginning of period | 29,770,125 | 22,247,400 | ||||||
| Cash and cash equivalents, end of period | $ | 26,197,585 | $ | 25,724,738 | ||||
| Supplemental disclosures of cash flow Information: | ||||||||
| Cash payments made for interest | $ | 5,315 | $ | 6,410 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements
3
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
TheStreet.com, Inc., together with its wholly-owned subsidiaries (collectively, the “Company”), operates its businesses in two segments, electronic publishing and securities research and brokerage. The Company’s electronic publishing segment provides investment commentary, analysis and news to both retail and professional customers, which it distributes through its production of web sites, email reports and newsletters and syndicated radio programming. The electronic publishing segment receives revenue from subscription sales, advertising and sponsorship sales, as well as content syndication and syndicated radio programming. The Company’s securities research and brokerage segment provides proprietary equity research and brokerage services to institutional clients, and, as a broker-dealer, receives revenue from trading commissions, a standard payment method in the professional markets.
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 Exchange Act 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 period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 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.
For further information, refer to the financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission (“SEC”) on March 16, 2005.
2. STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“FASB No. 148”), and elected to continue to account for stock options granted to employees and directors based on the accounting set forth in Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Stock options granted during the three-month period ended March 31, 2005 were exercisable at prices equal to the fair market value of the Company’s common stock on the dates the options were granted; accordingly, no compensation expense has been recognized for the stock options granted.
In December 2004, the FASB issued 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. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, however, the SEC deferred the implementation date
4
of SFAS No. 123(R). As a result, the Company plans to adopt SFAS No. 123(R) effective January 1, 2006 rather than the initial implementation date of July 1, 2005. The Company is currently evaluating the impact of this statement on its financial statements.
Effective December 10, 2002, stock option grant agreements to members of the senior management team were amended to provide that in the event of a change of control of the Company, as defined, 50% of each member’s then unvested options would vest and become exercisable. The Company is unable to estimate the number of options that ultimately will be retained, which otherwise would have been forfeited absent the modification and, as a result, no expense has been recorded. Additionally, such maximum possible future compensation expense is not considered to be material.
Had compensation for the Company’s outstanding stock options granted to employees and directors been determined consistent with the provisions of SFAS No. 123, the effect on the Company’s net loss and basic and diluted net loss per share would have been changed to the following pro forma amounts:
| For the Three
Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| Net loss, as reported | $ | (854,478 | ) | $ | (1,567,916 | ) | ||
| Less: noncash compensation, pro forma | (448,674 | ) | (622,153 | ) | ||||
| Net loss, pro forma | $ | (1,303,152 | ) | $ | (2,190,069 | ) | ||
| Basic and diluted net loss per share, as reported | $ | (0.03 | ) | $ | (0.06 | ) | ||
| Basic and diluted net loss per share, pro forma | $ | (0.05 | ) | $ | (0.09 | ) | ||
3. TREASURY STOCK
From January 2001 through October 2002, the Company purchased 5,422,100 shares of its common stock under a repurchase program authorized by the Board of Directors in December 2000. The program provides for 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 its stock repurchase program under new price and volume parameters, leaving unchanged the maximum amount available for repurchase under the program. During the year ended December 31, 2004, the Company purchased 31,316 shares of common stock under this program. During the three-month period ended March 31, 2005, the Company did not purchase any shares of common stock under this program. Since the 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.
4. LEGAL PROCEEDINGS
On December 5, 2001, a class action lawsuit alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming as defendants TheStreet.com, Inc., certain of its former officers and directors and James J. Cramer, a current director, and certain underwriters of the Company’s initial public offering (The Goldman Sachs Group, Inc., Chase H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and Merrill Lynch Pierce Fenner & Smith, Inc.). Plaintiffs allege that the underwriters of TheStreet.com, Inc.’s initial public offering violated the securities laws by failing to disclose certain alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the offering’s registration statement. The plaintiffs seek damages and statutory compensation against each defendant in an amount to be determined at trial, plus pre-judgment interest thereon, together with costs and expenses, including attorneys’ fees. Similar suits were filed against over 300 other issuers that had initial public offerings between 1998 and December 2001, and they have all been consolidated into a single action. Pursuant to a Court Order dated
5
October 9, 2002, each of the individual defendants to the action, including Mr. Cramer, has been dismissed without prejudice. On June 8, 2004, the Company and its individual defendants (together with the Company’s insurance carriers) entered into a settlement with the plaintiffs. The settlement is subject to a hearing on fairness and approval by the court overseeing the litigation.
