<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 2000
Registration No. 333-33784
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------------
STOCKPOINT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 7375 36-3775977
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
2600 CROSSPARK ROAD
CORALVILLE, IOWA 52241
(319) 626-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------------------
WILLIAM MCNALLY
GENERAL COUNSEL
STOCKPOINT, INC.
2600 CROSSPARK ROAD
CORALVILLE, IOWA 52241
(319) 626-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------
COPIES TO:
THOMAS MARTIN, ESQ. FREDERICK W. KANNER, ESQ.
DORSEY & WHITNEY LLP DEWEY BALLANTINE LLP
PILLSBURY CENTER SOUTH 1301 AVENUE OF THE AMERICAS
220 SOUTH SIXTH STREET NEW YORK, NEW YORK 10019
MINNEAPOLIS, MINNESOTA 55402 (212) 259-8000
(612) 340-2600 FAX: (212) 259-6333
FAX: (612) 340-8738
<PAGE> 2
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
-----------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
-----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price (1)(2) Registration Fee(2)
--------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value $63,250,000 $16,698
================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) A filing fee of $11,880 was paid with the initial filing of the Form S-1
registration statement on March 31, 2000.
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS Subject to Completion July 24, 2000
--------------------------------------------------------------------------------
5,000,000 SHARES
[STOCK POINT LOGO]
COMMON STOCK
--------------------------------------------------------------------------------
We are an Internet services company that provides online investment
analysis tools and financial information. This is the initial public
offering of our common stock and no public market currently exists for our
common stock.
We are offering 5,000,000 shares of our common stock. We currently expect
the initial public offering price will be between $9.00 and $11.00 per
share. We have applied for our common stock to be quoted on the Nasdaq
National Market under the symbol "STKP."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE REGULATOR HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Per share Total
Public offering price $
Underwriting discounts and commissions $
Proceeds, before expenses, to Stockpoint $
The underwriters may also purchase up to 750,000 additional shares of
common stock from us at the public offering price, less the underwriting
discounts and commissions, within 30 days from the date of this prospectus.
The underwriters may exercise this option only to cover over-allotments, if
any. If the underwriters exercise the option in full, the total
underwriting discounts and commissions will be $4,025,000, and the total
proceeds, before expenses to Stockpoint, will be $53,475,000.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2000.
UBS WARBURG LLC ROTH CAPITAL PARTNERS, INC.
The date of this prospectus is July 24, 2000
<PAGE> 4
INSIDE COVER PAGE--DESCRIPTION OF ARTWORK
INSIDE COVER
The artwork consists of the Stockpoint logo on a blue background, with the
words "World Markets," "Tools," "Portfolios," "Wireless," "Quotes,"
"Charts" and "Markets" running down the page. The middle of the page reads:
"Stockpoint's Mission is to be the leading global business provider of
online investment tools and market information. In the left margin there is
a list of stock indices.
Foldout
Text at top of page reads: "Stockpoint seamlessly integrates customizable
financial content and applications into client web sites." To the right of
the text is the Stockpoint logo. Below the text are 11 client web site
pages and our financial web site page.
In the upper left-hand corner is the web site page of WR HAMBRECHT + CO,
depicting quote information for Microsoft Corp. Below the web page there is
text that reads: "WR Hambrecht + Co" and "wrhambrecht.com." Overlaying a
portion of this web page is the web page of Italia-iNvest.com depicting
quote information for Fiat in the Italian language. Below the web page is
text that reads "GlobalNetFinancial.com, Inc." and "italia-invest.com."
In the upper-middle, there is a chart displaying the stockprice activity of
IBM along side two wireless devices.
In the upper right-hand corner are the web site pages of Worldly
Information Network and Barclays Global Investors. The web page of Worldly
Information Network includes a graph of the Dow Jones Industrial Average
and "global indexes" for the Americas, Asia and Europe. The Americas
indexes include Brazil Bovespa Index, DJ Industrials, Dow Jones 20 Bond
Average and Mexican Bolsa. Below the web site is text that reads: "Worldly
Information Network, Inc" and "Worldlyinvestor.com." The Asia indexes
include Australian All Ordinaries and Hong Kong Seng.
Barclays Global Investors web site page overlays a portion of the
worldlyinvestors.com's web page. The background screen of Barclays Global
Investors' web site page is black, and the screen shows "Currency
Calculator" and a list of currencies a viewer can choose from. Below the
web site page of Barclays Global Investors, there is text that reads:
"Barclays Global Investors "and" barclaysglobal.com."
In the middle of the page are the web site pages of A.B. Watley, Inc. and
MyWay.com. The MyWay.com web site depicts AT&T Corporation and its Analyst
Rating Summary, which includes Analyst Opinions and Average Recommendation.
Above the web site page of MyWay.com there is text that reads "MyWay.com"
and "myway.com." The web page of A.B. Watley, Inc. depicts three graphs:
Equity Indices, Interest Rates and Currency tables. Above A.B. Watley's web
site page there is text that reads: "A.B. Watley Group Inc." and
"abwatley.com."
In the lower-right corner are the web site pages of National Discount
Brokers and SURETRADE, Inc. National Discount Brokers' web site page
depicts "stockfinder pro" and several optional sample screens a viewer can
select. The sample screens include: a Blue Chip stocks screen, Growth &
Value Screen, Strong Growth Screen and High Dividend Yield Screen. Below
the web site page is text that reads: "National Discount Brokers" and
"ndb.com" The web site page of SURETRADE.COM. overlays a portion of
National Discount Brokers' web page, depicting "Fund Finder Pro" with
twenty two Fund objectives that a viewer can select. Above the web site
page of SURETRADE.COM is text that reads: "SURETRADE, INC." and
"suretrade.com."
In the lower middle of the page are the web site pages of LookSmart Ltd.
and Stockpoint. The web site page of LookSmart depicts performance
information for five individual stocks. The performance information
includes Market Price, Today's Change, Shares, Current Value, $ Gain/Loss
and % Gain/Loss. To the right of the web page, there is text that reads:
"LookSmart Ltd"and "money.looksmart.com." The Stockpoint.com web site page
depicts The Portfolio Pro product. Above the website page is text that
reads "Stockpoint" and "Stockpoint.com."
In the lower left-hand corner are the web site pages of Robertson Stephens
and RedChip. The Robertson Stephens screen shows a graph named "The Kebdex"
and a viewer can click either "Weekly" or "interactive" to view different
charts. Below the web site page there is text that reads: "Robertson
Stephens "and" internetstocks.com." The RedChip web site page overlays a
portion of the redchip.com web page that depicts a mini quote, a chart, and
stock data for Cisco Subsystems Inc. Above the web site page is text that
reads: "Redchip.com Inc." and "redchip.com."
<PAGE> 5
THROUGH AND INCLUDING ________, 2000, THE 25TH DAY AFTER THE COMMENCEMENT
OF THIS OFFERING, FEDERAL SECURITIES LAW MAY REQUIRE ALL DEALERS SELLING
SHARES OF OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prospectus summary............................. 4 Management.................................... 44
Risk factors................................... 8 Certain transactions.......................... 49
Forward-looking statements..................... 16 Principal stockholders........................ 53
Use of proceeds................................ 17 Description of capital stock.................. 54
Dividend policy................................ 17 Shares eligible for future sale............... 56
Dilution....................................... 19 Underwriting.................................. 57
Capitalization................................. 20 Legal matters................................. 59
Selected consolidated financial information.... 21 Experts....................................... 59
Management's discussion and analysis of
financial condition and results of operations.. 23 Where you can find more information........... 59
Business....................................... 33 Index to financial statements................. F-1
</TABLE>
--------------------------
In making a decision to buy our common stock, you should only rely on the
information contained in this prospectus. We have not authorized anyone to
provide you with other information. We are offering to sell these shares
only where it is legal to sell them. The information in this prospectus is
complete and accurate as to the date on the front cover, but the
information may have changed since that date.
3
<PAGE> 6
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. For a more complete understanding of this
offering, we encourage you to read the entire prospectus, including the
information under "Risk Factors" and the consolidated financial statements
and related notes, before making an investment decision. Unless otherwise
indicated, all information in this prospectus reflects a 3 for 2 stock
split that was declared on July 20, 2000.
STOCKPOINT
Stockpoint is a leading provider of online investment analysis tools and
financial information. We develop and integrate sophisticated financial
applications to provide our clients customized financial web pages. We
"host" these web pages by maintaining the data and applications on our web
servers and by applying Internet-based data management technology we have
developed. This enables our clients to outsource their financial web page
production and maintenance, and provide extensive financial content and
analysis tools to their users.
Our clients include web portals, media companies, traditional and online
brokerage firms, commercial banks, asset managers, electronic communication
networks, 401(k) sponsors and insurance companies. As of June 30, 2000, we
had license agreements with approximately 250 clients, including companies
such as Barclays Global Investors, SURETRADE, VerticalNet, Inc. and U.S.
Bancorp Piper Jaffray Inc. Our business generated revenue of $6.8 million
during the year ended 1999 and $6.5 million during the six months ended
June 30, 2000. We incurred losses of $3.2 million and $3.7 million during
these periods.
The Internet today is rapidly changing the way individuals conduct
financial transactions. The convenience, speed and the lower cost of
conducting trades over the Internet and the immediate availability of
financial information on the Internet, combined with the current
demographic trends favoring investment, have converged to produce a
significant movement to online investing. Forrester Research has projected
that online investment accounts in the U.S. will grow from $374 billion of
assets in 5.4 million online accounts in 1999 to $3.1 trillion of assets in
20.4 million online accounts by 2003, a number that would represent nearly
53% of U.S. households. Similar developments in electronic banking, driven
by the convenience of electronic bill payment, online fund transfers, the
monitoring of account balances and the trend toward integrated financial
services, are helping to reshape the way both individual and corporate
banking is conducted.
To accommodate this shift, the financial industry has become one of the
largest consumers of Internet technology, demanding both transactional
technology and technology that delivers the online financial information
needed to make intelligent transactional decisions. The quality and breadth
of the financial information that is offered is rapidly becoming a
differentiator among financial services providers.
With our products and services, our clients are able to offer their users
Internet-based real-time and delayed stock quotes, charting capabilities,
portfolio management and analysis tools, currency utilities, company
research and business news. We also enable our customers to offer many of
these features over wireless devices. We purchase financial content on a
nonexclusive basis, and combine, integrate and manipulate this content with
software we have developed and in a format customized for our clients, to
enable users to easily analyze and manage financial information and to make
investment decisions. Our Internet technologies allow us to rapidly develop
financial web pages for customers desiring to differentiate their financial
web sites from others.
Our objective is to be the leading provider of global online investment
analysis tools and financial information that enables our clients to
provide extensive financial content and decision-making tools on their web
sites. Key elements of our strategy include:
- ENABLING THE ONLINE FINANCIAL SERVICES MARKETS. We intend to rapidly
expand our sales force to reach businesses in the financial services
industry and other financial information providers that require
extensive online market analysis tools and financial information on
their web sites. We believe our broad client experience enables us to
intelligently recommend and sell new products, content and services
to improve web site functionality.
- EXPANDING OUR EXISTING CLIENT RELATIONSHIPS. We will continue to
expand our relationships with our existing clients by offering
additional value-added products and services that we create or obtain
through partnership or acquisition.
4
<PAGE> 7
- DEVELOPING INNOVATIVE PRODUCT OFFERINGS. We intend to focus our
development efforts on refining and extending the capabilities of our
current product suite as well as capitalizing on emerging trends to
construct leading edge products that facilitate data analysis and
more informed investment decisions.
- CREATING A WORLDWIDE PRESENCE. We intend to expand our product
offerings and international presence to serve the global online
financial information needs of our clients and their users. To
further our international objectives, we recently opened an office in
London, England and intend to open an office in Hong Kong or
Singapore during 2000.
- PURSUING STRATEGIC ALLIANCES OR ACQUISITIONS. We intend to accelerate
our global sales and marketing efforts and technology development,
and gain access to compelling content, applications and
functionality, through strategic alliances and acquisitions. We
intend to seek acquisitions of businesses to complement our products
or services or to give us access to new markets.
Our corporate headquarters are located at 2600 Crosspark Road, Coralville,
Iowa 52241 and our phone number is (319) 626-5000. Our Internet address is
www.stockpoint.com. Information on our web site is not part of this
prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............................. 5,000,000 shares.
Common stock to be outstanding
after the offering (1).......................... 11,178,239 shares.
Use of proceeds................................... We intend to use the net proceeds to repay most of our outstanding
indebtedness, to add sales and marketing personnel, to continue Internet
product development, to finance one or more data centers and foreign
offices and for working capital and other general corporate purposes.
Risk factors...................................... Investing in our common stock involves risks.
Proposed Nasdaq National Market symbol............ "STKP."
</TABLE>
---------------
(1) The number of shares of our common stock to be outstanding immediately
after this offering assumes conversion of all outstanding shares of
preferred stock into 2,782,437 shares of common stock upon completion of
this offering and assumes no exercise of the underwriters' overallotment
option. It excludes 2,852,550 shares of common stock issuable upon the
exercise of options and 2,726,959 shares of common stock issuable upon the
exercise of warrants outstanding
5
<PAGE> 8
as of June 30, 2000, assuming an initial public offering price of $10.00
per share. The actual number of warrants and their exercise price will
depend on the initial public offering price. See "Certain
Transactions-Bridge Loan Financing."
"Stockpoint" is our federally registered trademark. This prospectus also
contains names, trademarks, service marks and registered trademarks and
service marks of other companies.
6
<PAGE> 9
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
STATEMENT OF OPERATIONS DATA: 1997 1998 1999 1999 2000
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 1,427,908 $ 2,177,946 $ 6,829,869 $ 2,438,609 $ 6,467,852
Cost of revenues .......................... 308,608 764,965 2,289,881 913,882 3,078,951
------------ ------------ ------------ ------------ ------------
Gross profit .............................. 1,119,300 1,412,981 4,539,988 1,524,727 3,388,901
Operating expenses ........................ 4,366,476 6,856,777 7,429,328 3,243,082 6,354,866
------------ ------------ ------------ ------------ ------------
Operating loss from continuing operations.. (3,247,176) (5,443,796) (2,889,340) (1,718,355) (2,965,965)
Other expense, primarily interest ......... (688,525) (784,546) (1,058,545) (438,823) (946,247)
Income (loss) from discontinued
operations (1) .......................... (405,722) (356,946) 780,808 780,808 --
Extraordinary item-gain on extinguishment
of debt ................................. -- -- -- -- 233,600
------------ ------------ ------------ ------------ ------------
Net loss .................................. $ (4,341,423) $ (6,585,288) $ (3,167,077) $ (1,376,370) $ (3,678,612)
============ ============ ============ ============ ============
Basic and diluted loss per common share:
Loss from continuing operations ....... $ (1.27) $ (2.10) $ (1.35) $ (0.74) $ (1.25)
Net loss .............................. $ (1.40) $ (2.21) $ (1.11) $ (0.50) $ (1.18)
Weighted average common shares
outstanding ......................... 3,134,552 3,160,359 3,212,106 3,194,831 3,283,247
Pro forma basic and diluted loss per
common share(2):
Loss from continuing operations........
$ (0.66) $ (0.65)
Pro forma net loss .................... $ (0.53) $ (0.61)
Weighted average common shares
outstanding......................... 5,921,672 6,053,576
OTHER OPERATING DATA:
Unrecognized contracted revenue at
period end (3) .......................... $ 140,078 $ 1,458,447 $ 10,703,000 $ 4,900,000 $ 26,000,000
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(4)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents............................... $ 2,403,390 $35,614,035
Working capital (deficit)............................... (15,979,432) 29,265,532
Total assets............................................ 8,081,690 40,734,096
Total debt.............................................. 12,306,435 272,116
Stockholders' equity (deficiency)...................... $(13,799,038) $30,887,687
</TABLE>
----------------
(1) On May 29, 1999, we sold the technology and operational assets related
to the products we had marketed to the steel-making industry,
recognizing a gain of $433,133.
(2) As adjusted for the conversion of all outstanding shares of preferred
stock into common stock upon completion of this offering.
(3) Represents contracted revenues at period end less amounts recognized as
revenue in the statement of operations. The balance of unrecognized
contracted revenue at period end will be recognized ratably in future
periods over the duration of our contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(4) As adjusted to reflect the sale of 5,000,000 shares of common stock in
this offering at an assumed offering price of $10.00 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, and the application of a portion of
the estimated net proceeds from this offering to repay most of our
outstanding indebtedness, as described in "Use of Proceeds."
7
<PAGE> 10
RISK FACTORS
Before investing in our common stock, you should be aware that there are
various risks, including those described below. As a Stockpoint
stockholder, you will be subject to the risks inherent in our business. The
value of your investment may decline, and could result in a loss of your
entire investment. You should carefully consider the following factors as
well as the other information contained in this prospectus before deciding
to buy our common stock.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO GENERATE LOSSES IN
THE FUTURE.
As of June 30, 2000, we had an accumulated deficit of approximately $26.8
million, of which $22.7 million is attributable to our continuing
operations. We have not achieved profitability and expect to continue to
incur net losses at least into 2001. We expect to continue to incur
significant operating expenses and, as a result, will need to generate
significant revenues to achieve profitability, which may not occur. Even if
we do achieve profitability, we may be unable to sustain or increase
profitability on a quarterly or annual basis in the future.
WE HAVE A LIMITED HISTORY IN OPERATING OUR INTERNET-BASED LICENSING
BUSINESS.
Our business model depends largely on our ability to license our Internet
products and hosting services to third parties. We began to emphasize this
model only in mid-1998. For us, this means that we have only limited
experience in operating an Internet-based licensing business from which to
evaluate our business prospects and analyze the risks and uncertainties
that we face. We will be adversely affected if we are unsuccessful in
anticipating potential business issues or in addressing unexpected issues
as they arise. For you, this means that you have limited historical
information from which to evaluate our prospects.
WE MAY NEED MORE CASH AFTER THIS OFFERING AND WE MAY NOT BE ABLE TO OBTAIN
IT.
If we do not achieve or maintain significant revenues or profitability or
have not accurately predicted our cash needs, or if we decide to change our
business plans, we may need to raise additional funds in the future. Upon
completion of this offering, we will not have a committed line of credit in
place. Any required funding may not be available to us on favorable terms,
if at all. If we raise additional funds by issuing equity securities, you
may experience dilution in your ownership interest. If we raise additional
funds by issuing debt securities, we may incur significant interest expense
and become subject to covenants that could limit our ability to operate and
fund our business. If additional funds are not available when required, we
may be unable to effectively realize our current plans.
IF WE ARE UNABLE TO ATTRACT OR RETAIN QUALIFIED DEVELOPMENT STAFF, OUR
BUSINESS COULD BE HARMED.
Our future success depends substantially upon the continued efforts of our
software applications and web programming staff to provide the integration
services necessary to timely create, implement and host web site financial
content for our clients, and to update and expand our web site offerings.
None of our software engineers and web programmers are bound by employment
agreements. Competition for software engineers is intense in markets where
we maintain offices, and we may not be able to retain existing or attract
additional highly qualified programmers in the future. If we lose the
services of a significant number of our applications staff and web
programming staff or are unable to continue to attract additional
applications and web programming staff with appropriate qualifications, the
quality of our product offerings and our ability to retain and expand our
client base could suffer.
WE DEPEND ON THE CONTINUED SERVICE OF OUR KEY OFFICERS.
Our future success depends to a significant extent on the continued service
and coordination of our management team. The departure of any of our
officers or key employees could materially adversely affect our ability to
implement our business plan. We have employment agreements with William
Staib, Timothy Yamauchi, Luan Cox, Christopher Dominguez and Scott Porter,
our principal executive officers. These agreements provide for employment
through December 31, 2000, and in the case of Mr. Porter through March 31,
2001. The agreements provide for automatic renewal
8
<PAGE> 11
unless terminated by us or the officer. The agreements prohibit
solicitation of our customers and employees for a period after termination
of employment. We also maintain a key person life insurance policy on Mr.
Staib, our Chief Executive Officer. Nevertheless, these employment
agreements do not prohibit the executives from terminating their employment
or even competing against the Company, and the key man insurance on Mr.
Staib might not be sufficient to compensate us for the loss of his
services. Further, the employment agreements provide substantial benefits
to these executives upon termination of employment under certain
circumstances.
OUR BUSINESS DEPENDS ON OUR ABILITY TO ENTER INTO AND MAINTAIN
RELATIONSHIPS WITH CONTENT PROVIDERS.
Our business depends on financial data and information, such as stock
pricing information and financial news and research information, obtained
from third-party providers through non-exclusive contractual relationships.
Given the nature of our contracts with providers, we will be required to
renegotiate contracts when they expire (usually one to two years). In
particular, the contract with our key supplier, S&P Comstock, expires in
September 2001. We may not be able to renew our contracts with content
providers on favorable terms or at all. There is intense competition for
relationships with these firms and, in the past, we have been subjected to
fee increases when some of these contracts came up for renewal. We may have
to pay significant fees to establish additional content syndication
relationships, particularly if we expand, as expected, in international
markets, or maintain existing relationships in the future. We may be unable
to enter into relationships with these firms or sites on favorable terms or
at all. In addition, while we are not solely reliant on any one content
provider, the loss of a key vendor could render all or a portion of our
services unavailable for a period of time, which could have a negative
impact on our client relationships and cause harm to our reputation.
WE COMPETE WITH ENTITIES THAT RECEIVE FINANCIAL CONTENT FROM THE SAME
CONTENT PROVIDERS AND, TO A MORE LIMITED EXTENT, WE ALSO COMPETE WITH OUR
CONTENT PROVIDERS.
Many of our providers compete with each other and, to some extent, with us
for clients. Many of the financial content providers that we have contracts
with or have approached also provide financial news and information to our
competitors and clients. These content providers may be reluctant to enter
into or maintain strategic relationships with us. To the extent a content
provider desires to provide services to a competitor, or to compete with us
directly, it may be more inclined to aggressively interpret contracts in
its favor or to engage in other hard dealing.
CHANGING TECHNOLOGY AND METHODS OF INTERNET DELIVERY COULD CAUSE OUR RIGHTS
UNDER CONTRACTS TO BE REINTERPRETED.
The terms of our agreements with content suppliers vary widely. The
services that we provide and the methods that we utilize to do so change
rapidly, and the law and legal practice for content supplier contracts are
also unsettled and constantly developing. As a result, we may periodically
need to modify and renegotiate our vendor agreements prior to their
expiration. We attempt to operate our web site customization and hosting
services in accordance with our agreements and to renegotiate them as
necessary. However, we cannot assure you that our vendors will not claim
that we owe additional sums or must limit our activities.
IF OUR CLIENTS DO NOT BELIEVE OUR PRODUCT OFFERINGS PROVIDE THEM WITH A
COMPETITIVE BENEFIT, OUR ABILITY TO ATTRACT AND RETAIN CLIENTS COULD BE
ADVERSELY AFFECTED.
Most of our clients generate revenue through their web sites from
advertising revenue or transaction volume. To the extent that our clients
believe that they do not gain a competitive benefit, whether through
increased advertising revenue, transaction volume or otherwise, from the
incorporation of our financial content into their web sites, our ability to
attract and retain clients could be adversely affected.
WE HAVE LIMITED EXPERIENCE IN RENEWING OUR LICENSE CONTRACTS AND MAY NOT BE
ABLE TO RENEW A SIGNIFICANT PORTION OF THEM.
Only a relatively few of our license contracts, which typically have terms
that vary from one to two years, have come up for renewal. We have limited
experience with the renewal process. If we are unable to renew a
significant portion of our contracts with existing clients, our business
and financial performance could be materially adversely affected.
GlobalNetFinancial.com, which represented 14% of our 1999 revenues,
recently announced an agreement through which Telescan Inc., one of our
competitors, will increase its ownership interest in GlobalNetFinancial.com
to approximately
9
<PAGE> 12
15%. We provide a number of products and services to GlobalNetFinancial.com
under contracts that expire at various times over the next 12 months. If
GlobalNetFinancial.com or any other large client does not renew its
contracts with us, it could have an adverse effect on our business and
financial performance.
OUR BUSINESS MAY SUFFER IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH.
We have experienced rapid growth in our operations. This rapid growth has
placed, and our anticipated future growth will continue to place, a
significant strain on our managerial, operational and financial resources.
Our current management does not have extensive experience in managing a
large corporation. To manage our growth, we must continue to implement and
improve our managerial controls and procedures and operational and
financial systems on a timely basis. If we are unable to manage our growth
effectively, our business could be materially adversely affected.
OUR INTERNATIONAL OPERATIONS ARE NEW AND MAY NOT BE SUCCESSFUL.
We have only recently commenced operations in a number of international
markets and a key component of our strategy is to continue to expand our
international operations. We have limited experience in developing and
obtaining financial information relating to foreign markets and in
marketing, selling and distributing our products and services
internationally. We cannot assure you that we will be able to successfully
develop relationships with international content providers, or successfully
market, sell and distribute our products and services internationally.
There are risks in doing business in international markets which could
adversely affect our business, including:
- difficulties in obtaining international quote and exchange data;
- regulatory requirements;
- export restrictions and controls, tariffs and other trade barriers;
- difficulties in staffing and managing international operations;
- fluctuations in currency exchange rates;
- reduced protection for intellectual property rights;
- seasonal reductions in business activity;
- potentially adverse tax consequences; and
- political and economic instability.
The growth of the Internet as a means of conducting international business
has raised many legal issues, including the circumstances under which
countries or other jurisdictions have the right to regulate Internet
services available from service providers located elsewhere. In many cases,
there are no laws, regulations, judicial decisions or governmental
interpretations that clearly resolve these issues. Our costs could increase
and the growth of our international operations could be harmed by any new
laws or regulations, or the application or interpretation of existing laws
and regulations to the Internet.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE.