Although the lawsuit against the Company is an independent cause of action vis-a-vis the lawsuits pending against other issuers in the consolidated proceeding, and no issuer is liable for any wrongdoing allegedly committed by any other issuer, the proposed settlement between the plaintiffs and the issuers is being done on a collective basis and includes all but one of the 299 issuer defendants eligible to participate. Generally, under the terms of the settlement, in exchange for the delivery by the insurers of the Company and the other defendants of an undertaking guaranteeing that the plaintiffs will recover, in the aggregate, $1 billion from the underwriters (the “Recovery Deficit”), and the assignment to the plaintiffs by the issuers of their interests in claims against the underwriters for excess compensation in connection with their IPOs, the plaintiffs will release the non-bankrupt issuers from all claims against them (the bankrupt issuers will receive a covenant not to sue) and their individual defendants. The Recovery Deficit payable by the insurers to the plaintiffs will be equal to the difference, if any, between $1 billion and the actual amount the plaintiffs recover from the underwriters by reason of the IPO litigation and the assigned claims. Neither the Company nor any other issuer will be required to pay any portion of the Recovery Deficit, if any, and the insurers will cover all further legal defense costs incurred by the issuers, as well as notice costs and administrative costs and expenses.
Pursuant to an Opinion and Order dated February 15, 2005, the settlement was preliminarily approved by the court, subject to certain minor modifications. In the event the settlement does not receive final court approval and the Company or any of its individual defendants remains a defendant in the lawsuit, any unfavorable outcome of this litigation could have an adverse impact on the Company’s business, financial condition, results of operations and cash flows.
5. BUSINESS SEGMENT INFORMATION
During the year ended December 31, 2002, the chief operating decision maker allocated resources and assessed performance on a single-segment basis, as the Company’s securities research and brokerage segment had not yet commenced full operations. Effective January 1, 2003, the Company’s operations were classified into two business segments, media and financial services. Effective July 1, 2003, these segments were renamed “electronic publishing” and “securities research and brokerage” to better reflect the Company’s operating activities. The Company’s electronic publishing segment provides investment commentary, analysis and news to both retail and professional customers. The Company’s securities research and brokerage segment generates independent proprietary equity research for use by institutional clients, and as a broker-dealer, is able to accept payment for its product through trading commissions, a standard payment method in the professional markets. Commission revenue is recorded on a trade date basis. Beginning with the first quarter of 2003, these segments were evaluated separately by key management in assessing performance and allocating resources.
To use administrative and other overhead resources efficiently, certain functions necessary to the operation of the Company’s securities research and brokerage segment, which is operated by Independent Research Group LLC (“IRG Research”), a wholly owned subsidiary of TheStreet.com, Inc., including administrative, financial, legal and technology functions, are handled by the Company’s electronic publishing segment, which is operated by TheStreet.com. Expenses related to the performance of these functions are allocated to the securities research and brokerage segment based upon a services agreement between the two companies. Costs are allocated pro rata, based upon the average number of personnel employed by IRG Research each month as a percentage of the average of the total number of personnel employed each month by TheStreet.com and IRG Research combined. Management of the Company believes this allocation method to be reasonable. Costs allocated to the securities research and brokerage segment totaled $587,842 and $465,840 for the three-month periods ended March 31, 2005 and 2004, respectively.
6
The information presented below includes certain intercompany transactions and, therefore, is not necessarily indicative of the results had the operations existed as stand-alone businesses. Eliminations include intercompany sales of subscription-based products, which are billed at rates consistent with pricing arrangements for bulk product subscription sales. These intercompany transactions are eliminated in consolidation.
| For the Three Months Ended March 31, 2005 |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Electronic publishing |
Securities research and brokerage |
Eliminations |
Total |
|||||||||||
| Statement of Operations Data: | ||||||||||||||
| Subscription revenue | $ | 5,441,400 | $ | -- | $ | 14,120 | $ | 5,427,280 | ||||||
| Advertising revenue | 2,106,274 | -- | -- | 2,106,274 | ||||||||||
| Commission revenue | -- | 1,136,524 | -- | 1,136,524 | ||||||||||
| Other revenue | 271,632 | -- | -- | 271,632 | ||||||||||
| Total net revenue | $ | 7,819,306 | $ | 1,136,524 | $ | 14,120 | $ | 8,941,710 | ||||||
| Depreciation and amortization | $ | 142,361 | $ | 90,578 | $ | -- | $ | 232,939 | ||||||