We compete with an increasing number of companies that offer charting,
stock quotation and business information web applications, development and
hosting services. We also compete with the in-house development staffs of
many of our clients. We expect both of these forms of competition to
continue to intensify. Some of our existing competitors, as well as a
number of potential new competitors, have longer operating histories,
greater name recognition, larger client bases and significantly greater
financial, technical and marketing resources than we do. These factors may
provide them with significant advantages over us. Competitive pressures
could result in reduced market share, price reductions, reduced margins and
increased spending on marketing and product development, any of which could
adversely affect our business.
10
<PAGE> 13
FAILURE TO MAINTAIN OUR REPUTATION FOR RELIABILITY AND QUALITY MAY REDUCE
THE NUMBER OF OUR CLIENTS, WHICH COULD HARM OUR BUSINESS.
It is very important that we maintain our reputation as a reliable
developer and host of financial content for web sites. Many events beyond
our control, including slower response times than usual, systems or
operations failures, errors in the transmission of quotation data or the
misreporting of financial news or analysis by one or more of our content
contributors, could harm our reputation. These events could result in a
significant reduction in the number of our clients, which could materially
adversely affect our business.
UNEXPECTED INCREASES IN TRAFFIC MAY STRAIN OUR SYSTEMS.
In the past, we have experienced significant spikes in traffic on the web
sites that we host when there have been important financial news events.
Our client base has increased over time and we are seeking to increase it
further. Our web site hosting systems must accommodate a high volume of
traffic, often at unexpected times. Our hosted web sites may experience
slower response times than usual, temporary interruption of service or
other problems for these and other reasons. These occurrences could cause
our clients to perceive our services as not being adequate and, therefore,
terminate or not renew their contracts with us. This could adversely affect
our business.
SYSTEM FAILURES, TO WHICH WE ARE PARTICULARLY VULNERABLE BECAUSE WE
CURRENTLY OPERATE ONLY ONE COMPUTER DATA CENTER, COULD ADVERSELY AFFECT OUR
BUSINESS.
Our systems and operations are vulnerable to damage or interruption from a
variety of factors, including human error, natural disasters, power loss,
telecommunication failures, break-ins, sabotage (physical or electronic),
computer viruses, vandalism and similar unexpected adverse events. We
currently operate only one computer data center. We do not expect to begin
operating an additional facility until at least the fourth quarter of 2000.
This increases our vulnerability, since localized problems at our Iowa
facility, such as storm damage, flooding or localized telephone failure,
could make us unable to provide our services. Unanticipated problems have
caused interruptions in delivery of our services in the past and similar
problems could occur in the future. Any system failure, including network,
software or hardware failure, that causes an interruption in our services
or a decrease in responsiveness of our hosted web sites could result in
canceled client contracts, reduced revenue and harm to our reputation,
brand and our relations with our providers and adversely affect our
business.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE FINANCIAL
FORECASTING DIFFICULT.
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:
- the number, size and timing of new license contracts sold;
- the number, size and timing of license renewals and terminations;
- the character of any development services required by our clients;
- our ability to develop, market and introduce new and enhanced services
on a timely basis;
- actions taken by our competitors, including new product introductions
and enhancements; and
- adverse changes in the financial markets.
We believe that quarter-to-quarter comparisons of our operating results may
not be a good indication of our future performance. Investors should not
rely on our operating results for any particular quarter as an indication
of our future operating results.
DIFFICULTIES ASSOCIATED WITH OUR BRAND DEVELOPMENT MAY HARM OUR ABILITY TO
ATTRACT CLIENTS.
We believe that maintaining and increasing awareness of the Stockpoint
brand is an important aspect of our efforts to continue to attract clients.
The importance of brand recognition will increase in the future because of
the growing number of web sites providing financial content and
information. However, our efforts to build brand awareness may not be
successful.
11
<PAGE> 14
EVENTS RELATED TO OUR FORMER CHIEF EXECUTIVE OFFICER COULD AFFECT OUR
REPUTATION AND HARM OUR BUSINESS.
Robert Staib, our former Chief Executive Officer and a former director, was
arrested in December 1998 and indicted in April 1999 for bank fraud in
connection with the pledge of stock certificates he held in UAL, Inc. to
secure loans to an unrelated company. Robert Staib pleaded guilty to
certain allegations in March 2000 as part of an agreement settling the
indictment. His sentencing is currently set for August 2000. Robert Staib
has not been an officer or director of Stockpoint since his arrest in
December 1998. Nevertheless, publicity related to his sentencing or other
events could include references to us or to William Staib, our Chief
Executive Officer and the son of Robert Staib. Publicity of this type could
cause harm to our reputation and business, and our ability to obtain
financing.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND MANAGEMENT.
We may acquire products, technologies or businesses that we believe would
help expand our product and service offerings. Any future acquisitions
would present risks, including the difficulty of combining the technology,
operations or workforce of the acquired business with our own, disruption
of our ongoing operations and difficulty in realizing the anticipated
financial or strategic benefits of the transaction. Acquisitions may also
divert management's attention from day-to-day operations. These factors and
our limited experience in negotiating, consummating and integrating
acquisitions could adversely affect our business, earnings, financial
condition and, ultimately, our stock price. Acquisitions that use stock as
payment also could result in dilution of our per share earnings and of your
voting rights.
FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR
BRAND-BUILDING EFFORTS AND ABILITY TO COMPETE EFFECTIVELY.
We rely on a combination of trademark and copyright law, trade secret
protection, confidentiality agreements and other contractual arrangements
to protect our intellectual property rights. We do not rely on patented
processes or technologies. The protective steps we have taken may be
inadequate to deter misappropriation of our proprietary information. We may
be unable to detect the unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. We have registered our
trademarks in the United States and we have pending U.S. applications for
other trademarks. Effective trademark, copyright and trade secret
protection may not be available in every country in which we offer or
intend to offer our services. Failure to adequately protect our
intellectual property could harm our brand, devalue our proprietary content
and affect our ability to compete effectively. Defending our intellectual
property rights could also result in the expenditure of significant
financial and managerial resources, which could materially adversely affect
our business.
WE MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS,
INCLUDING A PENDING CLAIM REGARDING "GIF" FORMATS, WHICH COULD INCREASE OUR
COSTS.
Although we believe that our services do not infringe the intellectual
property rights of others, other parties may assert infringement claims
against us or claim that we have violated a patent or infringed a
copyright, trademark or other proprietary right belonging to them. In
particular, increasing attempts to patent software techniques and concepts
may lead to an increase in claims of infringement, particularly with
respect to companies involved in the Internet. As a result of a dispute, we
may have to modify our products or enter into a licensing agreement. This
licensing agreement, if required, may not be available on terms acceptable
to us, or at all. Any infringement claims, even if not meritorious, could
result in the expenditure of significant financial and managerial
resources, which could materially adversely affect our business.
In December 1999, we received correspondence from Unisys alleging that the
compression algorithms we use to generate Graphic Interchange Format, or
GIF, images require a license. We are currently negotiating with Unisys to
obtain a license agreement and believe that any licensing fee and royalty
payments that we may be required to pay for the right to use Unisys'
algorithms would not have a material effect on our business and financial
condition. We cannot assure you that Unisys will grant us a license or, if
a license is granted, that the licensing arrangement will be on
commercially reasonable terms. Our failure to obtain a license could
seriously harm our business.
The services we provide make extensive use of licensed third-party content
and some use of licensed third-party technology. In the license agreements
with respect to these items, the licensors have generally agreed to defend,
indemnify and hold us harmless with respect to any claim by a third party
that any licensed content or software infringes
12
<PAGE> 15
any intellectual property right. These provisions may not be adequate to
protect us from infringement claims.
DIFFICULTIES IN DEVELOPING NEW AND ENHANCED SERVICES AND FEATURES COULD
HARM OUR BUSINESS.
We intend to introduce additional and enhanced products and services to
retain our current clients, expand the products and services our clients
use and attract new clients. If our services are not favorably received or
a competitor introduces a service that we are unable to provide, potential
clients may choose a competitor's products or services and current clients
may decline to renew their contracts with us. We may experience
difficulties that could delay or prevent our introduction of new services.
These difficulties may include the inability to obtain or maintain
third-party technology license agreements. New services could contain
errors that are discovered after introduction. If so, we may need to
significantly modify the design or implementation of these services to
correct any errors. If we experience difficulties in introducing new
services or if these new services do not attract significant licensing
interest, our business could be materially adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CLIENT DEMANDS
EVOLVE.
To be successful, we must adapt to our rapidly changing market by
continually enhancing the technologies used in our products and services,
and introducing new technology to address the changing needs of our
business and consumers. If we are unable, for technical, legal, financial
or other reasons, to adapt in a timely manner to changing market conditions
or business and client requirements, our business could be materially
adversely affected.
WE HAVE GRANTED OPTIONS TO PURCHASE COMMON STOCK AT LOW EXERCISE PRICES
IN THE PAST THAT WILL RESULT IN FUTURE CHARGES TO OUR EARNINGS.
In the past, we have granted options to purchase our common stock at
exercise prices less than fair market value. We will recognize deferred
compensation expenses relating to the difference between the exercise price
and fair value of our stock at the date of grant. We expect to incur
deferred compensation expenses through the end of 2004, which will harm our
operating results in those periods. We expect to recognize deferred
compensation expenses of approximately $600,000 in 2000 and the remaining
deferred compensation expenses of approximately $1,400,000 over the next
three years.
RISKS RELATED TO OUR INDUSTRY
IF THE MARKET FOR PRODUCTS AND SERVICES RELATED TO INTERNET-BASED FINANCIAL
INFORMATION DOES NOT DEVELOP AS WE ANTICIPATE, WE MIGHT NOT ACHIEVE OUR
BUSINESS OBJECTIVES.
The market for Internet-based financial information has only recently begun
to develop. Because the market for our services is new, it is difficult to
accurately predict the growth rate and ultimate size of this market. In
addition, the market is rapidly evolving and is characterized by an
increasing number of potential competitors. The economic viability of the
business models used by some of our smaller business to consumer and other
Internet customers are uncertain. Further, current market conditions call
into question whether these customers will have access to additional
capital when required. As a result, we could experience client attrition if
these clients are unable to continue to pay for or renew their contracts
with us. We also could be adversely affected by industry consolidation
involving our Internet clients. The market for our services may not
continue to develop, or may develop more slowly than we expect, and our
product offerings may never achieve significant market acceptance.
THE GROWTH OF OUR BUSINESS DEPENDS ON GROWTH IN THE FINANCIAL SERVICES
INDUSTRY AND A DOWNTURN IN THAT INDUSTRY COULD ADVERSELY EFFECT OUR
BUSINESS.
A downturn in the financial markets could result in a decline in interest
in individual investing, which could adversely affect the market for our
services. In addition, U.S. financial institutions are continuing to
consolidate, which may increase our clients' leverage to negotiate prices
and decrease the overall potential market for some of our services. These
factors, as well as other changes occurring in the financial services
industry, could have a material adverse effect on our business.
CONCERNS ABOUT THE SECURITY AND OPERATION OF OUR WEB SITE HOSTING SERVICES
COULD INCREASE OUR EXPENDITURES OR DECREASE OUR CLIENT BASE.
There have been several recent widely-publicized instances of "hackers"
compromising the integrity, security and operation of web sites. We may
have to incur significant costs to protect our web site or those of our
clients or to
13
<PAGE> 16
alleviate problems caused by "hacking" if there is any:
- perceived increase in "hacking" activity;
- perception that our web site or the web sites that we host are
particularly vulnerable to this kind of activity; or
- instances in which our web site or one of the web sites we host is
affected by this kind of activity.
In addition to increased costs, any of these occurrences may decrease our
ability to retain existing clients or attract new ones.
OUR ABILITY TO MAINTAIN AND INCREASE OUR CLIENT BASE DEPENDS ON THE
CONTINUED GROWTH IN USE AND EFFICIENT OPERATION OF THE INTERNET.
Our business would be materially adversely affected if Internet usage does
not continue to grow or grows slowly. Internet usage may be inhibited for a
number of reasons, such as:
- inadequate Internet infrastructure to support the demands placed on it
as usage grows;
- continued security and authentication concerns with respect to
transmission over the Internet of confidential information;
- privacy concerns, including those related to the placement by web sites
of information on a user's hard drive without the user's knowledge or
consent;
- any well-publicized compromise of web site or Internet transmission
security;
- inconsistent quality of Internet products and services;
- limited availability of cost-effective, high-speed access to the
Internet; and
- significant future Internet service provider delays or outages.
POTENTIAL LIABILITY FOR INFORMATION DISPLAYED ON OUR WEB SITE OR THE WEB
SITES OF OUR CLIENTS MAY REQUIRE US TO DEFEND AGAINST LEGAL CLAIMS, WHICH
MAY RESULT IN SIGNIFICANT EXPENSE.
If any information that we publish proves to be erroneous, we might face
lawsuits based on claims of losses resulting from actions taken on the
basis of that information. We may also be subject to claims for defamation,
libel, copyright or trademark infringement or claims based on other
theories relating to the information we publish on our web site and the web
sites of our clients. These types of claims have been brought, sometimes
successfully, against online services as well as other print publications
in the past. We could also be subject to claims based upon the content that
is accessible from our web site or our clients' web sites through links to
other web sites. Our insurance and contractual indemnification provisions
may not adequately protect us against many of these claims. Defending
against any claims like this could result in the expenditure of significant
financial and managerial resources, whether our insurance covers us or not.
THE LAW RELATING TO INTERNET PRIVACY IS EVOLVING AND MAY AFFECT THE CONTENT
OF OUR WEB SITE AND THE INFORMATION WE PRESENT FROM OUR ADVERTISERS.
Although we are not aware of any legislation or regulatory requirement in
the United States that would directly require a business to notify visitors
to its web site that the data captured in visiting the site may be used by
marketing entities for direct promotion, some local governmental
authorities have broadly construed consumer protection statutes to prohibit
those practices. In particular, the Attorney General of the State of
Michigan notified us that it intended to take action against us if we did
not agree to negotiate a settlement of Michigan's claim that the placement,
without notification, of cookies on the computers of consumers that visited
our site violated Michigan's consumer protection statute. Although we had
drafted and have now implemented a privacy statement that provides the
notice, and believe we will come to a reasonable settlement of the Michigan
dispute, we cannot assure you as to when or if, or the terms upon which,
that dispute will be concluded or that other jurisdictions will not object
to web practices related to cookies and similar practices. Some countries,
including political entities in the European Union, have adopted specific
statutes prohibiting these practices.
14
<PAGE> 17
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET
COULD INCREASE OUR COSTS OF TRANSMITTING DATA AND LEGAL AND REGULATORY
EXPENDITURES AND DECREASE OUR CLIENT BASE.
Existing domestic and international laws or regulations specifically
regulate communications or commerce on the Internet. Laws and regulations
that address issues such as user privacy, pricing, online content
regulation, taxation and the characteristics and quality of online products
and services are under consideration by federal, state, local and foreign
governments and agencies. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet
service providers and online services providers in a manner similar to the
regulation of long distance telephone carriers and to impose access fees on
such companies. This regulation, if imposed, could increase the cost of
transmitting data over the Internet. It may take years to determine the
extent to which existing laws relating to issues such as intellectual
property ownership and infringement, libel, obscenity and personal privacy
are applicable to the Internet. The Federal Trade Commission and government
agencies in some states have been investigating Internet companies
regarding their use of personal information. We could incur additional
expenses if any new regulations regarding the use of personal information
are introduced or if these agencies chose to investigate our privacy
practices. Further, due to the global nature of the Internet, it is
possible that some states, the United States or foreign countries might
attempt to levy taxes on our activities. Any new laws or regulations
relating to the Internet, or adverse application or interpretation of
existing laws, could decrease the rate of growth in the use of the Internet
and the demand for our products and services.
RISKS RELATED TO THE OFFERING
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND THE PRICE IN
THIS OFFERING MAY NOT BE INDICATIVE OF THE PRICE AFTER THE OFFERING, WHICH
MAY DECLINE BELOW THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between us and
the representatives of the underwriters. The principal factors to be
considered in determining the initial public offering price include the
information set forth in this prospectus and otherwise available to the
representatives, the history and prospects for the industry in which we
compete, the ability of our management, the prospects for future earnings,
the present state of our development and our current financial position,
the general condition of the securities markets at the time of this
offering and the recent market prices of, and the demand for, publicly
traded common stock of generally comparable companies. The initial public
offering price should not be considered an indication of the actual value
of the common stock and may not be indicative of the price that will
prevail in the public market after the offering. In particular, the market
price of our common stock may decline below the initial public offering
price. After this offering, an active trading market may not develop or be
sustained.
THE MARKET PRICES OF INTERNET COMPANIES WITH CONTINUING LOSSES LIKE US HAVE
RAPIDLY DECLINED RECENTLY AND DRAMATIC FLUCTUATIONS IN MARKET PRICES FOR
OUR STOCK COULD EXPOSE US TO SECURITIES LITIGATION.
The prices at which our common stock will trade could be subject to wide
fluctuations in response to changes in earnings or revenue estimates by
analysts or other events or factors, many of which are beyond our control.
The stock market has from time to time experienced extreme price and volume
fluctuations which have often been unrelated to the operating performance
of the companies affected. The market prices for securities of
Internet-related companies like us with continuing losses have recently
declined significantly and rapidly. Investors may experience a material
decline in the market price of our common stock, regardless of our
operating performance. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. If we may become
involved in securities litigation in the future, it could cause us a
substantial loss and divert resources and the attention of management from
our business.
SUBSTANTIAL SALES OF OUR COMMON STOCK, OR THE PERCEPTION THAT SUBSTANTIAL
SALES MAY OCCUR, COULD CAUSE OUR STOCK PRICE TO FALL AND MAKE IT DIFFICULT
FOR US TO SELL ADDITIONAL SECURITIES.
If our stockholders sell substantial amounts of our common stock, in the
public market following this offering, the market price of our common stock
could fall. These sales might also make it more difficult for us to sell
equity securities in the future at a time and price that we deem
appropriate. After this offering, we will have 11,178,239 outstanding
shares of common stock, assuming no exercise of the underwriters'
over-allotment options and no exercise of outstanding options or warrants.
Of these shares, the 5,000,000 shares sold in this offering will be freely
tradeable, except for any shares
15
<PAGE> 18
purchased by our "affiliates," as defined in Rule 144 under the Securities
Act. The 6,171,114 shares of common stock outstanding prior to this
offering will be available for sale in the public market immediately after
the offering, except for any shares held by our affiliates. The remaining
7,125 shares will become eligible for resale 90 days after the effective
date of this offering. In addition, the holders of the 1,369,668 shares of
common stock and the holders of warrants to purchase 2,397,959 shares of
our common stock will be entitled to have the resale of their shares
registered under the Securities Act, or to participate in subsequent
registrations, or both. Most of our current stockholders, as well as option
and warrant holders, have agreed not to sell any of their shares of common
stock for 180 days after the date of this prospectus.
After the date of this prospectus, we intend to register up to shares
issuable upon the exercise of outstanding stock options and reserved for
issuance under our stock option plans. Once we register these shares, they
can be sold in the public market immediately following issuance.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE A TAKEOVER OF
STOCKPOINT.
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders.
MANAGEMENT COULD SPEND OR INVEST THE PROCEEDS OF THIS OFFERING IN WAYS WITH
WHICH YOU MAY NOT AGREE.
Our management will have significant discretion in applying the net
proceeds of this offering, and may spend or invest the proceeds from this
offering ineffectively or in ways with which you may not agree. Because our
management currently owns 36.7% of our voting stock and will own 20.9%
after this offering, it may be more difficult for you to object to these
and other management decisions.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase shares of our common stock, you will incur immediate and
substantial dilution of $7.24 per share in net tangible book value per
share.
WE WILL INCUR AN EXTRAORDINARY CHARGE IN THE QUARTER IN WHICH WE COMPLETE
THIS OFFERING AS A RESULT OF PAST WARRANT ISSUANCES AND THE REPAYMENT OF
OUTSTANDING INDEBTEDNESS WITH PROCEEDS FROM THIS OFFERING.
In connection with two recent financings, we issued warrants at low
exercise prices to support $3 million in loans we received. The value
attributed to these warrants (approximately $1.3 million) is treated as
interest expense which we will recognize over the 19 and 15 month terms of
the loan arrangements. We intend to repay the loans with the proceeds of
this offering and will incur an extraordinary charge for the unamortized
balance of the value of the warrants in the quarter in which this offering
is completed. As of June 30, 2000, the unamortized balance was
approximately $1,000,000.
COURT ACTION RELATING TO A SETTLEMENT AGREEMENT WITH ROBERT STAIB COULD
INCREASE THE NUMBER OF WARRANTS OUTSTANDING.
We settled a dispute in December 1999 regarding the number of warrants to
which Robert Staib, our former Chief Executive Officer and a former
director, was entitled by agreeing that some of his warrants were valid in
consideration of the surrender of warrants to purchase 1,368,750 shares
that he held. There is currently pending a motion filed by Robert Staib in
voluntary bankruptcy proceedings requesting that the bankruptcy court enter
an order confirming the validity of the settlement agreement. All of Robert
Staib's significant creditors have consented to the order and the
bankruptcy court is expected to approve the motion on July 31, 2000. If the
bankruptcy court determines that the settlement agreement is invalid,
although we would continue to contest the validity of all the warrants, it
is possible that some or all of the 1,368,750 warrants that Robert Staib
has surrendered for cancellation will be reissued. The exercise of the
warrants may be dilutive and reduce your percentage ownership.
WE DO NOT INTEND TO PAY DIVIDENDS.
We currently intend to retain any earnings for use in the operation and
expansion of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future.
FORWARD-LOOKING STATEMENTS
16
<PAGE> 19
This prospectus includes forward-looking statements. We have based these
statements on our current expectations and projections about future events.
These forward-looking statements include statements about:
- our strategies;
- the future growth of the Internet;
- worldwide growth in use of Internet as a source of information for
personal financial planning and transactions;
- buying patterns of our clients;
- trends based on our perceptions of past activity; and
- other statements that are not historical facts.
When used in this prospectus, the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Our actual results may vary materially from
those anticipated or implied by these forward-looking statements as a
result of a number of risks and uncertainties, including the risks
described in "risk factors" or elsewhere in this prospectus.
USE OF PROCEEDS
Based on an assumed initial public offering price of $10.00 per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses, we estimate that we will receive net proceeds from this
offering of approximately $45,996,700 million, or approximately $52,971,700
million if the underwriters' over-allotment option is exercised in full.
We intend to use approximately $13,200,000 of the net proceeds from this
offering to repay most of our outstanding indebtedness, including interest.
All repayments will include the amount of interest accrued through the date
of repayment. We specifically intend to repay the following debt
outstanding as of June 30, 2000, plus accrued interest:
- $4,145,000 of notes payable with two banks which bear interest at the
prime rate;
- $5,900,000 principal amount of debentures which bear interest at 8.75%
and mature September 30, 2002; and
- $2,970,000 outstanding under two lines of credit with a commercial bank
which bear interest at the prime rate and are secured by substantially
all our assets.
We will also be required to pay an aggregate of $194,000 to executive
officers as bonuses, and $60,000 of expenses to a former executive officer,
upon completion of this offering.
The remaining proceeds will be used primarily to add sales and marketing
personnel for our Internet business, to continue development of our
Internet products, to finance one or more data centers and foreign offices
and for working capital and other general corporate purposes. The amounts
we actually expend for such purposes may vary and will depend on a number
of factors, including the amount of our future revenues. We expect that the
proceeds from this offering will be sufficient to meet our needs at least
through 2001.
In addition, we may acquire businesses, products and technologies that are
complementary to ours, and a portion of the net proceeds may be used for
these acquisitions. We have no agreements with respect to any material
acquisitions as of the date of this prospectus.
Pending these uses, we intend to invest the net proceeds from this offering
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
17
<PAGE> 20
We currently intend to retain any earnings for use in the operation and
expansion of our business and therefore do not anticipate paying any other
cash dividends in the foreseeable future.
18
<PAGE> 21
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of our
common stock after this offering. Pro forma net tangible book value
dilution per share represents the difference between the amount per share
paid by purchasers of shares of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after
completion of this offering.
Our pro forma net tangible book value as of June 30, 2000 was
$(14,357,277), or $(2.32) per share of common stock. Pro forma net tangible
book value per share is equal to our total tangible assets less total
liabilities, divided by the number of outstanding shares of common stock
after giving effect to the conversion of our outstanding preferred stock
into common stock in connection with this offering. After giving effect to
our sale of 5,000,000 shares of common stock offered by this prospectus at
an assumed initial offering price of $10.00 per share and after deducting
the underwriting discount and estimated offering expenses payable by us,
and the write-off of unamortized deferred financing costs and debt discount
associated with the indebtedness that will be repaid with the proceeds of
this offering, our as adjusted pro forma net tangible book value as of June
30, 2000 would have been approximately $30,887,687, or $2.76 per share.
This represents an immediate increase in pro forma net tangible book value
of $5.08 per share to existing stockholders and an immediate dilution of
$7.24 per share to new investors purchasing shares in this offering. If the
initial public offering price is higher or lower, the dilution will be
greater or less, respectively. The following table illustrates this per
share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................................ $ 10.00
Pro forma net tangible book value per share as of June 30, 2000................ $ (2.32)
Increase in pro forma net tangible book value per share attributable to
this offering.............................................................. 5.08
--------
Pro forma net tangible book value per share after the offering................. 2.76
----------
Dilution per share to new investors............................................ $ 7.24
==========
</TABLE>
The following table summarizes, on the pro forma basis described above, as
of June 30, 2000, the differences between the number of shares of common
stock purchased from us, the total cash consideration paid to us and the
average price per share paid by existing stockholders and new investors:
<TABLE>
<CAPTION>
TOTAL AVERAGE
SHARES PURCHASED CONSIDERATION PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 6,178,239 55% $12,080,443 19% $ 1.96
New Investors 5,000,000 45 50,000,000 81 10.00
------------ ----------- ------------ ----
Total 11,178,239 100% $62,080,443 100%
============ =========== ============ ====
</TABLE>
The above tables exclude all options and warrants that will remain
outstanding upon completion of this offering. At June 30, 2000, there were
2,852,550 shares of common stock reserved for issuance upon exercise of
outstanding options with a weighted average exercise price of $3.43 per
share, and 2,726,959 shares of common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of $4.07 per
share, assuming an initial public offering price of $10.00 per share. The
actual number of warrants and their exercise price will depend on the
initial public offering price. See "Certain Transactions-Bridge Loan
Financing". The above tables also assume that the underwriters do not
exercise their over-allotment option.
19
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 as
follows:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of all
outstanding shares of our preferred stock into 2,782,437 shares of
common stock; and
- on a pro forma, as adjusted basis to reflect both the conversion of
all outstanding shares of our preferred stock into common stock as
described above and the sale of 5,000,000 shares of common stock in
this offering at an assumed public offering price of $10.00 per share,
the application of the estimated net proceeds from this offering to
repay most of our outstanding indebtedness, and the write off of
unamortized deferred financing costs and debt discount associated with
the indebtedness, as described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 2000
ACTUAL PRO FORMA AS ADJUSTED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt ........................................................................ $12,306,435 $ 12,306,435 $ 272,116
----------- ------------ -----------
Stockholders' equity (deficiency):
Preferred Stock, no par value per share; 5,000,000 shares authorized:
Convertible Series A Voting Preferred Stock, 320,000 shares issued and
outstanding (convertible into 750,000 shares of common stock),
no shares outstanding pro forma and as adjusted....................... 1,965,991 - -
Convertible Series B Voting Preferred Stock, 282,720 shares issued and
outstanding (convertible into 662,625 shares of common stock),
no shares outstanding pro forma and as adjusted..................... 1,733,639 - -
Convertible Series C Voting Preferred Stock, 773,254 shares issued and
outstanding (convertible into 1,369,812 shares of common stock),
no shares outstanding pro forma and as adjusted...................... 5,455,319 - -
Common stock, $.01 par value per share; 75,000,000 shares authorized;
3,395,802 shares issued and outstanding, 6,178,239 shares outstanding
pro forma, 11,178,239 shares outstanding as adjusted....................... 33,959 61,782 111,782
Common stock warrants...................................................... 1,676,598 1,676,598 1,676,598
Additional paid-in capital................................................. 3,800,530 12,927,656 58,874,356
Deferred stock-based compensation.......................................... (1,682,379) (1,682,379) (1,682,379)
Accumulated deficit........................................................ (26,782,695) (26,782,695) (28,092,670)
------------ ------------ -----------
Total stockholders' equity (deficiency).................................. (13,799,038) (13,799,038) 30,887,687
------------ ------------ -----------
Total capitalization............................................ $ (1,492,603) $ (1,492,603) $31,159,803
============ ============ ===========
</TABLE>
The outstanding stock information presented in the table excludes all
options and warrants that will remain outstanding upon completion of this
offering. At June 30, 2000, there were 2,852,550 shares of common stock
issuable upon the exercise of outstanding options with a weighted average
price of $3.43 per share, and 2,726,959 shares of common stock issuable
upon the exercise of outstanding warrants with a weighted average price of
$4.07 per share, assuming an initial public offering price of $10.00 per
share. The actual number of warrants and their exercise price will depend
on the initial public offering price. See "Certain Transactions-Bridge Loan
Financing." The above table also assumes that the underwriters' do not
exercise their over-allotment option.
20
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes
and with the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this prospectus. The consolidated
statement of operations data for 1995 through 1999 and the balance sheet
data at December 31 for each of 1995 through 1999 are derived from our
audited financial statements. The selected statement of operations data for
the six months ended June 30, 1999 and 2000 and the selected balance
sheet data at June 30, 2000 are derived from our unaudited interim
consolidated financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring accruals, that are
necessary for a fair presentation of our financial condition and results of
operations for these periods. Historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
STATEMENT OF OPERATIONS DATA (1) 1995 1996 1997 1998 1999 1999 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 363,454 $ 862,488 $ 1,427,908 $ 2,177,946 $ 6,829,869 $ 2,438,609 $ 6,467,852
Cost of revenues..................... 334,745 273,003 308,608 764,965 2,289,881 913,882 3,078,951
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit......................... 28,709 589,485 1,119,300 1,412,981 4,539,988 1,524,727 3,388,901
----------- ----------- ----------- ----------- ----------- ----------- -----------
Research and development............. 285,483 579,548 1,057,071 1,101,471 1,637,150 606,149 1,909,530
Sales and marketing.................. 297,654 254,273 752,675 1,566,030 1,590,899 684,593 2,084,751
General and administrative........... 1,499,340 1,845,637 2,556,730 3,523,006 3,588,977 1,577,940 2,038,378
Deferred compensation................ - - - 666,270 612,302 374,400 322,207
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expense............ 2,082,477 2,679,458 4,366,476 6,856,777 7,429,328 3,243,082 6,354,866
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss from continuing
operations......................... (2,053,768) (2,089,973) (3,247,176) (5,443,796) (2,889,340) (1,718,355) (2,965,965)
Other expense, primarily interest.... (206,570) (394,505) (688,525) (784,546) (1,058,545) (438,823) (946,247)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from continuing operations...... (2,260,338) (2,484,478) (3,935,701) (6,228,342) (3,947,885) (2,157,178) (3,912,212)
Income (loss) from discontinued
operations......................... 726,808 (177,877) (405,722) (356,946) 780,808 780,808 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before extraordinary item....... (1,533,530) (2,662,355) (4,341,423) (6,585,288) (3,167,077) (1,376,370) (3,912,212)
Gain on extinguishment of debt....... - - - - - - 233,600
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss............................. (1,533,530) (2,662,355) (4,341,423) (6,585,288) (3,167,077) (1,376,370) (3,678,612)
Cumulative dividends on preferred
stock.............................. - - (40,266) (409,418) (412,918) (206,458) (206,458)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders....................... $(1,533 530) $(2,662,355) $(4,381,689) $(6,994,706) $(3,579,995) $(1,582,828) $(3,885,070)
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted income (loss) per
common share (2):
Loss from continuing operations.... $ (0.73) $ (0.81) $ (1.27) $ (2.10) $ (1.35) $ (0.74) $ (1.25)
Income (loss) from discontinued
operations....................... 0.23 (0.05) (0.13) (0.11) 0.24 0.24 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss before extraordinary item..... (0.50) (0.86) (1.40) (2.21) (1.11) (0.50) (1.25)
Gain on extinguishment of debt..... - - - - - - 0.07
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss........................... $ (0.50) $ (0.86) $ (1.40) $ (2.21) $ (1.11) $ (0.50) $ (1.18)
=========== =========== =========== =========== =========== =========== ===========
Weighted average common shares 3,084,131 3,084,131 3,134,552 3,160,359 3,212,106 3,194,831 3,283,247
outstanding......................
Pro forma basic and diluted income
(loss) per common share (3):
Loss from continuing operations... $ (0.66) $ (0.65)
Income (loss) from discontinued
operations....................... 0.13 -
----------- -----------
Loss before extraordinary item.... (0.53) (0.65)
Gain on extinguishment of debt.... - 0.04
----------- -----------
</TABLE>
21
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loss....................... $ (0.53) $ (0.61)
============ ===========
Weighted average pro forma
common shares outstanding.... 5,921,672 6,053,576
OTHER OPERATING DATA:
Unrecognized contracted revenue
at -period end (4)............. $ -- $84,265 $140,078 $1,458,447 $ 10,703,000 $ 4,900,000 $ 26,000,000
<CAPTION>
DECEMBER 31, JUNE 30,
BALANCE SHEET DATA 1995 1996 1997 1998 1999 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ..........$ 612,242 $ 596,073 $ 242,609 $ 221,098 $ 2,203,623 $ 2,403,390
Working capital (deficit) .......... 300,606 (186,491) (498,987) (5,350,171) (2,668,644) (15,979,432)
Total assets ....................... 2,589,959 2,343,636 2,588,254 3,794,347 6,089,138 8,081,690
Short term debt .................... -- 10,000 -- 4,395,000 1,755,821 12,075,469
Long term debt ..................... 3,750,000 5,750,000 5,550,000 5,900,000 10,536,681 230,966
Stockholders' equity (deficiency)... (2,464,310) (5,071,034) (4,627,141) (9,745,756) (11,426,863) (13,799,038)
</TABLE>
----------
(1) We have reclassified our statement of operations data for 1995 through 1999
to give effect to the sale in May 1999 of our technology and operational
assets related to our products sold to the steel-making industry for
approximately $750,000, recognizing a gain of $433,133 on such sale.
(2) We computed net loss per share information applicable to common
stockholders by including cumulative dividends on our preferred stock. For
additional information, see Note 1 to our consolidated financial
statements.
(3) We prepared the pro forma income (loss) per common share information for
the year ended December 31, 1999 and the six months ended June 30, 2000 by
assuming that our preferred stock was converted into common stock as of the
beginning of the earliest period presented, or as of the issuance date for
shares of Series C preferred stock issued in lieu of dividends. These
conversions will occur automatically upon completion of this offering.
(4) Represents contracted revenues at period end less amounts recognized as
revenue in our statement of operations.
22
<PAGE> 25
MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis together with the
"Selected Consolidated Financial Information" and our consolidated
financial statements and the related notes included later in this
prospectus. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results could
differ substantially from those discussed below as the result of many
factors, including those discussed below and elsewhere in this prospectus,
particularly in "Risk Factors."
OVERVIEW
We were incorporated in 1987 as Milltech HOH, Inc., an Illinois
corporation, and reincorporated in 1993 as Neural Applications Corporation,
a Delaware corporation. We originally developed, marketed and supported
software based solutions for industrial, financial and other data intensive
markets. We derived virtually all of our revenue through 1995, and a
majority of our revenue from 1996 through 1998, from sales of our software
products designed to increase the efficiency of electric arc furnaces in
the metals industry. We sold our technology and operational assets related
to that business in May 1999 for $750,000 plus future royalties, resulting
in a gain of $450,000. We do not expect to receive a material amount of
future royalties. We have classified the operating results of this software
business as "discontinued operations" in our consolidated statements of
operations and the related assets and liabilities as "net assets of
discontinued operations" in our balance sheets. The discussion below of our
results of operations relates solely to our continuing operations.
During 1997, we began to shift our primary focus to the development and
sale of online investment analysis tools and financial information for the
Internet. In March 1997, we acquired Ethos Corporation, a California
company formed in July 1995 that had developed a web site featuring stock
quotation capability (then "www.investorsedge.com"). This web site is the
predecessor of our current Stockpoint.com web site. We accounted for the
acquisition of Ethos as a pooling of interests and restated our financial
statements for periods prior to the acquisition to include the combined
financial information of both companies for all periods presented.
Since 1997, we have placed increasing emphasis on the enhancement of our
Internet business. In July 1999, to better reflect our position as an
Internet applications and financial information services provider, we
changed our name to Stockpoint, Inc.
RESULTS OF OPERATIONS
Our revenues include license fees for hosting and custom software
application services for financial web sites and advertising revenues from
banner ads placed on our web site and those of our clients. In addition, we
have historically generated revenues from assorted data mining and
financial services consulting projects for our clients. We anticipate that
licensing revenues will represent the vast majority of our revenues in
future periods.
Our Internet business model has evolved from an initial dependence on
advertising revenues from our web site to our current model, which
emphasizes licensing of web site products and services to business clients.
During 1997, our revenues began to shift from advertising revenues to
licensing revenues. Licensing of web site products and services to business
clients comprised 48% of our 1997 revenues, 57% of our 1998 revenues and
84% of our 1999 revenues. Our license agreements typically provide for a
flat fee for the agreement's term. We base this fee principally on the
client's selection of site features. We also generally charge a per-view
fee if page views exceed the amount stated in the contract.
Our average contract size has increased from $3,500 in 1997 to $60,000 in
1999 and $120,000 for the six months ended June 30, 2000. These
increases have been primarily the result of the introduction of more
comprehensive product offerings and the expansion of our client base to
include companies interested in licensing more sophisticated product
options. In addition, beginning in 1999, we have been emphasizing two-year
contracts, which increases the average licensing revenues per contract.
Although we generally bill our clients up-front for a portion of our
services, we recognize revenues ratably over the period of the contract. We
reflect the obligation to provide the contracted services as "deferred
revenue" on our balance
23
<PAGE> 26
sheet. This means that we record a liability to balance our accounts
receivable or cash, depending on whether we have collected our billings. We
amortize deferred revenue as we provide the services. Our licensing
contracts typically have lengths of one or two years. We recognize revenue
for special projects as we perform the services.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB 101"), which summarizes the staff's views in applying
generally accepted accounting principles to revenue recognition in
financial statements. For periods after December 31, 1999, we have applied
SAB 101 to development fees, and the related costs, that are negotiated
with and essential to the functionality of our license agreements and
recognize the revenues and related costs ratably over the license period.
We have not applied SAB 101 to our financial statements as of December 31,
1999, because application would have had an immaterial effect.
Our direct cost of revenues primarily includes fees for data feeds and
licenses, custom applications and development charges and maintenance of
infrastructure, programming and quality assurance. We show these costs in
our statement of operations as "cost of revenues." We also include the
direct development and related costs associated with our data mining
applications and consulting services for projects in the Internet and
financial services markets in our cost of revenues. The fees charged under
our vending agreements generally are established as an annual amount or are
incurred on a per client basis. In some situations our fees for data feeds
and licenses are fixed until we and our clients exceed a specified usage
volume. Upon exceeding the specified level, we incur additional fees at a
variable rate. Costs associated with custom applications and development
charges and maintenance of infrastructure, programming and quality
assurance vary with the number of clients and level of volume. We expect
that an increasing percentage of cost of revenues will be variable cost
components that will increase as our volume rises.
Operating expense includes research and development, sales and marketing,
general and administrative and deferred compensation expense. These costs
primarily include compensation and related benefits for personnel along
with professional fees, travel, employee recruiting expense and occupancy
costs. Deferred compensation expense results from the difference between
the exercise price of vested options and the fair value of our stock at the
date of grant. We expect deferred compensation costs to continue through
the end of 2004 as the result of vesting of employee options granted in
1998 and 1999 at an exercise price less than the estimated fair value of
our stock at that time. We expect to recognize approximately $600,000 of
deferred compensation expense for the year ended December 31, 2000.
The following table sets forth, for the periods indicated, selected
financial data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1997 1998 1999 1999 2000
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................... 21.6 35.1 33.5 37.5 47.6
. ------------- ------------ ------------- ------------ ------------
Gross profit....................... 78.4 64.9 66.5 62.5 52.4
------------- ------------ ------------- ------------ ------------
Operating expenses:
Research and development....... 74.0 50.6 24.0 24.9 29.5
Sales and marketing............ 52.7 71.9 23.3 28.1 32.2
General and administrative..... 179.1 161.8 52.5 64.7 31.5
Deferred compensation.......... - 30.6 9.0 15.4 5.0
------------- ------------ ------------- ------------ ------------
Total operating expenses...... 305.8 314.9 108.8 133.1 98.2
------------- ------------ ------------- ------------ ------------
Operating loss from continuing
operations....................... (227.4) (250.0) (42.3) (70.6) (45.8)
Other expense,primarily interest... 48.2 36.0 15.5 18.0 14.6
------------- ------------ ------------- ------------ ------------
Loss from continuing operations.... (275.6)% (286.0)% (57.8)% (88.6)% (60.4)%
============= ============ ============= ============ ============
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
24
<PAGE> 27
Revenues increased 165% from approximately $2,400,000 for the six months
ended June 30,, 1999 to approximately $6,500,000 for the six months ended
June 30, 2000. The increase in revenues was due to an increase in the
number of corporate licensing agreements and the increased average revenues
per licensing agreement. Revenues from licenses increased 229% from
$1,900,000 for the six months ended June 30, 1999 to $6,200,000 for the six
months ended June 30, 2000. GlobalNetFinancial.com, Inc. represented 21.6%
and 16.9% of our total revenues for the six months ended June 30, 1999 and
2000.
Advertising revenues remained approximately the same at $200,000 for the
six months ended June 30, 1999 and 2000. Revenues from advertising were 8%
of total revenues for the six months ended June 30, 1999 but decreased to
3% of total revenues for the six months ended June 30,2000 due to the
increase in total revenues. We expect that advertising revenues will
account for a minimal percentage of our future revenues.
Revenues from our data mining and financial services consulting business
decreased 76% from $300,000 for the six months ended June 30, 1999 to
$100,000 for the six months ended June 30, 2000. The decrease was due to
completion of the consulting contracts and the allocation of personnel to
projects associated with our Internet financial services business. We have
eliminated this business as a separately pursued activity and do not
anticipate significant consulting revenues during 2000.
UNRECOGNIZED CONTRACTED REVENUES
Our unrecognized contracted revenue, which represents total revenues
contracted less revenues recognized, increased 431% from $4,900,000 at June
30, 1999 to $26,000,000 at June 30, 2000. This increase resulted from a
higher size and number of licenses under contract. Of the $26,000,000 in
unrecognized revenue at June 30, 2000, we estimate based on the duration of
our contracts that we will recognize $9,000,000 as revenue during 2000 and
$12,000,000 in 2001. We expect to recognize the balance of this
unrecognized revenue in 2002 and 2003. The actual amounts we recognize in
any particular year will depend on the release date of the client's web
site.
COST OF REVENUES
Cost of revenues increased 237% from approximately $900,000 for the six
months ended June 30, 1999 to approximately $3,100,000 for the six months
ended June 30, 2000. The increase was due to higher costs associated with
additional licensing revenues and international expansion, including fees
and charges for data feeds from content and Internet service providers.
Also, an increase in costs incurred for infrastructure, programming and
quality assurance contributed to the higher cost of revenues in the first
half of 2000.
As a percentage of total costs of revenues for the six months ended June
30, 1999 and 2000, fees for data feeds and licenses were 46% and 62%,
custom application and development charges and maintenance of
infrastructure, programming and quality assurance were 44% and 38%, and
costs associated with data mining and financial services consulting
projects were 10% and 0%.
As a percentage of revenues, costs of revenues increased by 27% from 37.5%
for the six months ended June 30, 1999 to 47.6% for the six months ended
June 30, 2000. This increase resulted primarily from additional fees and
charges for data feeds associated with the renegotiation of some data
contracts, our international expansion and fees related to acquisition of
new content that has not yet achieved economies of scale.
GROSS PROFIT
Gross profit as a percentage of revenues decreased from 62.5% for the six
months ended June 30, 1999 to 52.4% for the six months ended June 30, 2000.
Our gross profit percentage decreased primarily because of additional costs
associated with the renegotiation of some data contracts, our international
expansion including additional international content, and additional
domestic content associated with the higher license revenues during the
first half of 2000. These additions to the cost of revenue related to new
content have reduced our gross profit in the short term because they have
not yet achieved economies of scale. We anticipate that these additions to
content will help to generate additional revenues in the future. On an
absolute dollar basis, gross profit increased 122% from approximately
$1,500,000 for the six months ended June 30, 1999 to approximately
$3,400,000 for the six months ended June 30, 2000. This increase is
primarily attributable to the increase in our revenues.
OPERATING EXPENSES
Research and Development. Research and development expense consists
primarily of compensation and benefits for software programmers and
developers. Research and development costs increased 215% from
approximately $600,000 for
25
<PAGE> 28
the six months ended June 30, 1999 to approximately $1,900,000 for the six
months ended June 30, 2000. The increase in these costs was due to an
increased level of personnel to support a higher volume of clients, and add
to our product offerings and $100,000 in consulting fees to plan for future
infrastructure growth. In addition, wage increases to existing development
personnel were also necessitated due to competitive pressure for developers
thereby adding to research and development costs. As a percentage of
revenues, research and development costs increased from 24.9% for the six
months ended June 30, 1999 to 29.5% for the six months ended June 30, 2000.
On an absolute dollar basis, we expect our research and development costs
to continue to increase as we expand our infrastructure and develop
additional product offerings.
Sales and Marketing. Sales and marketing expense includes compensation,
benefits, commissions for our direct sales force and marketing staff,
advertising, travel expense and fees paid to a public relations firm. Sales
and marketing expense increased 204% from approximately $700,000 for the
six months ended June 30, 1999 to approximately $2,100,000 for the six
months ended June 30, 2000. The increase in sales and marketing was
primarily due to additional sales and marketing personnel and associated
compensation, sales commissions and benefits. Sales and marketing costs
increased as a percentage of revenues from 28.1% for the six months ended
June 30, 1999 to 32.3% for the six months ended June 30, 2000. On an
absolute dollar basis, we expect our sales and marketing costs to rise in
the future to accommodate our continued efforts to increase contracted
revenues.
General and Administrative. General and administrative expense consists of
compensation and benefits for finance and administrative personnel,
occupancy costs, professional and consulting fees, employee recruiting and
relocation and travel expenses. General and administrative expense
increased 29% from approximately $1,600,000 for the six months ended June
30, 1999 to approximately $2,050,000 for the six months ended June 30,
2000. This increase was due principally to an accrual for incentives of
$200,000 costs, $100,000 associated with the elimination of an
administrative position and an increase in other general and administrative
costs of $150,000. General and administrative expense decreased
as a percentage of revenues from 64.7% for the six months ended June 30,
1999 to 31.5% for the six months ended June 30, 2000. On an absolute dollar
basis, we expect our general and administrative costs to continue to
increase in the future to support our planned business growth.
Deferred Compensation. The deferred compensation charges we incurred in the
first six months ended June 30, 1999 and 2000 were computed by multiplying
the vesting employee stock options by the difference between the exercise
price and the estimated fair value of the underlying common stock on the
date of grant. Deferred compensation expense decreased 14% from
approximately $400,000 for the six months ended June 30, 1999 to
approximately $300,000 for the six months ended June 30, 2000. Deferred
compensation decreased as a percentage of revenues from 15.3% for the six
months ended June 30, 1999 to 5.0% for the six months ended June 30, 2000.
We expect that deferred compensation expense will decline in future periods
because we do not anticipate issuing options in the future at a price below
the then current market value of our common stock.
OTHER EXPENSE
Other expense consists primarily of interest on debt. Interest expense
increased 116% from approximately $400,000 for the six months ended June
30, 1999 to approximately $900,000 for the six months ended June 30, 2000.
The increase was due to higher borrowing on our bank lines of credit, an
increase in the interest rate for our credit lines from 6.25% during the
first half of 1999 to 9.50% during the first half of 2000 and interest
incurred on $5,900,000 of outstanding debentures. For the six months ended
June 30, 2000, we also incurred a charge of $300,000 for costs associated
with the issuance of warrants in December 1999 and March 2000. The
unamortized cost of the warrants will be charged to expense at the time of
our initial public offering and will be reflected as an extraordinary
charge in the quarter in which the offering is completed. As of June 30,
2000, the unamortized balance was approximately $1,000,000.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations increased 81% from approximately $2,200,000
for the six months ended June 30, 1999 to approximately $3,900,000 for the
six months ended June 30, 2000. Our operating expense and other expense for
the six months ended June 30, 2000 rose 98%, or $3,600,000 on a combined
basis, over the first half of 1999. This increase in expense was partially
offset by our $1,900,000 improvement in gross profit. We expect our loss
from continuing operations in 2000 to exceed the 1999 level due to
increases in our operating expenses especially as related to our expansion
of sales and marketing activities in the U.S. and internationally.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
26
<PAGE> 29
Revenues increased 214% from approximately $2,200,000 for 1998 to
approximately $6,800,000 for 1999. The increase in revenues was due
principally to the increase in the number of corporate licensing agreements
for our financial services and the increased average revenues per licensing
agreement. Revenues from licenses increased 364% from $1,200,000 for 1998
to $5,800,000 for 1999. One client, GlobalNetFinancial.com, Inc.,
represented 10% and 14% of our total revenues for 1998 and 1999,
respectively.
Advertising revenues decreased 53% from $750,000 for 1998 to $300,000 for
1999. This decrease somewhat offset our higher licensing revenues. We
expect that advertising revenues will account for a decreasing percentage
of our future revenues.
Although less significant, revenues from our data mining and financial
services consulting business increased 226% from $250,000 for 1998 to
$700,000 for 1999. The increase was due to $500,000 in revenues recognized
for work performed on a consulting contract received in the first quarter
of 1999. This contract had a duration of one year and is now completed.
UNRECOGNIZED CONTRACTED REVENUES
Our unrecognized contracted revenue increased 634% from $1,500,000 at the
end of 1998 to $10,700,000 at the end of 1999. We attribute this increase
to our larger number of licenses under contract.
COST OF REVENUES
Cost of revenues increased 199% from approximately $800,000 for 1998 to
approximately $2,300,000 for 1999. The increase was due primarily to an
increase in costs associated with higher licensing revenues, including fees
and charges for data feeds from various exchanges and Internet service
providers along with costs incurred for infrastructure, programming and
quality assurance.
As a percentage of total cost of revenues for 1998 and 1999, fees for data
feeds and licenses were 52% and 53%, custom application and development
charges and maintenance of infrastructure, programming and quality
assurance were 42% and 29%, and costs associated with data mining and
financial services consulting projects were 6% and 18%.
As a percentage of revenues, cost of revenues declined 5% from 35.1% for
1998 to 33.5% for 1999. This decrease resulted primarily because costs
associated with custom application and development charges and maintenance
of infrastructure, programming and quality assurance rose at a slower pace
than revenues.
GROSS PROFIT
Gross profit as a percentage of revenues increased from 64.9% for 1998 to
66.5% for 1999. Our gross profit percentage did not significantly increase
because our cost of data and other fees associated with the additional
license revenues remained relatively fixed as a percentage of revenues. We
expect our content costs to increase as a percentage of revenues and reduce
our gross profit percentage in the future. On an absolute dollar basis,
gross profit increased 221% from approximately $1,400,000 for 1998 to
approximately $4,500,000 for 1999 due primarily to higher revenues.
OPERATING EXPENSES
Research and Development. Research and development costs increased 49% from
approximately $1,100,000 during 1998 to approximately $1,600,000 for 1999.
The increase in these costs was due to greater client volume and the
increased level of personnel necessary to support this volume. Higher wages
for the computer programmers and developers necessary to expand our product
offerings also contributed to the increase. Research and development costs
decreased as a percentage of revenues from 50.6% for 1998 to 24.0% for
1999.
Sales and Marketing. Sales and marketing expense remained relatively
constant at $1,600,000 for 1998 and 1999. Sales and marketing costs
decreased as a percentage of revenues from 71.9% for 1998 to 23.3% for
1999.
General and Administrative. General and administrative expense increased 2%
from approximately $3,500,000 for 1998 to approximately $3,600,000 for
1999. This increase was due to a $600,000 increase in professional and
consulting fees and a $300,000 increase in bad debt expense, partially
offset by a $300,000 reduction in travel expense and a $500,000 reduction
27
<PAGE> 30
in compensation and benefit expenses. General and administrative expense
decreased as a percentage of revenues from 161.8% for 1998 to 52.5% for
1999.
Deferred Compensation. The deferred compensation charges we incurred in
1998 and 1999 were computed by multiplying the vesting employee stock
options by the difference between the exercise price and the estimated fair
value of the underlying common stock on the date of grant. Deferred
compensation expense decreased from approximately $700,000 in 1998 to
approximately $600,000 for 1999 due to an accelerated vesting schedule of
options in 1998. Deferred compensation decreased as a percentage of
revenues from 30.6% for 1998 to 9.0% for 1999.
OTHER EXPENSE
Interest expense increased 35% from approximately $800,000 for 1998 to
approximately $1,100,000 for 1999 due to higher borrowing on our bank lines
of credit and, to a lesser extent, interest incurred on the $5,900,000 of
debentures we issued in 1998. These debentures were outstanding for only a
portion of 1998.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations decreased 37% from approximately $6,200,000
for 1998 to approximately $3,900,000 for 1999. Our total 1999 operating
expense and other expense rose 11%, or $800,000 on a combined basis, over
1998. However, our $3,100,000 improvement in gross profit, primarily due to
increased revenues, more than offset these increased expenses.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Revenues increased 53% from approximately $1,400,000 for 1997 to
approximately $2,200,000 for 1998. The increase in revenues was due
primarily to an increase in license revenues as the result of a larger
number of corporate licensing agreements and also to an increase in the
average revenues per licensing agreement. Revenues from license agreements
increased 79% or $500,000 from $700,000 for 1997 to $1,200,000 for 1998.
Advertising revenues increased 25% from $600,000 for 1997 to $750,000 for
1998. In addition, revenues from projects related to our data mining and
financial services consulting was $100,000 in 1997 and $250,000 in 1998.
During 1997, we began using our new licensing strategy and de-emphasizing
online advertisements and consulting services.
UNRECOGNIZED CONTRACTED REVENUES
Unrecognized contracted revenue increased by 941% from $150,000 at the end
of 1997 to $1,500,000 at the end of 1998. This increase was the result of
growth in the number of licenses we had under contract.
COST OF REVENUES
Cost of revenues increased 148% from approximately $300,000 for 1997 to
approximately $800,000 for 1998. Our cost of revenues increased as a
percentage of revenues from 21.6% in 1997 to 35.1% in 1998. These increases
resulted primarily from higher costs for custom application and
development, infrastructure, programming and quality assurance to respond
to the increase in revenue and anticipated increase in business volume. In
addition, as the number of our corporate licensing agreements increased,
our data feed and Internet service provider charges increased as a
percentage of revenues.
As a percentage of total cost of revenues for 1997 and 1998, fees for data
feeds and licenses were 66% and 52%, custom application and development
charges and maintenance of infrastructure, programming and quality
assurance were 22% and 42%, and costs associated with data mining and
financial services consulting projects were 12% and 6%.
28
<PAGE> 31
GROSS PROFIT
Gross profit as a percentage of revenues decreased from 78.4% in 1997 to
64.9% in 1998. This decline was due principally to an increase in data feed
and Internet service provider charges. On an absolute dollar basis, gross
profit increased 26% from approximately $1,100,000 for 1997 to
approximately $1,400,000 for 1998. This increase resulted from the increase
in our revenues.
OPERATING EXPENSES
Research and Development. Research and development costs increased
approximately $50,000 or 4% from 1997 to 1998. The increase was due to the
hiring of additional staff to develop and enhance our services. Although
research and development costs increased in absolute dollars in 1998, they
decreased as a percentage of revenues from 74.0% in 1997 to 50.6% in 1998.
This decrease as a percentage of revenues was due to the increase in our
revenues.
Sales and Marketing. Sales and marketing expense increased 108% from
approximately $800,000 in 1997 to approximately $1,600,000 in 1998. We
began increasing our sales and marketing efforts in late 1997 and continued
to do so through 1998. In particular, we added to our direct sales force,
expanded our public relations programs and increased our attendance at
trade shows.
General and Administrative. General and administrative expense increased
38% from approximately $2,600,000 in 1997 to approximately $3,500,000 in
1998. This increase was due to a $500,000 increase in compensation and
benefit expense, a $300,000 increase in travel expense and a $100,000
increase in recruiting expenses.
Deferred Compensation. The $700,000 deferred compensation expense we
incurred in 1998 resulted from the vesting of employee stock options
granted in July 1998 at an exercise price below the estimated fair value of
our common stock.
OTHER EXPENSE
Other expense consists primarily of interest on debt. Interest expense
increased 14% from approximately $700,000 in 1997 to approximately $800,000
in 1998. This increase resulted from higher borrowing on our bank lines of
credit and, to a lesser extent, interest incurred on the $5,900,000 of
debentures we issued in 1998. These debentures were outstanding for only a
portion of 1998.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations increased 58% from approximately $3,900,000
in 1997 to approximately $6,200,000 in 1998. Although our revenues and
gross profit increased during 1998, our investment in operations and
increase in interest payments on debt resulted in increased losses from
continuing operations.
QUARTERLY OPERATING RESULTS FROM CONTINUING OPERATIONS
The following table sets forth, for the periods presented, quarterly
financial data from our statements of operations. We believe that the
quarterly information has been prepared on substantially the same basis as
our audited financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the financial information for the periods presented. You should read this
information in conjunction with
29
<PAGE> 32
the audited financial statements and notes to those statements included
later in this prospectus. Our operating results in any quarter are not
necessarily indicative of our future operating results.
<TABLE>
<CAPTION>
QUARTER ENDED
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ 462,992 $ 858,638 $ 933,118 $1,505,491 $ 1,992,900 $2,398,360 $ 2,738,018 $ 3,729,834
Cost of revenues... 253,640 344,662 401,897 511,985 593,283 782,716 1,349,515 1,729,436
----------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
Gross profit..... 209,352 513,976 531,221 993,506 1,399,617 1,615,644 1,388,503 2,000,398
Total operating
expenses......... 2,216,778 2,032,128 1,724,191 1,518,891 1,865,800 2,320,446 3,096,069 3,258,797
Other expense...... 215,354 233,101 229,585 209,238 323,397 296,325 395,918 550,329
----------- ----------- ----------- ---------- ---------- ----------- ----------- -----------
Loss from con-
tinuing operations $(2,222,780) $(1,751,253) $(1,422,555) $ (734,623) $ (789,580) $(1,001,127) $(2,103,484) $(1,808,728)
=========== =========== =========== ========== ========== =========== =========== ===========
</TABLE>
Revenues have generally increased from quarter to quarter due almost
entirely to increases in licensing revenues. As our revenues have
increased, the costs associated with revenue generation have risen to
accommodate our growth and we have increased our spending on additional
content and infrastructure.
Gross profit on an absolute dollar basis has generally increased due to
continued higher revenues. In the first quarter of 2000, gross profit
declined from the prior third and fourth quarter levels due to higher costs
for data feeds, content and other direct costs of revenues, including
custom application and development charges, infrastructure, programming and
quality assurance. The increase in costs for data feeds and content were
primarily due to costs associated with our international expansion, vendor
agreements for news and additional content providers. In the second quarter
of 2000 our gross profit increased over the first quarter 2000 due to
higher licensing revenue and a lower increase in cost of revenues.
Gross profit as a percentage of revenues generally increased from the third
quarter of 1998 through the third quarter of 1999. This increase in the
gross profit percentage was due to an increase in our revenues associated
with the development and growth of our business generated from corporate
licensing agreements and a lower increase in our cost of revenues for data
feeds, content and other direct costs of revenues.
From the fourth quarter of 1999 through the first quarter of 2000, the
gross profit percentage decreased as a result of renegotiation of some of
our content agreements to specifically permit our corporate licensing
business model, and our acquisition of additional content in anticipation
of our international expansion. Gross profit as a percentage of revenues
declined during the fourth quarter of 1999 to 67% and during the first
quarter of 2000 to 51% from the gross profit percentage of 70% in the third
quarter of 1999. These decreases were due to an increase in our cost of
data feeds and other content charges associated with the renegotiation of
some data contracts, our international expansion and fees related to the
acquisition of new content that had not yet achieved economies of scale.
Our cost of data feeds and content charges increased from 23% of revenues
during the fourth quarter of 1999 to 30% of revenues during the first
quarter of 2000, along with an increase in other direct costs associated
with cost of revenues, including custom application and development
charges, infrastructure, programming and quality assurance. During the
second quarter of 2000 our gross profit as a percentage of revenues
increased to 54% as some of our contracts achieved some economies of scale,
and our cost of data feeds and other content charges declined from 30% of
revenues to 29% of revenues. In addition, our cost of revenues for custom
application and development charges, infrastructure, programming and
quality assurance declined from 19% of reveues to 17% of revenues. As our
business grows and realizes increasing economies of scale, our gross profit
percentage is anticipated to improve. However, there can be no assurance
provided that our gross profit percentage will improve in future quarters.
Operating expenses declined in the fourth quarter of 1998 and succeeding
first two quarters of 1999 due to a cost containment program. Expenses
increased in the third and fourth quarters of 1999 as well as in the first
and second quarters of 2000 to accommodate our increased licensing level
and international expansion. Operating expense is expected to continue to
increase in absolute dollars however, we anticipate that operating expense
as a percentage of revenue will begin to decline in future quarters
starting in 2001. Interest expense in the third quarter of 1999 was higher
due to a 200 basis point increase in the interest rate under our credit
line retroactive to the first quarter. Interest expense in the fourth
quarter of 1999 and the first two quarters of 2000 remained relatively high
compared to prior quarters due to borrowing costs associated with
additional debt. We will incur an extraordinary charge for the remaining
unamortized balance of the debt discount for interest cost applicable to
the warrants issued for the additional debt in the quarter in which the
offering is completed. As of June 30, 2000 the unamortized balance was
approximately $1,000,000.
LIQUIDITY AND CAPITAL RESOURCES
We have generated losses in every year of our operations and have financed
those losses, as well as the growth of our business, through a series of
private placements and bank borrowings.
During the six months ended June 30, 2000 we generated approximately
$100,000 of cash from operating activities. We used approximately $650,000,
$1,300,000, $3,800,000 and $3,650,000 of cash in continuing operating
activities during the six months ended June 30, 1999 and the years ended
December 31, 1999, 1998 and 1997, respectively. We used this cash primarily
to fund losses of approximately $1,400,000, $3,200,000, $6,600,000 and
$4,300,000 during these periods. The losses were partially offset in most
of these periods by adjustments for noncash items such as depreciation and
compensation expense related to options and warrants and increases in
deferred revenue.
30
<PAGE> 33
We used cash in continuing investing activities of approximately $350,000,
$150,000 and $600,000 (the second and third amounts excluding $750,000
generated from the sale of discontinued operations), $800,000 and $500,000
during the six months ended June 30, 2000 and 1999 and the years ended
December 31, 1999, 1998 and 1997, respectively. We applied cash primarily
to finance the costs for computer hardware and software.
The financing activities that have funded these cash uses consist of a
series of debt and equity placements and bank financings. We conducted a
private placement of units consisting of our series C preferred stock and
debentures in 1997 and 1998, generating $9,800,000 of cash in 1997 and
$1,150,000 of cash in 1998 (net of issuance costs). The debentures, which
represented half of these proceeds, are secured by an irrevocable letter of
credit issued by the bank that also extended credit to us under a credit
line in 1998. We applied the cash proceeds from this private placement in
1997 to repayment of $5,500,000 of outstanding borrowings under a bank line
of credit, resulting in net cash from financing activities of $4,200,000 in
1997. Although we repaid $910,000 of borrowings under a line that matured
in 1998, we also obtained two additional credit lines from two commercial
banks that contributed $5,100,000 of cash from financing activities in
1998, resulting in net cash from financing activities of $5,300,000 in
1998. Additional borrowings under these credit lines became unavailable
after December 1998, impairing our ability to finance cash consumed in
operating activities during much of 1999. We satisfied our cash needs, in
part, during this period with proceeds from sale of our metals business.
We renegotiated the borrowings under our two credit agreements in December
1999. We had $4,145,000 plus $300,000 of accrued interest outstanding under
these agreements, $1,145,000 of which had matured in September 1999. We
negotiated an extension of these agreements to June 30, 2001 and obtained
waivers of various covenant defaults. The renegotiated agreement requires
us to repay all sums outstanding under the credit agreements, and either
repay the full amount of the debentures or obtain a replacement letter of
credit, contemporaneously with the closing of this offering. We intend to
use a portion of the proceeds from the offering to repay these debentures.
We will incur an extraordinary charge for the remaining unamortized portion
of the financing costs related to our debentures when we repay them.
At the same time as we renegotiated our existing credit agreements in
December 1999, we obtained a new $2,500,000 line of credit from a third
bank that is secured by substantially all of our assets and by guarantees
and collateral from eight investors. We issued warrants to purchase 750,000
shares of our common stock to the investors for these guarantees. Our
agreement with the investors requires us to repay the line on the earlier
of completion of this offering or June 30, 2001. If we default, the
investors may assume the bank's position. We are currently amortizing over
the credit line term a $540,000 debt discount that represents the value of
the warrants. We intend to repay this credit line in full with proceeds
from this offering and will incur an extraordinary charge for the remaining
unamortized balance of this debt discount in the quarter in which the
offering is completed. As of June 30, 2000, the unamortized balance was
approximately $350,000.
We financed cash needs during the first six months of 2000 with proceeds
from the $2,500,000 line of credit, and from a new $500,000 line of credit
from the same bank obtained in March 2000. Three investors guaranteed this
new line of credit and secured it with letters of credit or the pledge of
deposit accounts. We issued warrants to purchase 200,000 shares of common
stock to the investors for these guarantees. We are also required to repay
this line of credit by June 30, 2001. We will amortize over the term of the
credit line an $800,000 debt discount that represents the value of the
warrants. We intend to repay this credit line in full with proceeds from
this offering and will incur an extraordinary charge for the remaining
unamortized balance of this debt discount in the quarter in which the
offering is completed. As of June 30, 2000, the unamortized balance was
approximately $650,000.
We intend to use the net proceeds of this offering to repay most of our
outstanding indebtedness, to add sales and marketing personnel for our
Internet business, to continue development of our Internet products, to
finance one or more data centers and foreign offices and for working
capital and other general corporate purposes. In addition, we will consider
strategic alliances and acquisitions that we deem appropriate to enhance
our business and operations. We estimate that, as a result of this public
offering, we will have sufficient capital to meet our needs through at
least the year 2001. Upon completion of the offering, we will not have a
committed line of credit in place.
31
<PAGE> 34
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as "derivatives"), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure these instruments at fair value. Recognition of gains or losses
resulting from changes in the value of derivatives is based on the use of
each derivative instrument and whether it qualifies for hedge accounting.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. We have not yet determined the effect of SFAS No. 133
on our consolidated financial statements.
DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure relates to interest rates on our variable
rate debt. Our debt that bears this risk are our notes payable and lines of
credit in the amount of $7,115,000 outstanding at June 30, 2000. This debt
bears interest at the prime rate. We expect to repay this debt with a
portion of the proceeds of this offering.
32
<PAGE> 35
BUSINESS
GENERAL
Stockpoint is a leading provider of online investment analysis tools and
financial information. We develop and integrate sophisticated financial
applications to provide our clients customized financial web pages. We "host"
these web pages by maintaining the data and applications on our web servers and
by applying Internet-based data management technology we have developed. This
enables our clients to outsource their financial web page production and
maintenance, and provide extensive financial content and analysis tools to their
users.
Our clients include web portals, media companies, traditional and online
brokerage firms, commercial banks, asset managers, electronic communication
networks, 401(k) sponsors and insurance companies. As of June 30, 2000, we had
approximately 250 clients, including companies such as Barclays Global
Investors, SURETRADE, VerticalNet, Inc. and U.S. Bancorp Piper Jaffray Inc.
We offer comprehensive solutions for businesses seeking to add financial content
to their web sites. With the products and services we provide and host, our
clients are able to offer their users Internet-based real-time and delayed stock
quotes, charting capabilities, portfolio management and analysis tools, currency
utilities, company research and business news. We also enable our customers to
offer many of these features over wireless devices. Our services create an
online environment that allows our clients' users to easily analyze and manage
their holdings using detailed financial information and advanced Internet
technologies.
Since 1999, we have generated substantially all of our total revenues from
technology licenses. Our revenue is derived from license agreements under which
we provide customized financial content and applications directly from our data
center over the Internet to our clients' users. Most of our client contracts
have initial terms of one or two years.
INDUSTRY OVERVIEW
TRENDS
In recent years, the proliferation of personal computers, the widespread
adoption of the Internet, and the advent of increasingly powerful and easy to
use Internet navigation tools has resulted in explosive growth in the use of the
Internet as a global communications tool, a source of fast and easy access to
unprecedented breadth of information and an international means of commerce.
Industry sources estimate that the number of Internet users worldwide will grow
from 304 million in 2000 to 500 million in 2003.
Coincident with this revolution in the use of information technology has been a
rapid trend toward individual money management. During the past ten years, high
returns generated by the longest sustained positive U.S. stock market in
post-war history, together with an increase in retirement assets and the number
of investment options available, have caused substantial growth in the ownership
of financial assets worldwide. According to the Board of Governors of the
Federal Reserve System, total financial assets of U.S. households and nonprofit
organizations was $21.8 trillion at the end of 1995. By the end of 1999, that
number increased to $34.9 trillion. Furthermore, the Investment Company
Institute estimates that in early 1999, 48.2% of all U.S. households owned
equity securities directly in the form of individual stocks or indirectly
through mutual funds.
Taken together, these two trends have resulted in a dramatic increase in the use
of online financial services and trading. Investors are increasingly looking to
the Internet for information about their financial assets. According to
Forrester Research Inc., there were 5.7 million U.S. households using the
Internet to execute financial transactions and obtain financial information in
1999. Forrester Research predicts that this number will increase to 21 million
households by 2003, when 53% of U.S. households are expected to be online. In
addition, both retail and institutional investors are increasingly demanding
up-to-the-minute information on security prices and business trends, and the
market analysis tools necessary to assimilate this information. Many investors
are using this information to manage their financial assets more actively.
Moreover, instead of resorting to a broker or other financial intermediary,
individual investors now have access to online trading services that allow them
to rapidly execute their own transactions at a lower cost than that historically
charged by traditional brokers. Forrester Research has projected that online
investing accounts in the U.S. will grow from $374 billion of assets in 5.4
million online accounts in 1999 to $3.1 trillion of assets in 20.4 million
online
33
<PAGE> 36
accounts by 2003. The growth in electronic and online financial services has not
been limited to equity trading. Commercial banks have increasingly broadened
both the breadth of financial services they provide and the means of accessing
those services electronically. Many banking clients now not only have online
access to account information, but also have the ability to transfer those
assets between insured accounts, fixed income investments and equity investments
online.
ISSUES
As a result of these developments, many companies that have an Internet
presence, including web portals and media companies, have developed or are
developing financial market content for their web sites in an effort to enhance
their attractiveness to Internet users and to assist in user retention. In
particular, many financial services companies such as commercial and investment
banks, mutual fund companies and 401(k) plan sponsors are concluding that the
availability of stock quotes, analysis and business information on their web
sites is a prerequisite to the generation of significant web traffic and
e-commerce transactions. The quality and breadth of financial information
offered is rapidly becoming a differentiator among financial services providers.
Unlike many other web page development projects, the financial information
components of an Internet site require multiple skills not commonly available
through a single provider. Companies must contract for not only the web graphics
and display development services offered by many web site developers, but must
also purchase specialized applications software to provide graphing and
analysis, specialized database software to manage quote and financial
information, and hardware and communications infrastructure to handle the
storage and transmission of this information. Many of the available applications
are inflexible, cannot be customized to the company's existing web site, or
require extensive programming and customization to integrate with the other
applications that will be used on the site. Even if the developer is capable of
creating these applications and infrastructure, the company must purchase
financial content from various suppliers to display through the system. This
requires not only the integration of disparate content data, but the negotiation
of individual provider contracts.
Further, a company must constantly monitor and revise the software and hardware
tools that manage actively updated information in order for the financial
information components of a web site to be competitive. As a result, any company
that is considering internally adding and maintaining financial information and
analysis capabilities on its web site faces a considerable and on-going
expenditure of time, effort and expense.
THE STOCKPOINT SOLUTION
To address the demand for Internet-based financial information and analysis, we
offer our clients a menu of financial applications and content. We seamlessly
integrate these applications and content into our clients' sites to provide a
comprehensive solution for the financial information component of their Internet
strategy. We host these sites on behalf of our clients, relieving them of the
cost and expense of monitoring actively updated web content. Our web
applications have been specifically developed by us to allow customization to
the "look and feel" of a client's web site. In addition, we provide custom
services to integrate the proprietary data maintained by our clients. All of
these features can be purchased as a complete package or as individual functions
and rapidly integrated into the existing features of a client's web site.
We enable our clients to provide a broad range of financial information and
analysis to their users. We offer delayed and real-time U.S. stock exchange
quotation capabilities, as well as information on trading in international
markets. We provide industry-leading charting capabilities in both traditional
static image formats, and interactive Java format. We provide portfolio tracking
tools that enable our clients to offer their consumers the means of actively
monitoring their own portfolios. We offer international currency translation
utilities that provide currency translation on a real-time basis. Through
reseller relationships, we also offer company profiles, analyst and research
information, live market commentary, mutual fund data and other financial news.
We have specifically designed our products for ease of customization. Our
software permits us to add a client's graphics and to alter the color and
display layout to duplicate the look and feel used by our clients while
retaining our robust product functions. Our products are modular in design to
permit a client to add additional features as they need more functionality. We
have also designed the products to facilitate custom extensions that can be
built to make use of proprietary data or content provided by a client.
34
<PAGE> 37
As part of our comprehensive solution, we also offer web site hosting, data
center and content services. We maintain sophisticated communications,
processing and storage capacity and infrastructure for web pages at our
facilities. By establishing content contracts for the financial information that
we host on our clients' behalf, we provide rapid access to a broad spectrum of
financial data that can be displayed and manipulated by our proprietary software
tools. As a result, we are able to reduce our clients' day-to-day management
requirements while at the same time providing them with the actively updated
financial content that they require.
We believe that our comprehensive capabilities in financial information
solutions for the Internet allow us to provide high quality financial
information and analysis web functionality. We believe that we have developed a
reputation for comprehensive, reliable and high quality financial web pages.
GROWTH STRATEGY
Our objective is to be the leading provider of global online investment analysis
tools and financial information that enables our clients to provide extensive
financial content and decision-making tools on their web sites. Key elements
of our strategy include:
- ENABLING THE FINANCIAL SERVICES MARKETS. We intend to rapidly expand our
sales force to reach businesses in industries that require online
investment analysis tools and financial information on their web sites. At
June 30, 2000, we had contracts with approximately 250 companies in a
number of different industries. We believe this broad client experience
enables us to intelligently recommend and sell new products, content and
services to improve web site functionality. For example, our clients
include eight of Gomez Advisors' top 20 rated online brokerage firms. We
plan to focus our marketing efforts on web portals, media companies,
traditional and online brokerage firms, commercial banks, asset managers,
electronic communication networks, 401(k) sponsors and insurance companies.
- EXPANDING OUR EXISTING CLIENT RELATIONSHIPS. We intend to continue to
strengthen our relationships with our existing clients by offering
additional value-added products and services that we create or obtain
through partnership or acquisition. For example, in July 2000 we began
marketing our Portfolio Pro product to our existing clients.
- DEVELOPING PRODUCT OFFERINGS USING INNOVATIVE TECHNOLOGY. We maintain a
large development staff that creates innovative products and services. We
intend to focus our development efforts on refining and extending the
capabilities of our current products as well as capitalizing on emerging
trends to construct leading edge products that facilitate data analysis and
more informed investment decisions. For example, we recently introduced a
suite of wireless applications that enables users to view financial charts
on their cell phones and some other portable devices. We also intend to
establish one or more data centers, which may be leased or owned, to
maintain the scalability and availability of our web hosting services.
- CREATING A WORLDWIDE PRESENCE. We intend to expand our product offerings
and international presence to serve the global online financial information
needs of our clients and their users. For example, Commonwealth Securities
Limited, Australia's largest online brokerage firm, recently engaged us to
provide U.S. securities data for their web site. We also supply select
clients with online financial market data from Belgium, Canada, Denmark,
France, Italy, the Netherlands and the United Kingdom. To further our
international objectives, we recently opened an office in London, England
and intend to open an office in Hong Kong or Singapore during 2000.
Revenues from international clients represented approximately 4% of our
total revenues in 1999 and approximately 6% for the six months ended June
30, 2000.
- PURSUING STRATEGIC ALLIANCES OR ACQUISITIONS. We intend to accelerate our
global sales and marketing efforts and technology development, and gain
access to compelling content, applications and functionality, through
strategic alliances and acquisitions. For example, our relationships with
content providers allow us to cost effectively deliver financial
applications and content to our clients' web sites. We intend to seek
acquisitions of businesses to complement our products or services or to
give us access to new markets.
STOCKPOINT TARGET MARKETS
35
<PAGE> 38
We focus our sales and marketing efforts in eight key online financial services
markets. Depending on the scope of their current Internet financial offering,
clients will either license a full finance channel or license individual tools
or applications.
WEB PORTAL AND MEDIA COMPANIES
Internet "portal" and media web sites either create proprietary content or
aggregate content from various sources to attract and retain visitors. Most
of these sites include financial content as one of the key content elements
included for this purpose. Financial content is fundamentally different
from other types of content because of the technological challenge of
distributing an increasingly complex analysis of financial information.
This complexity is attributed to an increasing rate of transactions, the
number of world markets and the number of users.
Many portal and media sites do not have the required technical resources or
expertise to build their own investment site. They prefer to outsource this
development and functionality to others, such as Stockpoint. In our
experience, a typical portal or media client will tend to license a
full-featured financial site as opposed to buying a la carte. Examples of
these clients served by us include LookSmart Ltd. and MyWay.com, for both
of whom we host a full financial channel, and GlobalNetFinancial.com,
ZDTV, TheStreet.co.uk, Worldly Information Network, Inc., Redchip.com,
Inc.
ONLINE BROKERAGE FIRMS
We currently have contracts with eight of the top 20 online brokerages as
ranked by Gomez Advisors. Online brokerages must have an established
web-based investing presence and continue to offer innovative products and
applications to differentiate their offerings from those of others. For
example, they may license charts or stock screening functionality to
augment an existing site. Over time, we believe these clients will retain
outside contractors to provide additional functionality to either reduce
the number of their vendor relationships or buy new products outside of
their principal expertise. Examples of online brokerage clients served by
us include National Discount Brokers Group Inc., SURETRADE and A.B.
Watley, Inc.
TRADITIONAL BROKERAGE FIRMS
Traditional brokerage firms are also adding Internet functionality to their
service offerings. Many traditional brokerage firms have experienced an
erosion of their share of the online brokerage marketplace and perceive a
potential competitive threat from growing online brokerage firms. In our
experience, while online brokerage firms may license specific tools and
applications, traditional brokerage firms seek more of a full scope
solution which can be brought to market rapidly. Examples of online
investment banks served by us include Commonwealth Securities Ltd.,
Robertson Stephens, U.S. Bancorp Piper Jaffray Inc., Deutsche Bank, RW
Baird & Co., Inc., WR Hambrecht + Co., eMeyerson.com, Inc. and USAA.
COMMERCIAL BANKS
Many commercial banks are beginning to offer full scope financial portals
and brokerage services. We believe that many of these banks intend to
develop a more comprehensive financial solution for their consumers and
will expand their offerings to include investment financial information and
analytical tools. Examples of commercial banks served by us include M&T
Bank Corp. and Union Bank of California N.A.
MUTUAL FUNDS/ASSET MANAGEMENT
These companies typically have an established web presence and license
specific applications and functionality. The business objective of these
clients is to differentiate themselves with a more compelling user
experience or by offering a more cost effective data solution for its
advisors. An example of one of these clients is Fremont Funds and Barclays
Global Investors.
STOCK EXCHANGES AND ELECTRONIC COMMUNICATION NETWORKS (ECNS)
36
<PAGE> 39
Although their primary focus is to facilitate trade execution, stock
exchanges and ECNs are also building web sites for users to track their
investments. Exchanges and ECNs have a diverse set of needs ranging from a
la carte applications to full web site offerings. An example of an ECN that
is our customer is MarketXT, Inc.
CORPORATIONS
We provide quote information for corporate investor relations sites,
including the sites of several Fortune 500 companies. Typically, these
pages include the company's specific stock quote, fundamental data and
access to SEC reports. An example of a corporation we serve is Coca Cola
Co.
401(K) PLAN SPONSORS
We provide 401(k) online tracking tools to employers. This online
capability allows the employees to track the performance of their 401(k)
investments in real-time. An example of a client utilizing this
functionality is PricewaterhouseCoopers LLP.
STOCKPOINT PRODUCT OFFERINGS
Our financial products, which we generally offer on a bundled basis, enable
financial services companies to provide financial information on their web
sites. Our financial product offerings include:
QUOTATION FEATURES
We license real-time and delayed stock and mutual fund quotes for
securities of the following countries: Canada, Denmark, France, Italy, the
Netherlands, the United Kingdom and the United States. For most of these
countries, our applications provide current price, open, change, high, low,
52-week high and low, earnings per share, volume, shares outstanding,
market capitalization, dividend, ex-dividend, and price/earnings ratio.
Stock quotes are available either on web sites that we host or over
wireless web-capable telephones.
CHARTING
Classic Quick Charts. We believe that our Classic Quick Charts provide
easy-to-read information that distinguishes them from many competitive
offerings. These fast, cleanly designed charts show price performance and
volume for securities in our database. The Classic Quick Charts allow users
to select time increments including, one minute, ten minutes, hourly and
daily. Classic Quick Charts also include interactive features such as
moving average, and the ability to plot against other stocks and indexes.
Technical indicators can be added for comparison, which include Bollinger
bands, moving averages convergence/divergence, on balance volume, price
rate of change, relative strength, standard deviation and stochastics.
Interactive Charts. This feature expands on Classic Quick Charts to provide
minute-by-minute updates of charted information. We offer intraday price
performance and volume on securities in our database. The intraday
interactive charts allow users to select time increments including
tick-by-tick, one minute, ten minutes, hourly and daily. Users have the
ability to zoom in on date and time ranges by clicking and dragging on the
chart, and technical indicators can be added for comparison without
refreshing the chart or web page.
We also provide charts containing intraday information for United States
and international markets over wireless web-capable telephones and other
devices.
PORTFOLIO TRACKING AND MANAGEMENT
Our personal portfolio manager allows users to track the performance of
their portfolios from their PCs. Our web-based personal portfolio manager
lets users easily edit multiple portfolios and calculate current profit and
loss for individual and combined portfolios. The personal portfolio manager
includes a login screen, portfolio setup screen, portfolio menu screen and
a data export feature. Easily customized to complement a client's web site,
our personal portfolio manager serves as a tool to generate return visits
by users.
37
<PAGE> 40
We also offer the following products in this category: stock and mutual
fund screening applications, automatic portfolio alerting via email, an
interactive Java portfolio manager and a scrolling, personalized desktop
stock ticker.
INDEXES AND CURRENCY DATA
We provide the major market indexes for the United States as well as for
most international markets. We also permit the client to display prices of
international currencies in real time and display this information in a
currency table featuring cross-reference functionality. All of this data is
stored by our proprietary databases in both intraday and historical
formats, and can be plotted with our charting applications.
NEWS AND ANALYST INFORMATION
Through reseller relationships with numerous content sources, we provide an
extensive offering of news and analyst information. We obtain this
information on a non-exclusive basis.
Company Profiles. We offer company profiles from Market Guide, which
feature comprehensive fundamental information on U.S. and foreign companies
trading on the NYSE, Nasdaq and AMEX. Companies are continually added and
updated.
Analyst and Research Information. We offer this feature from Zacks
Investment Research, an industry leader for analyst information. Zacks
provides analyst summaries, analyst opinions, average recommendations,
earnings per share, surprise percentage, consensus estimates and industry
rank. Income statements and balance sheets are also available.
News Wire Services. Through a relationship with Comtex Scientific
Corporation, we offer full-text news stories from wire services such as
Business Wire, PR Newswire, AP Online and UPI. For international news, we
have a relationship with AFX News Limited. Our news service tracks news
stories by category and keyword, and can automatically display charts and
quotes for companies referenced in each story.
SEC Filings. We have contracted with TRW Inc. to obtain real-time SEC
filings. Also, through a service provided by Edgar Online, users can read
the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" excerpt from SEC filings for publicly-traded
companies. We recently launched our IPO Center, which enables the user to
track initial public offering filings and new issue pricings, evaluate
after-market performance and review the filing history of specific
investment banks.
Live Market Commentary. This feature is offered through Briefing.com, a top
provider of live market commentary and analysis on the Internet, focusing
on important news affecting markets and providing insight on possible
trading implications. Briefing.com covers upgrades and downgrades, earnings
reports, economic releases, technical trading points, market sectors and
technology stocks.
Mutual Fund Data. We offer mutual fund data from Value Line. The Value Line
mutual fund offering contains comprehensive performance data on over 8,300
U.S. retail funds. Listing includes sector distribution, top 10 holdings,
administration information, Value Line Rankings, performance (one, three,
five and ten years), fund distribution and management overview.
RELATIONSHIPS WITH CONTENT PROVIDERS
We provide substantive content through our financial product offerings in two
broad categories: quote information and market/company information. All content
utilized on both Stockpoint.com and client web sites is obtained from third-
party content providers. We do not currently generate any original content but
instead rely on contractual relationships with major vendors of electronically
available financial information for our content feeds.
For pricing information, news and information, mutual fund data, analyst
information and other feeds, we maintain contractual arrangements with S&P
Comstock, Comtex Scientific Corporation, Briefing.com, MarketGuide, Zacks,
38
<PAGE> 41
CDA/Wiesenberger, Commodity Systems, Inc., TRW and AFX News Limited. These
relationships vary in term from one month to several years, and include both
variable and fixed price payment provisions. Generally, the contracts may not be
assigned by either party without the consent of the other party. We believe that
we are not solely reliant on any one content provider and that there are
alternative sources for any single type of content. However, the need to replace
any key vendors could render all or a portion of our services unavailable for a
period of time, resulting in a significant negative impact on our client
relationships and harm to our reputation.
SALES AND MARKETING
We currently have a sales staff of 16 employees. Our sales offices are located
in San Francisco, New York City and London. Our sales team is assigned to one of
three major domestic regions. We currently focus our sales efforts directly on
target-market clients. All sales people currently receive commissions on license
sales, upsells and renewals to existing clients. We expect to expand our direct
sales staff and to open an office in Hong Kong or Singapore during 2000. In
addition, we sell our products and services through distributors and resellers.
During the production phase, our six client service representatives manage and
address client concerns and oversee the progress of the client's project.
Our five-person marketing staff currently focuses on public-relations, client
communication and product marketing programs. These programs have expanded our
brand recognition. We have done only a limited amount of web-based or other
advertising. Substantially all of our client web sites have the "Powered by
Stockpoint" logo, which we believe has enhanced our brand awareness as our
client base has grown. We also derive substantial name recognition and receive
initial client contacts through our web site, Stockpoint.com.
CUSTOMIZATION ACTIVITIES
We believe that our ability to customize our applications differentiates us from
our competitors. Our clients expect that their web sites will be unique and will
not look the same as sites we host for our other clients. Our clients also
require that the web applications we develop and host mirror the appearance of
their other web pages and integrate seamlessly into their web sites.
We designed our proprietary server and application software to enable us to
create customized web sites without expending the enormous effort typically
associated with custom development. For example, we designed our charting
technology with approximately 80 configurable parameters that permit our web
designers to configure chart sizes, fonts, colors, time increments and settings
for moving averages, technical indicators and comparison stocks or indexes. This
design enables us to customize at a reduced cost and with a faster turnaround
time than would be possible by modifying the underlying program code.
In some instances, our clients require that we develop customized extensions of
our applications to assimilate and manipulate data that is provided by the
client. For example, we provide a charting solution to clients of MarketXT Inc.
that incorporates their ECN's quote and trade data. Also, we have integrated
proprietary industry group data from US Bancorp Piper Jaffray Inc. to enable
their clients to chart that data versus other securities.
In other cases, our customization activities have led to the creation of new
products. For example, through a contract with GlobalNetFinancial.com, we have
created product offerings for quotes, charts and portfolios that utilize stock
market data from Denmark, Italy, the Netherlands and the United Kingdom.
To customize the appearance of our hosted web pages to meet our clients' needs,
we maintain a staff of 24 web site developers. These developers perform the
web site development for clients and also establish the communications links and
data transfers required to integrate clients' web sites with the pages we host
on their behalf. We also maintain a staff of applications programmers who
develop custom extensions of our applications to assimilate client data or
provide specialized functionality.
39
<PAGE> 42
PRODUCT DEVELOPMENT
We have a three-pronged approach to product development:
- CLIENT DRIVEN DEVELOPMENT. By maintaining close relationships with our
clients through our client services and sales groups, we stay attuned to
our clients' needs . This input, plus client directed development, largely
drives the priorities of our development group. Examples of products
created by customer driven development include our international index
data, currency conversion functionality and expansion of our product
offerings to include Great Britain and Italian equity securities.
- DEVELOPMENT BASED UPON ANTICIPATED MARKET NEEDS. Since 1997, we have
retained Forrester Research to assist us in predicting market trends for
the Internet financial marketplace. We leverage our relationship with
Forrester Research and our internal research and development and marketing
groups to anticipate market needs. We then either develop or acquire
products to meet these needs. Examples of products created by this type of
development are our Classic Quick Charts, our Java-based scrolling stock
ticker and enhancements to our personal portfolio manager application.
- INNOVATIVE TECHNOLOGY DEVELOPMENT. We place considerable emphasis on
research and development to pursue innovative technology applications. We
have a staff of 16 engineers with expertise in fields such as computer
science, advanced mathematics, financial theory and artificial
intelligence. We currently have several products under development which we
believe will result in future upsell opportunities to our existing client
base. The new products include Portfolio Pro, Alerts Engine, IPO Center and
a suite of Financial Guidance products. We also are developing a suite of
wireless products which provide users access to our Web-based financial
product offerings through wireless devices.
In July 2000, we released a transaction-based portfolio product known as
Portfolio Pro. This product is available on our website,
www.stockpoint.com. Portfolio Pro features the ability to track transaction
details of an online investor. By capturing the transaction details, it
allows for asset allocation analysis and tax lot accounting. In the future,
we intend to add the capability of charting an individual's historical
portfolio performance versus various indices. We also intend to link our
transaction-based portfolio product to various brokerage firms, which will
enable these firms to provide electronic portfolio updates from their data
centers.
During the third quarter of 2000, we plan to release version 1.0 of our
Alerts Engine product. The Alerts Engine will notify users via e-mail of
stock activity based on user-definable thresholds in stock prices, volume
and news activity. Notification will be available both via wired as well as
wireless devices.
In March 2000, we released version 1.0 of our wireless product suite. This
version is designed to deliver financial content through wireless devices.
The wireless product has been designed to be compatible with all wireless
web devices that support standard wireless application protocols. Our
development plan over the next six months includes providing users with the
access to the functionality in our Web-based products, namely Portfolio
Pro, E-Mail alert and IPO Center.
In April 2000, we released version 1.1 of our IPO Center product which
features the ability to monitor current IPO filings and pricings. In
addition, the IPO Center lists current filings and pricings, and enables an
investor to access a summary of a company's offering by clicking on a
linked ticker symbol.
During the third quarter of 2000, we plan to release version 1.0 of our
Financial Guidance product suite. This product suite is designed to help
consumers interactively plan their financial future through the combination
of advice, education and "what-if" analyses. This product is intended to be
our initial product release resulting from our development efforts to
create applications that facilitate data analysis and more informed
investment decisions.
STOCKPOINT.COM
In addition to our licensing business, we operate Stockpoint.com, a free
financial web site that serves both as a technology showcase to support our
licensing business and as a proving ground for new product offerings.
40
<PAGE> 43
Stockpoint.com offers investors an online environment in which they can analyze
and manage their holdings using comprehensive financial information and advanced
web technologies. Through Stockpoint.com, we field-test and obtain feedback on
our new products to ensure that our products meet end-user expectations.
We do not intend to invest a significant amount of resources in promoting
Stockpoint.com as a consumer site. Instead, we intend to focus on the
business-to-business marketplace and to use Stockpoint.com as a complement to,
rather than a competitor with, the offerings of our business clients.
Although we receive some advertising-based revenues from Stockpoint.com, it is
not a significant portion of our total business. We do not have any
subscription-based revenues from Stockpoint.com end-users.
COMPETITION
We compete with a number of companies that offer charting, stock quotation and
business information web applications, development and hosting services. The
number of these competitors continues to grow as new entities enter various
Internet-related markets as a result of the recent growth in Internet traffic
and the Internet's perceived future opportunities. It is possible that new
competitors may rapidly acquire a significant market share. Further, there are
an increasing number of quotation, financial news and information sources that
compete for the attention of consumers and advertisers that are sought by our
clients. We expect both of these forms of competition to continue to increase.
We compete for web site clients with a number of other providers of web-based
quotation, charting and financial news applications, such as MarketWatch.com,
Inc., Telescan Inc., Reuters Group PLC, Thompson Financial Services and S&P
Personal Wealth. We also compete with client web site development companies and
the in-house development staff of large corporations.
Competitive pressures could result in reduced market share, price reductions,
reduced margins and increased spending on marketing and product development, any
of which could adversely affect our business, financial condition and operating
results.
Our ability to compete effectively depends on many factors, including the
originality, timeliness, comprehensiveness and trustworthiness of our
applications and hosting, the ease in use of services developed by us and the
effectiveness of our sales and marketing efforts. We believe the principal
competitive factors in the online services market include system performance,
product differentiation, quality and quantity of content, user friendliness,
price, client support, effectiveness of marketing techniques and consistency and
quality of services. We believe that we compete effectively in these areas. We
also believe that our strategy of focusing on business-to-business licensing of
products combined with ongoing services and continued expansion of the range of
our services offerings may serve to lessen the impact of future competitive
pressures. There is, however, no assurance that these marketing strategies will
be successful. Finally, we believe that once our online financial products are
embedded in a client's web site, that client will find the difficulties inherent
in replacing our products with those provided by another vendor to be a
disincentive to changing providers.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
client bases and significantly greater financial, technical and marketing
resources than us. This may allow them to devote greater resources than we can
to the development and promotion of their services. These competitors may also
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to existing and potential employees, outside contributors,
strategic partners and advertisers. Our competitors may develop relationships
with providers and develop or acquire content that is equal or superior to ours
or that achieves greater market acceptance than ours.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws and
confidentiality procedures to protect our proprietary intellectual property
rights. We generally enter into agreements that govern the assignment of
inventions and the ownership and protection of proprietary information with
employees and agreements that govern nondisclosure of proprietary information
with clients. We also work to limit access to and distribution of our software,
documentation and other proprietary information. We seek to use copyright law to
protect our documentation and other written materials. We do not, however, rely
on patents or patented technology to protect our proprietary information.
41
<PAGE> 44
"Stockpoint" is our federally registered trademark.
We license virtually all of the financial data that is used to provide the
content at our web sites pursuant to agreements with content suppliers, the
terms of which vary widely. The services that we provide and the methods that we
utilize to do so change rapidly. Also, the law and legal practice for content
supplier contracts are unsettled and constantly developing. As a result, we must
periodically modify and renegotiate our vendor agreements. We attempt to operate
our web site customization and hosting services in accordance with our
agreements and to renegotiate them as necessary. However, although we do not
believe we are in violation of our agreements, we cannot assure you that our
vendors will not claim that we owe additional sums or must limit our activities.
Some of our applications incorporate technology widely available on the Internet
and from other sources. During the past two years, there has been a renewed
effort to obtain protection of techniques used in software products through
patent and other protections. As the number of software products and delivery
techniques proliferates on the Internet, we believe that we may become subject
to infringement claims. We have been notified by a patent holder that it
believes our use of GIF compression algorithms incorporated into our web hosting
applications may require a license. Although we do not believe that we derive
substantial revenue from the use of these algorithms and can obtain a license,
if one is required, without materially affecting our operations, we cannot be
certain that other parties will not allege that the our technology and services
violate their rights.
COMPUTER AND NETWORK OPERATIONS
We maintain a data center in Coralville, Iowa at which we host virtually all of
the financial content for our clients' web sites. We operate multiple servers,
mass storage devices and sophisticated routers and switching systems to
accommodate high capacity web traffic. We use Intel-based servers with the
Microsoft NT operating system that access high capacity database storage devices
using SQL Server as well as our own proprietary database applications.
Our data center has separate air conditioning units. The power system includes
power conditioning and battery back-up. We also have a full "zero downtime"
emergency generator system capable of providing emergency power to our entire
Coralville facility. Data is regularly backed up and stored off-site and certain
data is duplicated on separate storage devices within the data center. The
building in which the data center is located is secured by 24-hour card key
access.
End-users access our data center through the Internet. We have two connections
to the Internet. Our principal connection is a DS3 (45 Mbit) through NetINS with
access through UUNET, Sprintlink and Cable & Wireless. We have contracted with
UUNET for an additional DS3 connection. We use a load balancing solution for
distributing client requests over our base of servers.
We have designed our data center with a high degree of redundancy and
interoperability. We have implemented a detailed, automated monitoring system
over the data center. The system pages and alerts data center technicians
immediately upon any system failures, even as traffic is switched automatically
to redundant systems. Except for scheduled maintenance, our data center is
available 24 hours a day, 365 days a year. We maintain business interruption
insurance in the amount of $12 million.
We believe that our computer and communications hardware systems are adequate
for existing operations. We purchase additional or upgraded hardware as required
to meet any significant increases in actual or anticipated traffic. We are
currently reviewing strategies for improving our disaster recovery capabilities
and the responsiveness of our services to users. We plan to use a portion of the
net proceeds from this offering to establish one or more additional data
centers, which may be leased or owned, or co-location arrangements.
EMPLOYEES
As of June 30, 2000, we had a total of 134 employees, consisting of 44 in
production, 41 in research and development, 22 in general or administrative
roles and 27 in sales and marketing. All of these employees are located in the
United States. None of our employees is subject to a collective bargaining
agreement or represented by a labor union. We have experienced no work stoppages
and believe that our relationships with our employees are good.
We maintain key man life insurance on William Staib in the amount of $4,000,000,
payable to us.
42
<PAGE> 45
FACILITIES
Our principal administrative, support and research and development facility, and
our data center, is located in approximately 25,600 square feet of leased office
space in Coralville, Iowa. We pay an annual rent of approximately $280,000 for
this facility. Our lease on this facility runs through August 2004, with an
option to extend for an additional five-year period. We believe that our current
Iowa facilities are adequate to meet our needs for the foreseeable future.
We lease approximately 8,900 square feet of office space in San Francisco for
sales and marketing and web site development personnel at an annual rent of
approximately $365,000. Our lease in San Francisco runs through April 1, 2001
with an option to extend for two additional eighteen month periods.
We also lease approximately 800 square feet of office space in New York City and
345 square feet of office space in London, England. The rent for the New York
space is $13,420 per month and the lease expires in October 2000. The rent for
the London space is 2,600 pounds sterling per month and the lease expires in
September 2000. Upon expiration, both leases will convert into month-to-month
leases, terminable upon 30 days' notice.
We also plan to use a part of the proceeds from this offering to establish
one or more data centers.
LITIGATION
From time to time we have been, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of business. We are not aware of
any legal proceedings or claims that we believe will have, individually or in
the aggregate, a material adverse effect on our business, financial condition or
results of operations.
In December 1999, we received correspondence from Unisys alleging that the
compression algorithms we use to generate Graphic Interchange Format, or GIF,
images require a license. We are currently negotiating with Unisys to obtain a
license agreement and believe that any licensing fee and royalty payments that
we may be required to pay for the right to use Unisys' algorithms would not have
a material effect on our business and financial condition. We cannot assure you
that Unisys will grant us a license or, if a license is granted, that the
licensing arrangement will be on commercially reasonable terms.
In June 2000, the Attorney General of the State of Michigan notified us
that it intended to take action against us if we did not agree to negotiate a
settlement of Michigan's claim that the placement, without notification, of
cookies on the computers of consumers that visited our site violated Michigan's
consumer protection statute. Although we had drafted and have now implemented a
privacy statement that provides the notice, and believe we will come to a
reasonable settlement of the Michigan dispute, we cannot assure you as to when
or if, or the terms upon which, that dispute will be concluded.
43
<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Stockpoint are as follows:
<TABLE>
<CAPTION>
Name Age Position
-------------------------------------------------------- ---------------- --------------------------------------
<S> <C> <C>
William E. Staib........................................ 30 Chief Executive Officer and Director
Timothy S. Yamauchi..................................... 39 Chief Operating Officer
Scott D. Porter......................................... 52 Chief Financial Officer
Luan A. Cox............................................. 29 Executive Vice President, Sales
L. Christopher Dominguez................................ 32 Executive Vice President
Carolyn S. Mattimore.................................... 42 Vice President, Marketing
Santosh K. Ananthraman.................................. 35 Vice President, Research
Naftaly J. Stramer...................................... 44 Vice President, Development
Harry O Hefter.......................................... 71 Chairman of the Board of Directors
David G. Sengpiel...................................... 46 Director
</TABLE>
William E. Staib has served as a director since May 1992 and as Chief Executive
Officer since December 1998. Mr. Staib has served as Stockpoint's Chief
Technology Officer since June 1998 and as its Vice President of Technology from
1992 to 1998. In 1998, Mr. Staib was named as the "State of Iowa's Young
Entrepreneur of the Year" by the U.S. Small Business Administration. In 1996,
Mr. Staib led the team which developed Stockpoint's core technology for
distributing and displaying historical chart and quote data on the Internet. In
1992, he was recognized for creating "One of the Six Most Outstanding
Engineering Achievements in the United States" by the National Society of
Professional Engineers. Mr. Staib is the inventor of one international and two
U.S. patents and holds B.S. and M.S. degrees in electrical engineering from
Stanford University. Mr. Staib is the son of Robert Staib, our former Chief
Executive Officer.
Timothy S. Yamauchi has served as Stockpoint's Chief Operating Officer since
July 1998. From September 1995 to July 1998, he served as Chief Financial
Officer, Secretary and Treasurer of HealthDesk Corporation, an Internet
information provider in the healthcare industry. From May 1994 to June 1995, Mr.
Yamauchi was Chief Financial Officer of Innofusion Corporation, a private home
healthcare company. From May 1991 to May 1994, Mr. Yamauchi was Treasurer and
Director of Planning for Total Pharmaceutical Care, Inc., a public home
healthcare company. Mr. Yamauchi has a B.S. in business from California State
University of Los Angeles and an M.B.A. from Harvard Business School. He is also
a Certified Public Accountant.
Scott D. Porter has served as Stockpoint's Chief Financial Officer since July
1999. From August 1998 to February 1999, Mr. Porter was the Chief Financial
Officer of RSPnet.com, a provider of Internet services that was acquired by
VirtualFund.com, Inc. during 1999. From April 1991 to July 1998, Mr. Porter was
the President (and previously Chief Financial Officer) of Parsons Technology,
which was acquired by Intuit Inc. in 1994 and by The Learning Company in 1998.
Mr. Porter has a B.S. in accounting and an M.B.A. degree from the University of
Colorado and is also a Certified Public Accountant.
Luan A. Cox has served as Executive Vice President, Sales since November 1999.
Ms. Cox joined Stockpoint in April 1998 as Director of Technology Sales and
served as its Senior Vice President of Sales from July 1999 to October 1999.
From April 1997 to April 1998, Ms. Cox was the Director of Business Development
at Quote.com, an Internet financial services company. From April 1996 to April
1997, Ms. Cox served as Internet Director for 1-800-MUTUALS, Inc. a mutual fund
company. From February 1995 to April 1996, she was an account manager for
Independent Advantage Financial, an investment planning and insurance company.
Prior to that time, she was a senior sales associate with Jefferson-Pilot
Insurance Company. Ms. Cox graduated from the University of North Texas in 1992
with a B.B.A. in finance and has held Series 6, 7, 63 and 65 Security Licenses
with the National Association of Securities Dealers.
44
<PAGE> 47
L. Christopher Dominguez has served as an Executive Vice President of Stockpoint
since July 1999. From April 1995 to July 1999, he served as Vice President of
Sales of Ethos Corporation, which Stockpoint acquired in 1997. From September
1993 to September 1994, he served as Advertising Director of BuySide Magazine.
Mr. Dominguez received a B.A. from Denison University.
Carolyn S. Mattimore joined Stockpoint in August 1999 and serves as its Vice
President, Marketing. From July 1996 to January 1999, Ms. Mattimore was a
strategic marketing consultant for venture-backed start-up companies in the
Boston, Massachusetts area. From August 1991 to July 1995, she was Vice
President of Marketing for First Call, a subsidiary of Thomson Financial. She
has also held a Series 7 Security License with the National Association of
Securities Dealers. Ms. Mattimore has an M.P.A. from Harvard University, John F.
Kennedy School of Government and a B.B.A. from St. Mary's College, Notre Dame.
Santosh K. Ananthraman, has been Vice President of Research at Stockpoint since
March 2000. From January 1999 to February 2000 he was Chief Technology Officer
of Neural Inc., a former subsidiary of ours, and from 1997 to 1998 he held
various positions in our Intelligent System Services division. Mr. Ananthraman
specializes in the areas of data mining and personalization. He has successfully
directed numerous consulting projects with companies such as Nasdaq, Engineering
Animation, Harley Davidson, John Deere and Daimler-Chrysler. After he received
his Ph.D. from Duke University in 1993, he also served as an Adjunct Assistant
Professor of Electrical and Computer Engineering at the University of Iowa from
1993 to 1998, where he taught graduate classes and co-supervised M.S. and Ph.D.
students. Mr. Ananthraman served on grant review panels for the National Science
Foundation and has reviewed articles for numerous research publications. He has
also has published extensively in his area of expertise. He received his B.S. in
electrical engineering from Regional Engineering College in India.
Naftaly J. Stramer has been Vice President of Development of Stockpoint since
October 1999. Between 1994 and 1999, Mr. Stramer served as Software Assurance
Manager and as Manager of Development Services for Stockpoint. Prior to joining
Stockpoint, Mr. Stramer served as a senior SQA engineer at Intergraph
Corporation for five years. Prior to Intergraph, he was a Computer Engineer and
Group Leader for Rafael, the Armament Development Authority based in Israel. Mr.
Stramer holds a B.SC. in Computer Engineering from the Israel Institute of
Technology.
Harry O. Hefter has served as a director of Stockpoint since 1987, has served as
Chairman since December 1998 and from 1987 to February 1997, and was Vice
Chairman from February 1997 to December 1998. Mr. Hefter has for more than the
last thirty years also served as President of the HOH group of companies in
Chicago, Illinois, which provide specialized services relating to the
engineering, integration and optimization of process control systems,
architecture and construction management for industry and government. Mr. Hefter
is a Civil Engineer with over 40 years of experience in the engineering field.
David G. Sengpiel has served as a director of Stockpoint since January 1997.
Since March 1999, Mr. Sengpiel has been the Chief Operating Officer of Quester
I.T., Inc., a software company that provides consulting, research and training
in the application of language analysis, addressing, marketing and
communications issues. From August 1997 to March 1999, Mr. Sengpiel was Chief
Operating Officer of CareMedic, Inc., which automates Medicare reimbursement
processes. From 1995 until August 1997, Mr. Sengpiel was a Vice President with
Equity Dynamics, Inc., a consulting firm, and with Pappajohn Capital Resources,
a venture capital firm. From 1993 to 1995, Mr. Sengpiel was Alternative
Investments Manager for Farm Bureau Life Insurance Company.
Stockpoint maintains an audit committee and a compensation committee. Currently,
Mr. Hefter and Mr. Sengpiel are the sole members of both committees. We also
maintain a management committee consisting of Mr. Staib, Ms. Cox and Mr.
Dominguez that meets regularly to coordinate operations between the Company's
two principal offices and to discuss and determine strategic matters.
All executive officers are chosen by the Board of Directors and serve at the
Board's discretion. Directors are divided into three classes, each of which
consists, as nearly as possible, of one-third of the board. In 1997, the
stockholders elected two Class I directors (Messrs. Staib and Sengpiel) to serve
for one-year terms, one Class II director (Mr. Hefter) to serve for a two-year
term and one Class III director (currently vacant) to serve for a three-year
term. At each succeeding annual meeting of stockholders thereafter, successors
to the class of directors whose terms expired at that annual meeting will be
elected for a three-year term and will hold office for three years.
45
<PAGE> 48
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by our Chief Executive
Officer and by our other most highly compensated executive officers during the
year ended December 31, 1999 whose compensation exceeded $100,000. This
prospectus refers to these executives as the Named Executive Officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION
---------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS (#) COMPENSATION (2)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William E. Staib (3)................. 1999 $ 130,000 - 300,000 $ 2,600
Director & Chief Executive Officer
Timothy S. Yamauchi.................. 1999 116,458 $ 38,739 142,500 2,337
Chief Operating Officer
Luan A. Cox.......................... 1999 78,125 275,532 252,000 3,200
Executive Vice President, Sales
L. Christopher Dominguez (4)......... 1999 82,916 126,660 127,500 -
Executive Vice President
Santosh K. Ananthraman.............. 1999 87,938 12,163 52,500 2,255
Vice President of Research
</TABLE>
---------------
(1) For Ms. Cox and Mr. Dominguez, the amounts represent sales commissions.
(2) Represents 401(k) plan matching contributions by Stockpoint.
(3) Mr. Staib was appointed acting Chief Executive Officer in December 1998 and
elected Chief Executive Officer in June 1999. Prior to that time, he was
Chief Technology Officer.
(4) Mr. Dominguez was appointed Executive Vice President in July 1999.
The following table sets forth information with respect to stock option granted
during the fiscal year ended December 31, 1999 to each of the Named Executive
Officers.
46
<PAGE> 49
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
TOTAL APPRECIATION FOR OPTION
NUMBER OF OPTIONS TERMS(1)
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES FAIR VALUE EXERCISE
OPTIONS IN FISCAL ON DATE PRICE PER EXPIRATION
GRANTED YEAR OF GRANT SHARE DATE 0% (2) 5% 10%
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Staib............... 300,000 16.3% $ 4.80 $ 4.80 9/15/09 $1,560,000 $3,447,000 $6,342,000
Timothy S. Yamauchi............ 90,000 4.9 4.80 4.80 9/15/09 468,000 1,034,100 1,902,600
52,500 2.9 4.00 1.00 1/1/09 472,500 802,725 1,309,350
Luan A. Cox.................... 195,000 10.6 4.80 4.80 9/15/09 1,014,000 2,240,550 4,122,300
57,000 3.1 4.00 1.00 1/1/09 513,000 871,530 1,421,580
L. Christopher Dominguez....... 60,000 3.3 4.80 4.80 9/15/09 312,000 689,400 1,268,400
67,500 3.7 4.00 1.00 1/1/09 607,500 1,032,075 1,683,450
Santosh K. Ananthraman........ 52,500 2.9 4.00 1.00 1/1/09 472,500 802,725 1,309,350
</TABLE>
---------------
(1) The potential realizable value amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the
end of the option term. These gains are based on assumed rates of stock
price appreciation of 0%, 5% and 10% from the date of grant to the end
of the option term based upon an initial public offering price of
$10.00 per share. These assumptions do not represent our estimate or
projection of the future common stock price. Actual gains, if any, on
stock option exercises are dependent on the future performance of our
common stock, overall market conditions and the option holder's
continued employment through the vesting period.
(2) Value is based on the difference between the per share exercise price
of the options and the assumed initial public offering price of $ 10.00
per share.
The following table summarizes the value of options held at December 31, 1999 by
the Named Executive Officers. No options were exercised by the Named Executive
Officers during 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION VALUES AT DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999 (1)
Name EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William E. Staib........................... 97,125 224,875 $600,525 $1,337,475
Timothy S. Yamauchi........................ 31,600 148,400 202,320 1,075,680
Luan A. Cox................................ 47,800 207,200 252,360 1,301,640
L. Christopher Dominguez................... 26,775 123,225 186,255 935,745
Santosh K. Ananthraman..................... 19,526 55,475 177,075 497,925
</TABLE>
---------------
(1) Value is based on the difference between the per share exercise price of
the options and the assumed initial public offering price of $ 10.00 per
share.
EMPLOYMENT AGREEMENTS
We have employment agreements with Mr. Staib, Mr. Yamauchi, Mr. Porter, Ms. Cox
and Mr. Dominguez. The agreements provide for annual base salaries of $130,000
for Mr. Staib, $150,000 for Mr. Yamauchi, $135,000 for Mr. Porter, $150,000 for
Ms. Cox and $150,000 for Mr. Dominguez. Each officer is also entitled to annual
incentive compensation. Upon completion of this offering, Mr. Staib's salary
will increase to $180,000. The agreements also provide for, upon completion of
this offering, cash bonus payments of $60,000 to Mr. Staib, $45,000 to Mr.
Yamauchi, $29,000 to Mr. Porter, $30,000 to Ms. Cox and $30,000 to Mr.
Dominguez.
47
<PAGE> 50
The agreements with Mr. Staib, Mr. Yamauchi, Ms. Cox and Mr. Dominguez expire in
December 2000, subject to automatic annual renewals absent a 90-day notice of
nonrenewal by either party. The agreement with Mr. Porter expires in March 2001,
subject to automatic annual renewal absent a 90-day notice of nonrenewal by
either party.
In the event the employment of Messrs. Staib, Yamauchi or Dominguez is
terminated "without cause" or as a result of a "constructive termination," the
officer will continue to receive annual salary and health benefits for a period
of nine months after termination and 40% of those options granted in September
1999 which remain unvested will vest. In the event the employment of Mr. Porter
is terminated without cause or as a result of a constructive termination, Mr.
Porter will continue to receive annual salary and health benefits for a period
of nine months after termination. In the event of the termination of Ms. Cox's
employment without cause or as a result of constructive termination, she
receives $450,000 plus nine months of benefits. In addition, if termination
occurs within 12 months following a change in control, the annual salary and
health benefits of each of Messrs. Staib, Yamauchi and Dominguez will continue
for a period of 18 months. The employment agreements with Mr. Staib, Mr.
Yamauchi, Ms. Cox and Mr. Dominguez also provide that all unvested stock options
held by these individuals will immediately vest upon a change in control.
STOCK OPTION PLANS
In December 1995, the Board of Directors approved the 1995 Long-Term Incentive
and Stock Option Plan (as amended, the "1995 Plan") and the 1995 Nonemployee
Director Stock Option Plan (the "Directors' Plan"). The 1995 Plan authorizes the
issuance of up to 3,500,000 shares of common stock, subject to an annual
increase equal to 1 1/2 % of the outstanding shares of common stock as of the
December 31 of the immediately preceding year. As of July 21, 2000, the
Directors' Plan authorizes the issuance of up to 250,000 shares of common stock.
Under the 1995 Plan, options that are intended to qualify as incentive stock
options, options that are not intended to so qualify, stock appreciation rights,
restricted stock or performance awards may be granted to full or part-time
employees, officers, consultants, directors (other than nonemployee directors)
or independent contractors. The 1995 Plan will terminate on November 30, 2005.
Under the Director's Plan, in which only nonemployee directors are eligible to
participate, non-qualified stock options to purchase 7,500 shares of common
stock, vesting in three equal annual installments, are automatically granted to
each director eligible to participate on the date such person first becomes a
director and an additional 7,500 shares, vesting one year following the date of
grant, is automatically granted on the date of each annual meeting of
stockholders. All options under the Directors Plan have terms of ten years and a
per share exercise price equal to the fair market value of a share of common
stock on the date of the grant.
In July 1998, the Board of Directors exchanged all outstanding options for
non-qualified options under the 1995 Plan in an identical number, at an exercise
price of $1.00 per share, and on a vesting schedule identical to that of the
exchanged options.
We have granted options to most of our employees. At June 30, 2000,
non-qualified options to purchase an aggregate of 2,785,050 shares of common
stock were outstanding under the 1995 Plan with a weighted average exercise
price of $3.41 per share. At June 30, 2000, options to purchase 30,000 shares of
common stock were outstanding under the Directors' Plan with a weighted average
exercise price of $4.67 per share.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. Harry O. Hefter
receives a $20,000 consulting fee annually for management services he performs.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, our Amended
and Restated Bylaws provide that we shall indemnify such persons for such
liabilities in such manner under such circumstances and to such extent as
permitted by Section 145. Our Board of Directors may authorize the purchase and
maintenance of insurance and the execution of individual agreements for the
purpose of such indemnification. We are required to advance all reasonable costs
and expenses (including attorneys' fees) incurred in defending any action, suit
or proceeding to all persons entitled
48
<PAGE> 51
to indemnification under the Bylaws, all in the manner, under the circumstances
and to the extent permitted by Section 145.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of Stockpoint for which indemnification has been sought. We
are not aware of any threatened litigation that may result in claims for
indemnification.
As permitted by the Delaware General Corporation Law, our Amended and Restated
Certificate of Incorporation includes a provision that eliminates the personal
liability of directors for monetary damages for breach of fiduciary duty as a
director except liability for (a) any breach of the director's duty of loyalty
to the corporation or its stockholders, (b) acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law or (d) any transaction from
which the director derived an improper personal benefit.
We maintain Directors and Officers Insurance which covers all directors and
officers. The total amount of coverage is $3,000,000, including the costs of
defense.
CERTAIN TRANSACTIONS
CONSULTING AGREEMENT
In August 1999, Stockpoint and Equity Dynamics entered into a one-year
consulting agreement. John Pappajohn, a principal of Equity Dynamics,
beneficially owns approximately 18.3% of our common stock. Under the agreement,
Equity Dynamics agreed to provide a minimum of 20 days per year of management,
financial and other advisory services in exchange for which it is to be paid
$50,000 per year and received warrants to purchase an aggregate of 187,500
shares of common stock at an exercise price of $4.00 per share. The warrants are
immediately exercisable and expire five years from the date of the agreement.
BANK GUARANTEES
We have, in large part, financed our operations through bank lines of credit and
other debt facilities guaranteed by John Pappajohn and Robert Staib, our former
Chief Executive Officer. We issued to Mr. Pappajohn warrants to purchase an
aggregate of 806,250 shares of common stock at $2.67 per share in consideration
of his guarantee of three lines of credit from April 1993 through June 1996.
Robert Staib, our former Chief Executive Officer, also guaranteed a series of
our credit agreements in seven transactions or renewals from November 1994
through June 1996. He also purported to pledge marketable securities as
collateral for these guarantees. For these guarantees, we issued warrants to
Robert Staib to purchase an aggregate of 1,209,375 shares of common stock at
$2.67 per share, expiring at various times from January 1998 through January
2004, as well as guarantee fees aggregating $25,000. Included among these
guarantees was the guarantee of two unsecured lines of credit aggregating
$4,145,000 which remain outstanding and on which Robert Staib remains a
guarantor.
Robert Staib also guaranteed a commercial bank's obligations under several
irrevocable standby letters of credit that secure $5,900,000 of our outstanding
debentures and agreed to pledge marketable securities as collateral. We paid
Robert Staib $50,000 in November 1997 for the guarantee and pledge, issued to
Robert Staib warrants to purchase 750,000 shares of common stock at $5.33 per
share and agreed to issue to Robert Staib warrants for an additional 150,000
shares during each year Robert Staib's guarantee of our line of credit remained
outstanding. In August 1997, we and Robert Staib entered into an amended
Indemnification and Hold Harmless Agreement and a Reimbursement and
Subordination Agreement pursuant to which we agreed to indemnify Robert Staib
for losses he incurred because of his guarantees.
In connection with loans he had guaranteed for an unrelated company, Robert
Staib was arrested in December 1998, indicted in April 1999 for bank fraud and
pled guilty to certain allegations in March 2000 as part of an agreement
settling the indictment. At our request, Robert Staib ceased any involvement in
our business in December 1998. Robert Staib formally resigned as our Chairman
and CEO in April 1999. At the time of his arrest in December 1999, we were
informed by our principal commercial lenders that they believed the collateral
pledged by Robert Staib to secure our outstanding
49
<PAGE> 52
credit lines, as well as the letter of credit on the debentures, was not
authentic. The lenders ceased making any further advances under our credit
arrangements. We eventually restructured these credit arrangements in December
1999 under agreements that require, among other things, that they be repaid upon
completion of this offering. A description of the restructured agreements is
contained above under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
The banks have reserved any rights to proceed against Robert Staib under his
guarantees.
In September 1999, warrants to purchase 140,625 shares held by Robert Staib
expired unexercised. In December 1999, we entered into an agreement with Robert
Staib to settle any claims related to his employment and disputes relating to
the validity of his guarantees and the warrants he had received. We agreed not
to pursue any action to invalidate Robert Staib's warrants to purchase 750,000
shares of common stock at $2.67 per share in exchange for his cancellation and
return of all 1,050,000 warrants previously issued at $5.33 per share and the
remaining 318,750 warrants issued at $2.67 warrant per share. Of the 750,000
warrants, warrants to purchase 469,500 shares will expire in February 2001, and
warrants to purchase 280,500 shares will expire in June 2001. We also agreed to
pay Robert Staib $60,000 upon completion of this offering in settlement of all
other claims, including claims for reimbursement of expenses incurred during his
employment.
There is currently pending a motion filed by Robert Staib in voluntary
bankruptcy proceedings requesting the bankruptcy court to enter an order
confirming the validity of the settlement agreement. All of Robert Staib's
significant creditors have consented to the order and the bankruptcy court is
expected to approve the motion on July 31, 2000. If the bankruptcy court
determines that the settlement agreement is invalid, although we would contest
the validity of all the warrants, it is possible that some or all of the
1,368,750 warrants that Robert Staib has surrendered for cancellation will be
reissued.
VOTING TRUST AGREEMENT
On December 3, 1999, Robert Staib entered into a voting trust agreement with
U.S. Bank, National Association, as trustee. Under the agreement, Robert Staib
delivered 369,000 shares of our common stock and 1,600 shares of our Series B
convertible preferred stock to the trustee. In addition, Robert Staib agreed to
deliver to the trustee any shares issued upon the exercise of his warrants to
purchase 750,000 shares of our common stock. Under the terms of the agreement,
the shares subject to the agreement may not be sold, pledged or transferred by
the trustee without the consent of Robert Staib and us. The trustee is entitled
to exercise all shareholder rights, including the right to vote and express a
consent. With respect to any matters submitted for stockholder approval, the
trustee will vote the shares in the same proportion as the shares not held by
the trustee voting on the matters have voted.
The voting trust agreement will terminate upon the earliest of any of the
following events:
- the trustee has resigned, died or dissolved and no substitute trustee is
selected by us within 30 days after the date of resignation or death of the
trustee;
- we are dissolved and liquidated;
- all of the shares subject to the agreement have been transferred to one or
more persons;
- we have commenced a voluntary case, or are subject to an involuntary case,
under applicable bankruptcy law;
- Robert Staib and we mutually agree to terminate this agreement; or
- upon the later to occur of December 31, 2002 or the date on which Robert
Staib beneficially owns less than 5% of our outstanding common stock.
We have agreed with the underwriters for this offering that prior to the
expiration of the later to occur of December 31, 2002 and the date on which
Robert Staib beneficially owns less than 5% of our outstanding common stock, we
will not agree to terminate the voting trust agreement unless all independent
disinterested directors conclude that terminating the agreement is in the best
interests of our company and stockholders. In the event of the resignation,
death or dissolution of the trustee prior to the later to occur of December 2002
or the date on which Robert Staib beneficially owns less than 5% of our
outstanding common stock, we also are obligated to appoint a successor trustee.
BRIDGE LOAN FINANCING
We entered into a $2,500,000 line of credit with a commercial bank in December
1999. This line of credit is secured by substantially all of our assets, as well
as guaranteed, and secured by letters of credit or deposit accounts pledged by,
eight investors, including John Pappajohn. In consideration of the guarantees
and pledges, we issued to the investors warrants to purchase 30 shares of common
stock for each $100 of the credit line that the investors guaranteed, or
warrants to purchase a total of 750,000 shares of common stock. The warrants
expire in December 2004 and may be
50
<PAGE> 53
exercised at any time prior to then at a price of $5.00 per share. The exercise
price, however, will be adjusted to the price, if lower:
- at which we issue shares of our common stock in a private transaction,
excluding shares issued under employee options, outstanding warrants and
other instruments;
- equal to 50% of the price at which we conduct a bona fide public offering;
or
- equal to 50% of the consideration received per share in any business
combination in which we engage while the warrants are outstanding.
If the exercise price is adjusted, the number of shares covered by each warrant
will also be adjusted to the number obtained by multiplying the number of shares
initially issuable by the initial exercise price and dividing the result by the
adjusted exercise price. If we complete a public offering of our common stock
pursuant to a firm commitment underwriting at a price less than $10 per share,
then the exercise price will be adjusted to 50% of the public offering price and
the number of shares which can be purchased will be equal to $3,750,000 divided
by the new exercise price. The agreement pursuant to which the investor
guarantees were received requires that the credit line be repaid by June 30,
2001 and provides that the investors may purchase, and may assume the bank's
position under, the credit agreement in the event of specified defaults. Mr.
Pappajohn received warrants to purchase 375,000 shares in consideration of the
guarantee of $1,250,000 of the line of credit.
We entered into a $500,000 line of credit with a commercial bank in March 2000.
This line of credit is secured by substantially all of our assets, as well as
guaranteed, and secured by letters of credit or deposit accounts pledged by
three investors. In consideration of the guarantees and pledges, we issued to
the investors warrants to purchase 30 shares of common stock for each $100 of
the credit line that the investors guaranteed, or warrants to purchase a total
of 150,000 shares of common stock. The warrants expire in March 2005 and may be
exercised at any time prior to that date at a price of $6.67 per share. The
exercise price, however, will be adjusted to the price, if lower:
- at which we issue shares of our common stock in a private transaction,
excluding shares issued under employee options, outstanding warrants and
other instruments;
- equal to 50% of the price at which we conduct a bona fide public offering;
or
- equal to 50% of the consideration received per share in any business
combination, excluding a pooling of interest transaction, in which we
engage while the warrants are outstanding.
If the exercise price is adjusted, the number of shares covered by each warrant
will also be adjusted to the number obtained by multiplying the number of shares
initially issuable by the initial exercise price and dividing the result by the
adjusted exercise price. If we complete a public offering of our common stock
pursuant to a firm commitment underwriting at a price less than $13.33 per
share, then the exercise price will be adjusted to 50% of the public offering
price and the number of shares which can be purchased will be equal to
$1,000,000 divided by the new exercise price. The agreement pursuant to which
the investor guarantees were received requires that the credit line be repaid by
June 30, 2001 and provides that the investors may purchase, and may assume the
bank's position under, the credit agreement in the event of specified defaults.
The following table shows the total number of shares that would be issuable upon
the exercise of, and the exercise price of, the warrants described above based
on the initial public offering prices indicated.
<TABLE>
<CAPTION>
$ 9 $ 10 $ 11
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 1999 Warrants
Shares of common stock........................833,333 750,000 750,000
Exercise price per share......................$ 4.50 $ 5.00 $ 5.00
</TABLE>
51
<PAGE> 54
<TABLE>
<S> <C> <C> <C>
March 2000 Warrants
Shares of common stock........................222,222 200,000 181,818
Exercise price per share...................... $4.50 $5.00 $5.50
</TABLE>
If the initial public offering price is less than $9.00 per share, the number
of shares issuable upon exercise of the warrants will be increased, and the
exercise price per warrant will be decreased, based on the formula described
above.
52
<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
our common stock as of June 30, 2000 by:
- each person known by us to beneficially own more than 5% of our outstanding
common stock;
- each director;
- each Named Executive Officer; and
- all directors and executive officers as a group.
Except as otherwise noted, each stockholder has sole voting and investment power
with respect to the shares set forth opposite that stockholder's name.
This table lists applicable percentage ownership based on 6,178,239 shares of
common stock outstanding as of June 30, 2000, after giving effect to the 3 for 2
stock split declared on July 20, 2000 and the conversion of all outstanding
shares of preferred stock, and also lists applicable percentage ownership based
on 11,178,239 shares outstanding immediately following the completion of this
offering.
<TABLE>
<CAPTION>
NUMBER PERCENT OF OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER OF SHARES BEFORE OFFERING AFTER OFFERING
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harry O. Hefter................................. 1,500,000 24.3% 13.4
180 North Wabash Avenue
Chicago, IL 60601
John Pappajohn (1).............................. 1,308,436 18.9% 11.0
2116 Financial Center
Des Moines, IA 50309
U.S. Bank National Association as trustee for
Robert B. Staib (2)........................ 1,122,750 16.2% 9.4
601 Second Avenue South
Minneapolis, MN 55402
William E. Staib (3)........................... 584,126 9.3% 5.2
Edgewater Private Equity Fund.................. 375,000 6.1% 3.4
900 Michigan Avenue, 14th Floor
Chicago, IL 60601
L. Christopher Dominguez (4)................... 109,034 1.7% 1.0
Luan Cox (5)................................... 87,050 1.4% .8
Timothy S. Yamauchi (6)........................ 62,825 1.0%
David Sengpiel (7)............................. 31,500 * .6
512 58th Street
West Des Moines, IA 50266
All directors and officers as a group (10 persons)
(8) 2,433,957 36.7% 20.9
</TABLE>
-----------------
* Less than 1%.
(1) Includes 731,250 shares of common stock issuable on exercise of outstanding
warrants, assuming an initial public offering price of $10.00 per share;
56,250 shares of common stock and 32,109 shares of common stock issuable
upon the conversion of 20,550 shares of Series A Preferred Stock owned by
Halkis Ltd., an entity of which Mr. Pappajohn is the sole proprietor;
56,250 shares of common stock and 32,109 shares of common stock issuable
upon the conversion of 20,550 shares of Series A Preferred Stock owned by
Thebes Ltd., an entity of which Mr. Pappajohn's wife is the sole
proprietor; and 56,250 shares of common stock and 32,109 shares of common
stock issuable upon the conversion of 20,550 shares of Series A Preferred
Stock owned Mr. Pappajohn's wife. Mr. Pappajohn disclaims any beneficial
ownership in any shares owned by Thebes and his wife.
53
<PAGE> 56
(2) Includes 372,750 shares held by U.S. Bank National Association, trustee of
the Robert B. Voting Trust dated December 3, 1999, established for
the benefit of Robert Staib. Also includes 750,000 shares of common stock
issuable upon the exercise of outstanding warrants held by Robert Staib.
Upon exercise of these warrants, the shares will be automatically deposited
into the trust. Under the terms of the voting trust agreement, the trustee
may vote on all matters that come before any stockholders' meeting for
stockholder approval and will vote the Staib shares in the same proportion
as the shares not held by the trustee voting on the matters have voted. In
December 1999, under the terms of an agreement between Robert Staib and us,
Robert Staib agreed to cancel and return 1,368,750 shares of common stock
issuable upon the exercise of warrants. There is currently pending a motion
filed by Robert Staib in voluntary bankruptcy proceedings requesting the
bankruptcy court to enter an order confirming the validity of the
agreement. If the bankruptcy court determines that the agreement is
invalid, although we would continue to contest the validity of all the
warrants, it is possible that some or all of the 1,368,750 warrants that
Robert Staib has surrendered for cancellation will be reissued. See
"Certain Transactions-Bank Guarantees."
(3) Includes 134,126 shares of common stock subject to stock options
exercisable within 60 days of June 30, 2000.
(4) Includes 64,676 shares of common stock subject to stock options exercisable
within 60 days of June 30, 2000 and 24,632 shares issuable upon the
exercise of warrants.
(5) Includes 87,050 shares of common stock subject to stock options exercisable
within 60 days of June 30, 2000.
(6) Includes 62,825 shares of common stock subject to stock options exercisable
within 60 days of June 30, 2000.
(7) Includes 22,500 shares of common stock subject to stock options exercisable
within 60 days of June 30, 2000 and 9,000 shares of common stock.
(8) Includes 430,449 shares of common stock subject to stock options
exercisable within 60 days of June 30, 2000 and 24,632 shares of common
stock issuable upon the exercise of outstanding warrants.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 80,000,000 shares of capital stock, of
which 75,000,000 shares are common stock, $.01 par value per share, and
5,000,000 shares are shares of preferred stock, no par value, undesignated as to
rights and preferences. As of June 30, 2000, 3,395,802 shares of common stock
were issued and outstanding and held by approximately 127 stockholders of
record, and 1,375,974 shares of preferred stock were issued and outstanding and
held by approximately 166 stockholders. Upon the closing of this offering, all
outstanding shares of preferred stock will convert into an aggregate of
2,782,437 shares of common stock.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. If Stockpoint is liquidated or
dissolved, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to any prior distribution
rights of any preferred stock then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. Subject to
the prior rights and preferences of any outstanding preferred stock, the holders
of the common stock are entitled to receive ratably any dividends by the Board
of Directors out of funds legally available for dividends. See "Dividend
Policy."
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder approval, to
issue the undesignated shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares. The Board of Directors has authority to issue preferred stock in
one or more series and to fix voting power (full or limited, or no voting
power), and the designations, preferences and relative, participating, optional
or other special rights and qualifications or restrictions of the undesignated
preferred stock as the Board of Directors shall determine, without further vote
or action by the stockholders. These rights include the dividend rights,
conversion rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series. Issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of Stockpoint without further action
by the stockholders and may adversely affect voting and other rights of holders
of our common stock.
54
<PAGE> 57
WARRANTS
At June 30, 2000, we had outstanding warrants to purchase 2,726,959 shares of
common stock with an average weighted exercise price of $4.07 per share,
assuming an initial public offering price of $10.00 per share. The actual
number of warrants and their exercise price will depend on the initial public
offering price. The warrants expire between June 2001 and March 2005. See
"Certain Transactions-Bridge Loan Financing."
REGISTRATION RIGHTS
After this offering, the holders of 1,369,668 shares of common stock will be
entitled to rights with respect to the registration of those shares under the
Securities Act as follows:
- DEMAND REGISTRATION RIGHTS: At any time one year or more after the
effective date of an initial public offering of our common stock, the
holders of at least 51% of the eligible securities then outstanding
may, on one occasion only, demand in writing that we, at our expense
and subject to certain limitations, file a registration statement
covering the sale of those securities. At the request of the holders of
a majority of the securities to be registered, the method of
disposition of the securities will be an underwritten public offering.
We will select the managing underwriter of any public offering.
- PIGGYBACK REGISTRATION RIGHTS: From and after the date on which one
year has elapsed from the date we first consummate a public offering of
our common stock, each time we determine to proceed with the actual
preparation and filing of a registration statement other than certain
limited purpose registration statements, we will give written notice of
our determination to all record holders of eligible securities, who
will have the right to include those securities in the registration
statement, subject to certain conditions and restrictions.
- S-3 REGISTRATION RIGHTS: At any time one year or more after the
effective date of an initial public offering, and provided that we
qualify for use of the relevant form, holders of a majority of the
outstanding eligible securities may request, on one occasion only, that
we file at our expense subject to certain limitations, a registration
statement on Form S-3 covering the sale of the eligible securities.
The holders of warrants to purchase a total of 2,397,959 shares of our common
stock have rights to require us to include those shares in any registration
statement, other than a registration statement filed in connection with an
initial public offering, that we file prior to the expiration date of the
relevant warrant. These rights include the right to require us to use our best
efforts to qualify the warrant shares for sale in the states any warrantholder
designates. We will bear the entire cost and expense of any registration like
this other than the fees of counsel for the warrantholders and any registration
fees, transfer taxes or underwriting discounts or commissions applicable to the
warrant shares.
ANTI-TAKEOVER PROVISIONS
As a Delaware corporation, we are subject to the provisions of Section 203 of
the Delaware General Corporation Law. Section 203, subject to certain
exemptions, prohibits a Delaware corporation from engaging in any of a broad
range of "business combinations" and "control share acquisitions" involving an
"interested" stockholder, or any affiliate or associate of such interested
stockholder, for a period of three years following the date that such
stockholder became an interested stockholder, unless:
- prior to such date, the Board of Directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced excluding, for purposes of determining
the number of shares outstanding, those shares owned (i) by persons who
are directors and also officers and (ii) by employee stock plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved by
the Board of Directors and authorized
55
<PAGE> 58
at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. For purposes of Section
203, an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock. These provisions may have the effect of
discouraging, delaying, deferring or preventing a change in control of
Stockpoint.
Our amended and restated certificate of incorporation provides that the board of
directors is divided into three classes of directors, with each class serving a
staggered three-year term. The number of directors is fixed by resolution of the
board of directors consisting of at least three but not more than 11 directors.
The size of our board is currently fixed at four members. Unless a change in the
size of the board is approved by a majority of the entire board of directors,
any increase or decrease in the number of directors must be approved by holders
of at least 75% of the outstanding common stock. Newly-created directorships
resulting from any increase in the number of directors may be filled by a
majority of the directors then in office and any other vacancy may be filled by
a majority of remaining directors then in office or a sole remaining director.
As a result of the classification of our board of directors,
approximately one-third of the members of our board of directors will be elected
each year. When coupled with the provision of our amended and restated
certification of incorporation authorizing the board of directors to fill
newly-created directorships or vacancies and increase the size of the board up
to 11, these provisions may prevent stockholders from removing incumbent
directors and simultaneously gaining control of the board by filling vacancies
created by the removals with their own nominees. The amendment of the provisions
relating to the structure and classification of our board of directors would
require approval by holders of at least 75% of the outstanding common stock.
LISTING
We have applied for quotation of our common stock on the Nasdaq National Market
under the symbol "STKP."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be Norwest Bank
Minnesota, National Association.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. We
cannot make any predictions regarding the effect, if any, that future sales of
substantial amounts of our common stock, or the perception that those sales
might occur, could have on the market price for our common stock. Nevertheless,
sales of substantial amounts of our common stock in the public market could
adversely affect the prevailing market price. These factors could also make it
more difficult for us to raise additional equity capital in the future.
Upon completion of this offering, we will have outstanding a total of 11,178,239
shares of our common stock, assuming no exercise of the underwriters' option to
purchase additional shares and no exercise of outstanding options and warrants.
All of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act unless the shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 6,178,239 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701 under
the Securities Act, rules that are summarized below. 6,171,114 of the shares
held by existing stockholders were acquired more than two years ago. Subject to
the lock-up agreements described below, all of those shares, except shares held
by persons who are "affiliates" of Stockpoint under SEC rules, will be eligible
for immediate sale in the public markets under Rule 144(k). The remaining 7,125
shares will become eligible for resale 90 days after the effective date of this
offering under Rule 701.
56
<PAGE> 59
LOCK-UP AGREEMENTS
Our directors, executive officers, five percent stockholders and certain other
holders of our common stock, as well as option and warrant holders, have entered
into "lock-up" agreements providing that they will not sell, offer to sell,
contract to sell, hypothecate, pledge, grant any option to sell or otherwise
dispose of, directly or indirectly, any shares of common stock or securities
convertible into or exercisable or exchangeable for common stock for a period of
180 days after the date of this prospectus without the prior written consent of
UBS Warburg LLC. Although UBS Warburg LLC may release the shares subject to the
lock-up agreements in whole or in part at any time, we understand that it has no
current plan to do so.
RULE 144
In general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of our common stock for at least one year would be entitled to
sell, within any three-month period beginning 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell those shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
RULE 701
In general, under Rule 701 as currently in effect, each of our employees,
consultants or advisors who purchases shares from us in connection with a
compensatory stock plan or other written agreement is eligible to resell those
shares 90 days after the effective date of this offering in reliance on Rule
144, but without compliance with certain restrictions, including the holding
period, contained in Rule 144.
REGISTRATION RIGHTS
The holders of 1,369,668 shares of our common stock and holders of warrants to
purchase an aggregate of 2,397,959 shares of our common stock have various
rights with respect to the registration of their shares under the Securities
Act. Registration of these shares would result in their becoming freely
tradeable without restriction, except for shares purchased by affiliates. See
"Description of Capital Stock-Registration Rights."
STOCK OPTIONS
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all shares of common
stock issuable under our stock option plans. See "Management - Stock Option
Plans." This Form S-8 registration statement is expected to be become effective
immediately upon filing and shares covered by that registration statement will
then be eligible for sale in the public markets, subject to Rule 144 limitations
applicable to affiliates.
UNDERWRITING
Stockpoint and the underwriters for the offering named below have entered into
an underwriting agreement. Subject to conditions, each underwriter has severally
agreed to purchase the number of shares indicated in the following table. UBS
57
<PAGE> 60
Warburg LLC and Roth Capital Partners, Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
----------------------------------------------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC......................................................................
Roth Capital Partners, Inc...........................................................
---------------------------------
Total......................................................................... 5,000,000
=================================
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional 750,000 shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional 750,000 shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share.......................................................... $ $
Total........................................................ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $503,300.
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
other selling terms.
The underwriters have informed us that they do not expect discretionary sales to
exceed 5% of the shares of common stock to be offered.
We, each of our directors, executive officers and certain of our stockholders
have agreed not to offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the SEC a registration statement under
the Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable for common stock for a period of 180 days after
the date of this prospectus without the prior written consent of UBS Warburg
LLC.
The underwriters have reserved for sale, at the initial public offering price,
up to 250,000 shares of common stock being offered for sale to our customers,
business partners and other parties, including our employees. The number of
shares available for sale to the general public will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares in this offering.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price will be negotiated between us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history and the prospects for the industry in which we compete;
- the ability of our management;
58
<PAGE> 61
- our prospects for future earnings, the present state of our development
and our current financial position;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include stabilizing
transactions. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of the
common stock while the offering is in progress. These transactions may also
include short sales and purchases to cover positions created by short sales.
Short sales involve the sale by the underwriters of a greater number of shares
than they are required to purchase in the offering.
Short sales may be either "covered short sales" or "naked short sales." Covered
short sales are sales made in an amount not greater than the underwriters'
over-allotment option to purchase additional shares in the offering. The
underwriters may close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments that the underwriters may be required to make in respect thereof.
In April 2000, we entered into an agreement with Dain Rauscher Wessels under
which Dain Rauscher agreed to provide financial advisory and investment banking
services to us. Under the terms of this agreement, we will be required to pay
$250,000 to Dain Rauscher upon completion of this offering.
LEGAL MATTERS
Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon the validity of the
issuance of shares of common stock offered by this prospectus for Stockpoint.
Dewey Ballantine LLP, New York, New York will pass upon various legal matters in
connection with the offering for the underwriters.
EXPERTS
The consolidated financial statements of Stockpoint as of December 31, 1998 and
1999 and for the years ended December 31, 1997, 1998 and 1999 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect to
the shares of common stock offered by this prospectus. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information contained in the registration statement and the exhibits and
schedules that are another part of the registration statement. In particular,
statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each case we
refer you to the copy of that contract or other document to the extent filed as
an exhibit to the registration statement for a more complete description. For
further information on Stockpoint and our common stock, you should review the
registration statement, including exhibits and schedules.
You may read and copy all or any portion of the registration statement or any
reports, statements or other information we file at the SEC's public reference
room at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC, 20549
and at
59
<PAGE> 62
the regional offices of the SEC located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can request copies of these documents upon payment of a
duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Our SEC
filings, including the registration statement, are also available on the SEC's
web site at http://www.sec.gov.
Upon completion of this offering, we will be required to file periodic reports,
proxy statements and other information with the SEC. These documents will be
available for inspection and copying as described above. In addition, upon
approval of our application for quotation of our common on the Nasdaq National
Market, those reports, proxy statements and other information will also be
available for inspection at the offices of Nasdaq Operations, 1735 K Street, NW,
Washington, DC 20006.
We intend to furnish our stockholders with annual reports containing financial
statements audited by our independent auditors and to make available to our
stockholders quarterly reports containing unaudited financial data for the first
three quarters of each fiscal year.
60
<PAGE> 63
STOCKPOINT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and June 30, 2000 (unaudited)............................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000 (unaudited).................. F-5
Consolidated Statements of Stockholders' (Deficiency) for
the Years Ended December 31, 1997, 1998 and 1999 and for
the six months ended June 30, 2000 (unaudited)............ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000 (unaudited).................. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Stockpoint, Inc.:
We have audited the accompanying consolidated balance sheets of Stockpoint,
Inc. (formerly Neural Applications Corporation) and subsidiary as of December
31, 1998 and 1999, and the related consolidated statements of operations,
stockholders' (deficiency), and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Stockpoint, Inc. and subsidiary
at December 31, 1998 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
As discussed in Note 13 to the consolidated financial statements, the
Company discontinued the operations of its metals segment on May 28, 1999, when
it sold the technology and operational assets of the metals segment. The gain on
sale and results prior to the sale are included in discontinued operations in
the accompanying consolidated financial statements.
/s/ Deloitte & Touche LLP
Cedar Rapids, Iowa
February 8, 2000
(July 20, 2000 as to Note 15)
F-2
<PAGE> 65
STOCKPOINT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTES 2 AND 9)
CURRENT ASSETS:
Cash and cash equivalents................ $ 221,098 $2,203,623 $ 2,403,390
Accounts receivable, less allowance for
doubtful accounts of $58,208 for 1998,
$150,000 for 1999 and $150,000 for
2000.................................. 1,118,310 1,859,852 2,702,780
Prepaid expenses and other assets........ 146,323 247,201 564,160
Net current assets of discontinued
operations (Note 13).................. 804,201 -- --
---------- ---------- -----------
Total current assets.................. 2,289,932 4,310,676 5,670,330
---------- ---------- -----------
SOFTWARE, EQUIPMENT AND FURNITURE:
Purchased software....................... 214,473 322,665 454,437
Equipment................................ 1,388,863 1,886,301 2,123,253
Furniture and fixtures................... 56,360 67,227 96,599
---------- ---------- -----------
Total................................. 1,659,696 2,276,193 2,674,289
Less accumulated depreciation............ (571,133) (929,071) (1,154,121)
---------- ---------- -----------
Software, equipment and furniture,
net.............................. 1,088,563 1,347,122 1,520,168
---------- ---------- -----------
OTHER ASSETS:
Software development costs, less
accumulated amortization of $191,654
for 1998, $204,519 for 1999 and
$220,299 for 2000 (Note 1)............ 28,645 15,780 --
Deferred development costs............... -- -- 332,953
Deferred offering costs.................. -- -- 228,945
Deferred financing costs, less
accumulated amortization of $108,865
for 1998, $215,512 for 1999 and
$301,778 for 2000..................... 387,207 415,560 329,294
---------- ---------- -----------
Total other assets.................... 415,852 431,340 891,192
---------- ---------- -----------
Total................................. $3,794,347 $6,089,138 $ 8,081,690
========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 66
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, (NOTE 14)
---------------------------- JUNE 30, JUNE 30,
1998 1999 2000 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES:
Short-term debt (Notes 2 and 16)............. $ 4,145,000 $ 1,750,000 $ 12,034,319
Forgivable loan (Note 2)..................... 250,000 -- --
Accounts payable............................. 796,370 1,566,781 2,783,531
Deferred revenue............................. 1,498,181 2,808,181 5,517,593
Accrued installation and warranty costs...... 46,282 296,086 391,268
Other accrued liabilities.................... 833,956 552,451 881,901
Customer deposits............................ 70,314 -- --
Current portion of long-term debt (Note 2)... -- -- 12,650
Current portion of capital lease (Note 8).... -- 5,821 28,500
------------ ------------ ------------
Total current liabilities.................. 7,640,103 6,979,320 21,649,762
------------ ------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, net of debt discount and less
current portion (Note 2)................... 5,900,000 10,508,421 134,633
Capital lease, less current portion (Note
8)......................................... -- 28,260 96,333
------------ ------------ ------------
Total long-term liabilities................ 5,900,000 10,536,681 230,966
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 7, 8, 9 and 16)
STOCKHOLDERS' (DEFICIENCY) (Note 11):
Preferred stock, no par value; 5,000,000 shares
authorized:
Convertible Series A Preferred Stock, 320,000
shares issued at December 31, 1998 and 1999
and June 30, 2000 ($2,000,000 liquidation
value, convertible into 750,000 shares of
common stock) (Note 4), no pro forma shares
outstanding................................ 1,965,991 1,965,991 1,965,991 $ --
Convertible Series B Preferred Stock, 282,720
shares issued at December 31, 1998 and 1999
and June 30, 2000 ($1,767,000 liquidation
value, convertible into 662,625 shares of
common stock) (Note 4), no pro forma shares
outstanding................................ 1,733,639 1,733,639 1,733,639 --
Convertible Series C Preferred Stock, 773,254
shares issued at December 31, 1998 and 1999
and June 30, 2000 ($6,968,988 liquidation
value, convertible into 1,369,812 shares of
common stock) (Note 4), no pro forma shares
outstanding................................ 5,455,319 5,455,319 5,455,319 --
Common stock, $.01 par value per share;
75,000,000 shares authorized; 3,194,552,
3,264,177 and 3,395,802 shares issued at
December 31, 1998 and 1999 and June 30, 2000,
respectively (Note 5 and 15), 6,178,239 pro
forma shares outstanding..................... 31,946 32,642 33,959 61,782
Common stock warrants (Note 7)................. -- 819,868 1,676,598 1,676,598
Additional paid-in capital..................... 2,599,110 3,864,739 3,800,530 12,927,656
Deferred compensation (Note 6)................. (1,594,755) (2,194,978) (1,682,379) (1,682,379)
Accumulated deficit............................ (19,937,006) (23,104,083) (26,782,695) (26,782,695)
------------ ------------ ------------ ------------
Total stockholders' (deficiency)........... (9,745,756) (11,426,863) (13,799,038) $(13,799,038)
------------ ------------ ------------ ============
Total.......................................... $ 3,794,347 $ 6,089,138 $ 8,081,690
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 67
STOCKPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS:
REVENUES (Note 10)................. $ 1,427,908 $ 2,177,946 $ 6,829,869 $ 2,438,609 $ 6,467,852
COST OF REVENUES (excluding
deferred compensation of $86,257
for 1998, $124,337 for 1999,
$35,419 for June 30, 1999 and
$30,481 for June 30, 2000)....... 308,608 764,965 2,289,881 913,882 3,078,951
----------- ----------- ----------- ----------- -----------
GROSS PROFIT....................... 1,119,300 1,412,981 4,539,988 1,524,727 3,388,901
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development
(excluding deferred
compensation of $61,176 for
1998, $114,005 for 1999,
$73,074 for June 30, 1999 and
$62,887 for June 30, 2000)..... 1,057,071 1,101,471 1,637,150 606,149 1,909,530
Sales and marketing (excluding
deferred compensation of
$58,229 for 1998, $137,552 for
1999, $32,134 for June 30, 1999
and $27,655 for June 30,
2000).......................... 752,675 1,566,030 1,590,899 684,593 2,084,751
General and administrative
(excluding deferred
compensation of $460,608 for
1998, $236,408 for 1999,
$233,773 for June 30, 1999 and
$201,184 for June 30, 2000).... 2,556,730 3,523,006 3,588,977 1,577,940 2,038,378
Deferred compensation (Note 6)... -- 666,270 612,302 374,400 322,207
----------- ----------- ----------- ----------- -----------
Total operating expenses....... 4,366,476 6,856,777 7,429,328 3,243,082 6,354,866
----------- ----------- ----------- ----------- -----------
OPERATING LOSS FROM CONTINUING
OPERATIONS....................... (3,247,176) (5,443,796) (2,889,340) (1,718,355) (2,965,965)
OTHER EXPENSE, PRIMARILY
INTEREST......................... (688,525) (784,546) (1,058,545) (438,823) (946,247)
----------- ----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS.... (3,935,701) (6,228,342) (3,947,885) (2,157,178) (3,912,212)
DISCONTINUED OPERATIONS (Note 13):
Income (loss) from operations...... (405,722) (356,946) 347,675 347,675 --
Gain on disposition................ -- -- 433,133 433,133 --
----------- ----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM....... (4,341,423) (6,585,288) (3,167,077) (1,376,370) (3,912,212)
GAIN ON EXTINGUISHMENT OF DEBT(Note
2)................................. -- -- -- -- 233,600
----------- ----------- ----------- ----------- -----------
NET LOSS............................. (4,341,423) (6,585,288) (3,167,077) (1,376,370) (3,678,612)
CUMULATIVE DIVIDENDS ON PREFERRED
STOCK.............................. (40,266) (409,418) (412,918) (206,458) (206,458)
----------- ----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS....................... $(4,381,689) $(6,994,706) $(3,579,995) $(1,582,828) $(3,885,070)
=========== =========== =========== =========== ===========
BASIC AND DILUTED INCOME (LOSS) PER
COMMON SHARE -- HISTORICAL:
Loss from continuing
operations..................... $ (1.27) $ (2.10) $ (1.35) $ (0.74) $ (1.25)
Income (loss) from discontinued
operations..................... (0.13) (0.11) 0.24 0.24 --
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item... (1.40) (2.21) (1.11) (0.50) (1.25)
Gain on extinguishment of debt... -- -- -- -- 0.07
----------- ----------- ----------- ----------- -----------
Net loss......................... $ (1.40) $ (2.21) $ (1.11) $ (0.50) $ (1.18)
=========== =========== =========== =========== ===========
BASIC AND DILUTED INCOME (LOSS) PER
COMMON SHARE -- PRO FORMA
(UNAUDITED) (Note 14):
Loss from continuing
operations..................... $ (0.66) $ (0.65)
Income from discontinued
operations..................... 0.13 --
----------- -----------
Loss before extraordinary item... (0.53) (0.65)
Gain on extinguishment of debt... -- 0.04
----------- -----------
Net loss......................... $ (0.53) $ (0.61)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 68
STOCKPOINT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
SUBSIDIARY CONVERTIBLE CONVERTIBLE CONVERTIBLE
SERIES A SERIES A SERIES B SERIES C COMMON ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON STOCK PAID-IN
STOCK STOCK STOCK STOCK STOCK WARRANTS CAPITAL
---------- ----------- ----------- ----------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996....... $ 100,000 $1,965,991 $1,733,639 $ -- $31,346 $ -- $ 108,285
Issuance of 694,618 shares of
Convertible Series C Preferred
Stock, net of issue costs of
$414,684......................... -- -- -- 4,885,316 -- -- --
Redemption of subsidiary Series A
Preferred Stock.................. (100,000) -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
--------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1997....... -- 1,965,991 1,733,639 4,885,316 31,346 -- 108,285
Issuance of 78,636 shares of
Convertible Series C Preferred
Stock, net of issue costs of
$29,997.......................... -- -- -- 570,003 -- -- --
Deferred compensation.............. -- -- -- -- -- -- 2,491,425
Amortization of deferred
compensation (including $230,400
allocated to discontinued
operations)...................... -- -- -- -- -- -- --
Cashless exercise of warrants for
60,000 shares of common stock.... -- -- -- -- 600 -- (600)
Net loss........................... -- -- -- -- -- -- --
--------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1998....... -- 1,965,991 1,733,639 5,455,319 31,946 -- 2,599,110
Issuance of 7,125 shares of common
stock............................ -- -- -- -- 70 -- 4,680
Deferred compensation.............. -- -- -- -- -- -- 1,261,575
Amortization of deferred
compensation (including $49,050
allocated to discontinued
operations)...................... -- -- -- -- -- -- --
Issuance of common stock
warrants......................... -- -- -- -- -- 819,868 --
Cashless exercise of warrants for
62,501 shares of common stock.... -- -- -- -- 626 -- (626)
Net loss........................... -- -- -- -- -- -- --
--------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE AT DECEMBER 31, 1999....... -- 1,965,991 1,733,639 5,455,319 32,642 819,868 3,864,739
Deferred compensation
(unaudited)...................... -- -- -- -- -- -- (190,392)
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- -- --
Issuance of common stock warrants
(unaudited)...................... -- -- -- -- -- 856,730 --
Cashless exercise of warrants for
83,813 shares of common stock
(unaudited)...................... -- -- -- -- 838 -- (838)
Exercise of warrants for 47,812
shares of common stock
(unaudited)...................... -- -- -- -- 479 -- 127,021
Net loss (unaudited)............... -- -- -- -- -- -- --
--------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE AT JUNE 30,
2000(unaudited).................. $ -- $1,965,991 $1,733,639 $5,455,319 $33,959 $1,676,598 $3,800,530
========= ========== ========== ========== ======= ========== ==========
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT
------------ -----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996....... $ -- $ (9,010,295)
Issuance of 694,618 shares of
Convertible Series C Preferred
Stock, net of issue costs of
$414,684......................... -- --
Redemption of subsidiary Series A
Preferred Stock.................. -- --
Net loss........................... -- (4,341,423)
----------- ------------
BALANCE AT DECEMBER 31, 1997....... -- (13,351,718)
Issuance of 78,636 shares of
Convertible Series C Preferred
Stock, net of issue costs of
$29,997.......................... -- --
Deferred compensation.............. (2,491,425) --
Amortization of deferred
compensation (including $230,400
allocated to discontinued
operations)...................... 896,670 --
Cashless exercise of warrants for
60,000 shares of common stock.... -- --
Net loss........................... -- (6,585,288)
----------- ------------
BALANCE AT DECEMBER 31, 1998....... (1,594,755) (19,937,006)
Issuance of 7,125 shares of common
stock............................ -- --
Deferred compensation.............. (1,261,575) --
Amortization of deferred
compensation (including $49,050
allocated to discontinued
operations)...................... 661,352 --
Issuance of common stock
warrants......................... -- --
Cashless exercise of warrants for
62,501 shares of common stock.... -- --
Net loss........................... -- (3,167,077)
----------- ------------
BALANCE AT DECEMBER 31, 1999....... (2,194,978) (23,104,083)
Deferred compensation
(unaudited)...................... 190,392 --
Amortization of deferred
compensation (unaudited)......... 322,207 --
Issuance of common stock warrants
(unaudited)...................... -- --
Cashless exercise of warrants for
83,813 shares of common stock
(unaudited)...................... -- --
Exercise of warrants for 47,812
shares of common stock
(unaudited)...................... -- --
Net loss (unaudited)............... -- (3,678,612)
----------- ------------
BALANCE AT JUNE 30,
2000(unaudited).................. $(1,682,379) $(26,782,695)
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 69
STOCKPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(4,341,423) $(6,585,288) $(3,167,077) $(1,376,370) $(3,678,612)
Adjustments to reconcile net loss to net cash
flows from operating activities of continuing
operations:
(Income) loss from discontinued operations..... 405,722 356,946 (347,675) (347,675) --
Gain on disposition of discontinued
operations................................... -- -- (433,133) (433,133) --
Depreciation and amortization.................. 243,187 361,495 521,015 218,559 711,627
Gain on extinguishment of debt................. -- -- -- -- (233,600)
Noncash expense related to stock options and
warrants..................................... -- 896,670 858,810 337,200 379,208
Net changes in assets and liabilities:
Accounts receivable............................ (66,648) (508,159) (741,542) 65,407 (842,928)
Prepaid expenses and other assets.............. (81,581) (6,477) 9,953 (16,436) (316,959)
Deferred development costs..................... -- -- -- -- (332,953)
Accounts payable............................... 136,874 404,099 770,411 27,815 1,216,750
Deferred revenue............................... 133,137 900,954 1,310,000 (20,302) 2,709,412
Accrued liabilities and customer deposits...... (60,808) 388,846 (102,015) 896,085 514,632
----------- ----------- ----------- ----------- -----------
Net cash flows from operating activities of
continuing operations...................... (3,631,540) (3,790,914) (1,321,253) (648,850) 126,577
Net cash flows from discontinued
operations................................. (407,746) (727,083) 835,009 835,009 --
----------- ----------- ----------- ----------- -----------
Net cash flows from operating activities..... (4,039,286) (4,517,997) (486,244) 186,159 126,577
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for software, equipment and
furniture...................................... (477,919) (749,923) (623,487) (136,579) (352,403)
Expenditures for software development costs...... -- (38,597) -- -- --
Proceeds from sale of discontinued operations.... -- -- 750,000 750,000 --
----------- ----------- ----------- ----------- -----------
Net cash flows from investing activities..... (477,919) (788,520) 126,513 613,421 (352,403)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under bank lines of
credit......................................... -- 5,055,000 2,475,000 -- 5,855,000
Payments on borrowings under bank lines of
credit......................................... (5,510,000) (910,000) -- -- (5,360,000)
Proceeds from borrowings under note payable...... -- -- -- -- 45,200
Payments on borrowings under note payable........ -- -- -- -- (4,317)
Payments on capital lease........................ -- -- (2,494) -- (8,845)
Payments for bank line of credit fees............ -- -- (135,000) -- --
Payments for deferred offering costs............. -- -- -- -- (228,945)
Payments for issuance costs of debentures........ (411,575) (29,997) -- -- --
Payments for issuance costs of preferred stock... (414,684) (29,997) -- -- --
Proceeds from issuance of Convertible Series C
Preferred Stock................................ 5,300,000 600,000 -- -- --
Proceeds from issuance of debentures............. 5,300,000 600,000 -- -- --
Proceeds from issuance of common stock........... -- -- 4,750 3,000 127,500
Redemption of subsidiary Series A Preferred
Stock.......................................... (100,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash flows from financing activities..... 4,163,741 5,285,006 2,342,256 3,000 425,593
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (353,464) (21,511) 1,982,525 802,580 199,767
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................... 596,073 242,609 221,098 221,098 2,203,623
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 242,609 $ 221,098 $ 2,203,623 $ 1,023,678 $ 2,403,390
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for interest......... $ 699,021 $ 663,110 $ 936,018 $ -- $ 489,763
=========== =========== =========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased by capital lease............. $ -- $ -- $ 36,575 $ -- $ 99,597
Issuance of common stock warrants for consulting
services....................................... -- -- 279,868 -- 57,000
Issuance of common stock warrants in connection
with bank line of credit....................... -- -- 540,000 -- 799,730
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 70
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- In July 1999, Neural Applications Corporation amended its
certificate of incorporation to change its name to Stockpoint, Inc. (which
individually or collectively with its wholly-owned subsidiary discussed below is
referred to herein as the "Company"). The Company operates in a single business
segment. The Company is a provider of financial information and market analysis
components for Internet web sites. The Company integrates sophisticated
financial content and applications to provide its clients customized web sites
that the Company hosts. In doing so, the Company enables organizations such as
brokerages, commercial and investment banks, mutual funds, 401(k) plans, portals
and media companies to outsource essential web site functionality. The Company
also engages in projects to provide data mining applications and financial
services consulting to businesses related to their Internet web sites.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Stockpoint, Inc. and its wholly-owned subsidiary. Prior
to June 1999, such subsidiary was Ethos Corporation, which was acquired by the
Company on March 6, 1997 (see Note 11). In June 1999, Ethos Corporation was
merged into the Company. Simultaneously, certain assets were contributed to a
newly formed subsidiary named Neural, Inc. Intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION -- The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company has had recurring operating losses since inception, which has
resulted in an accumulated deficit of $23,104,083 at December 31, 1999.
Management is continuing its efforts to market the Company's existing products
and services and develop new products and services to enable the Company to
achieve a revenue base that can support its operations. Management believes that
existing capital resources and financing available under the Company's line of
credit will be adequate to satisfy minimum capital requirements for at least
twelve months.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the allowance for doubtful accounts and accrued
installation and warranty costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of accounts
receivable, accounts payable, customer deposits, and notes payable approximate
the carrying values of the instruments due to the short-term maturities of such
instruments or, for long-term notes payable, due to no significant change in
interest rates since their issuance.
CONCENTRATION OF CREDIT RISK -- The Company's financial instruments that
are subject to concentration of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable which are generally not
collateralized. The Company's policy is to place its cash and cash equivalents
with high credit quality financial institutions in order to limit the amount of
credit exposure. The Company's trade accounts receivable are
F-8
<PAGE> 71
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
primarily with customers in the financial services industry. The Company
maintains allowances for probable credit losses.
CONCENTRATION OF SOURCES OF CONTENT -- The Company obtains financial data
and information, such as stock pricing information, financial news, and research
information, from a limited number of content providers through nonexclusive
contractual relationships with terms that usually range from one to two years.
The Company may not be able to renew these contracts on favorable terms or a
change in content providers could cause significant service disruptions which
would adversely affect the business.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include interest
earning deposits with original maturities of ninety days or less.
PURCHASED SOFTWARE, EQUIPMENT, AND FURNITURE -- Purchased software,
equipment, and furniture are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives (three to five years)
of the related assets. The Company reviews such assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
SOFTWARE DEVELOPMENT COSTS -- Software development costs for products and
significant product enhancements incurred subsequent to the establishment of
their technological feasibility and prior to their general release to customers
are capitalized. The ultimate recovery of the costs is dependent on the
Company's ability to successfully complete the products or enhancements under
development and to achieve a level of market acceptance, which will generate
revenues and profits in amounts sufficient to permit such recovery. The Company
evaluates the recoverability of capitalized software development costs by
project on a periodic basis.
The Company begins amortizing software development costs when the products
and product enhancements are released to customers. Amortization expense was
$55,064, $29,948 and $12,865 for the years ended December 31, 1997, 1998 and
1999, respectively. Capitalized software development costs are amortized pro
rata based upon revenue earned over total anticipated revenue from the related
products or product enhancement or straight-line over three years, whichever
method results in the greatest amortization expense.
DEFERRED OFFERING COSTS -- Incremental costs directly attributable to the
Company's planned initial public offering of its common stock have been deferred
and will be offset against the proceeds of the offering.
DEFERRED FINANCING COSTS -- Incremental costs directly attributable to the
Company's line of credit agreement and private placement offering of debentures
have been deferred and are being amortized as interest expense over the life of
the line of credit agreement and debentures, respectively.
PRODUCT SUPPORT AND WARRANTY COSTS -- Estimated costs anticipated to be
incurred during the product support and warranty period related to the Company's
discontinued metals segment (see Note 13) was accrued when revenue from the
system sale was recognized. The Company remains liable for such costs for
systems sold prior to the sale of the metals segment.
REVENUE RECOGNITION AND DEFERRED REVENUE -- Revenues from Internet
advertising, license, and maintenance and support agreements are recognized
ratably over the periods
F-9
<PAGE> 72
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the agreements. Revenues from services for projects and Internet development
agreements are recognized as project or development time is incurred. Deferred
revenue represents amounts billed to customers as permitted by the agreements
which have not yet been recognized as revenue.
The staff of the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101") in
December 1999. SAB 101 summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The application of SAB 101 to revenue recognition for development fees that are
negotiated with and essential to the functionality of the license agreement
would have had an immaterial effect on the Company's financial statements as of
December 31, 1999. The Company has applied SAB 101 to such development fees on a
prospective basis. The Company, beginning January 1, 2000, defers development
fees, and the related costs, that are negotiated with and essential to the
functionality of the license agreement and recognizes the revenues and related
costs ratably over the license period.
DEBT DISCOUNT -- Original issue debt discount associated with the value
assigned to detachable common stock warrants issued in connection with the
Company's lines of credit is being amortized as interest expense over the life
of the line of credit agreements.
INCOME TAXES -- Deferred income taxes are provided to recognize the tax
effect of temporary differences between the basis of assets and liabilities for
tax and financial statement purposes. A valuation allowance is provided to
reduce deferred tax assets to the amount considered realizable.
STOCK BASED COMPENSATION -- The Company measures stock-based compensation
cost with employees as the excess of the fair value of the Company's common
stock at date of grant over the amount the employee must pay for the stock. The
Company measures stock-based compensation with other than employees as the fair
value of the goods or services received or the fair value of the equity
instrument issued, whichever is more reliably measurable.
If compensation cost for stock option grants to employees had been
determined based on fair value at the grant dates consistent with the method
prescribed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation," the Company's net loss applicable to common
stockholders and net loss per share would have been the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common
stockholders:
As reported............................ $(4,381,689) $(6,994,706) $(3,579,995)
Pro forma.............................. (4,442,009) (7,018,879) (3,651,326)
Net loss per common share:
As reported............................ $ (1.40) $ (2.21) $ (1.11)
Pro forma.............................. (1.42) (2.22) (1.14)
</TABLE>
F-10
<PAGE> 73
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: seven year expected life
of option; stock volatility of zero; risk-free interest rates of 6.25%, 5.5% and
6.0% in 1997, 1998 and 1999, respectively; and no dividends during the expected
term. The pro forma amounts for compensation cost may not be indicative of the
effects on net loss applicable to common stockholders and net loss per common
share for future years.
NET LOSS PER COMMON SHARE INFORMATION -- The Company's net loss per common
share is based upon the weighted average number of common shares outstanding
during the periods presented. Equivalent shares in the form of convertible
preferred stock, stock options and warrants are excluded from the calculation
since they are antidilutive. The Company's net loss per common share is
calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loss from continuing
operations.................... $(3,935,701) $(6,228,342) $(3,947,885) $(2,157,178) $(3,912,212)
Cumulative dividends on
preferred stock............... (40,266) (409,418) (412,918) (206,458) (206,458)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations
applicable to common
stockholders.................. (3,975,967) (6,637,760) (4,360,803) (2,363,636) (4,118,670)
Income (loss) from discontinued
operations.................... (405,722) (356,946) 780,808 780,808 --
----------- ----------- ----------- ----------- -----------
Loss before extraordinary
item.......................... (4,381,689) (6,994,706) (3,579,995) (1,582,828) (4,118,670)
Gain on extinguishment of
debt.......................... -- -- -- -- 233,600
----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders.................. $(4,381,689) $(6,994,706) $(3,579,995) $(1,582,828) $(3,885,070)
=========== =========== =========== =========== ===========
Basic and diluted loss per
common share:
Loss from continuing
operations.................. $ (1.27) $ (2.10) $ (1.35) $ (0.74) $ (1.25)
Income (loss) from
discontinued operations..... (0.13) (0.11) 0.24 0.24 --
----------- ----------- ----------- ----------- -----------
Loss before extraordinary
item........................ (1.40) (2.21) (1.11) (0.50) (1.25)
Gain on extinguishment of
debt........................ -- -- -- -- 0.07
----------- ----------- ----------- ----------- -----------
Net loss...................... $ (1.40) $ (2.21) $ (1.11) $ (0.50) $ (1.18)
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding................... 3,134,552 3,160,359 3,212,106 3,194,831 3,283,247
=========== =========== =========== =========== ===========
Potential common shares excluded
from per share computation
because they were
antidilutive:
Convertible preferred
stock..................... 2,454,552 2,660,910 2,758,200 2,681,097 2,782,437
Options..................... 633,225 882,975 2,478,450 1,274,100 2,852,550
Warrants.................... 2,530,125 3,280,334 2,715,958 3,325,334 2,726,959
----------- ----------- ----------- ----------- -----------
Total....................... 5,617,902 6,824,219 7,952,608 7,280,531 8,361,946
=========== =========== =========== =========== ===========
</TABLE>
F-11
<PAGE> 74
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The recognition of gains or losses resulting from changes in the
values of derivatives is based on the use of each derivative instrument and
whether it qualifies for hedge accounting. SFAS No. 137 deferred the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company
has not yet determined the effect of SFAS No. 133 on the consolidated financial
statements.
SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" is not applicable to the Company's operations.
RECLASSIFICATION -- Certain reclassifications have been made to prior years
amounts to conform with the current period presentation.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- The interim consolidated
financial statements and the related information in the notes as of June 30,
2000 and for the six months ended June 30, 1999 and 2000 are unaudited. Such
interim consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position, the
results of operations and cash flows for the interim periods presented. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
F-12
<PAGE> 75
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. NOTES PAYABLE
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Debentures, 8.75%, due September 30, 2002,
collateralized by irrevocable letters of credit
to pay principal and accrued interest in an
amount equal to 107% of the principal amount of
the debentures, waiver of collateral violation
with bank providing the irrevocable letters of
credit only exists through June 30, 2001 as
discussed below................................ $ 5,900,000 $ 5,900,000 $ 5,900,000
Prior lines of credit, 8.25%, restructured to
notes payable in December 1999................. 4,145,000 -- --
Notes payable to banks, interest rate at prime
(8.5% at December 31, 1999), $1,145,000 due
June 30, 2001 and $3,000,000 due November 2,
2002, waiver of collateral violation with banks
only exists through June 30, 2001 as discussed
below.......................................... -- 4,145,000 4,145,000
Lines of credit, interest rate at prime (8.5% at
December 31, 1999), due June 30, 2001,
collateralized by substantially all of the
Company's assets............................... -- 2,475,000 2,970,000
Note payable to the Iowa Department of Economic
Development, forgivable loan, 6%, see repayment
terms below, collateralized by certain
software, equipment and furnishings, and
accounts receivable............................ 250,000 250,000 106,400
Note payable, 8%, due January 25, 2005,
collateralized by equipment.................... -- -- 40,883
Unamortized debt discount........................ -- (511,579) (980,681)
----------- ----------- -----------
Total notes payable, net of discount............. 10,295,000 12,258,421 12,181,602
Less current portion............................. 4,395,000 1,750,000 12,046,969
----------- ----------- -----------
Long-term debt, net of discount.................. $ 5,900,000 $10,508,421 $ 134,633
=========== =========== ===========
</TABLE>
The Company's debentures are due earlier, at the Company's option, if the
Company completes a public offering of its common stock at a price of at least
$5.33 per share and generates net proceeds of at least $15,000,000. The
debentures also prohibit the Company from pledging any of its existing assets to
collateralize any indebtedness without the consent of a majority of the holders
of the debentures. During 1999, the Company obtained a waiver from the debenture
holders which allows the Company to pledge up to $3,000,000 of Company assets.
The irrevocable letters of credit related to the debentures and the prior
lines of credit, which were restructured to notes payable as discussed below,
are collateralized by a pledge of marketable securities held by the Company's
former chairman of the Board of Directors and chief executive officer. The
lenders alleged that the marketable securities were counterfeit and in December
1998 informed the Company that the Company would not be
F-13
<PAGE> 76
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
able to borrow any additional amounts available under the lines of credit. Due
to the uncertainty regarding the validity of the pledge, the Company classified
the borrowings under the lines of credit as current at December 31, 1998.
On December 3, 1999 the lines of credit were terminated and the balances
outstanding were restructured to notes payable. Under the terms of the
restructuring agreement, the lenders agreed to waive any events of default
existing on December 3, 1999 under the lines of credit and the irrevocable
letters of credit related to the debentures through June 30, 2001. Accordingly,
these amounts have been classified as long-term at December 31, 1999.
The notes payable require repayment and either (a) the debentures must be
repaid, (b) a replacement letter of credit must be obtained or (c) cash
collateral equal to 120% of the letters of credit must be provided if before
June 30, 2001 the Company completes a strategic transaction. A strategic
transaction is defined as an initial public offering of an equity security by
the Company, a sale of substantially all of the Company's assets, or any other
strategic transaction including a merger or joint venture involving a major
component of the Company's business.
Covenants under the notes payable require, among others, that the Company
will not incur any other debt or liens except for the new bank line of credit
discussed below; not declare or pay any dividends; not redeem any capital stock;
and limit annually its capital leases, capital expenditures, and salaries of
certain employees to specified levels. The Company was in compliance with these
covenants as of December 31, 1999.
In December 1999, the Company obtained from a bank a new $2,500,000 line of
credit, which expires on June 30, 2001. A group of guarantors entered into
credit support agreements with the bank as additional collateral for the line of
credit. The Company granted to the guarantors warrants for the purchase of
750,000 shares of the Company's common stock at an exercise price of $5.00 per
share as consideration for their credit support. The value assigned to the
warrants, shown as debt discount, has been based on the estimated rate of
interest that would have been required for the line of credit if the credit
support had not been obtained. The warrants expire in December 2004. The
warrants also provide for an adjustment to the exercise price, and the number of
common shares which can be purchased, if the Company completes a public offering
of its common stock pursuant to a firm commitment at a price less than $10 per
share. The exercise price in such event will be adjusted to 50% of the public
offering price and the number of shares of common stock which can be purchased
will be equal to $3,750,000 divided by the new exercise price. The Company also
granted to the guarantors the right to name one representative to the Company's
Board of Directors. Covenants under the line of credit and guaranty agreements
require, among others, that the Company will prepay the obligation to the extent
of the proceeds from any sale of the Company's assets or any equity or debt
issuance; prepay the obligation upon any consolidation, merger, or transfer of
substantially all assets of the Company; obtain approval before entering into
capital leases above annual specified levels; and make draws under the line of
credit only in accordance with the Company's cash flow budget. The Company was
in compliance with these covenants as of December 31, 1999.
F-14
<PAGE> 77
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2000, the Company repaid $1,750,000 of the balance outstanding
under the line of credit as required by the cash flow budget provision of the
agreement. Accordingly, this amount has been classified as a current liability
at December 31, 1999.
During February 2000, the Company obtained final approval of the terms for
repayment of its forgivable loan with the Iowa Department of Economic
Development ("Department"). Prior to such approval, the loan was due and payable
as of June 30, 1999. The Department agreed to forgive $170,000 of principal and
$63,600 of accrued interest on the loan. Such amounts were recorded as gain on
extinguishment of debt in the first quarter of the Company's 2000 calendar year.
The remaining principal balance will be repaid, with interest at 6%, in
approximately equal monthly installments during 2002 through 2004. The
forgivable loan has been reclassified to long-term at December 31, 1999.
3. INCOME TAXES
Due to the Company's history of operating losses, a valuation allowance was
provided for the Company's net deferred tax asset at December 31, 1998 and 1999
and June 30, 2000 and no tax benefit was recognized for the years ended December
31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000.
The tax effects of significant items comprising the Company's net deferred
tax asset and the related valuation allowance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, net of allowance................. $ 23,200 $ 64,500
Inventories........................................... 568,100
Accrued vacation pay.................................. 41,100 64,000
Accrued warranties.................................... 12,000 107,000
Nonqualified stock options............................ 358,100 660,700
Stock warrants........................................ 69,500
Other accrued liabilities............................. 15,700
Accrual to cost method adjustment..................... 296,700
Net operating loss carryforward....................... 6,429,000 7,011,000
----------- -----------
Total deferred tax assets............................. 7,743,900 7,976,700
----------- -----------
Deferred tax liabilities:
Software development costs............................ (16,700) (7,300)
Fixed assets and other intangibles.................... (36,000) (111,200)
----------- -----------
Total deferred tax liabilities........................ (52,700) (118,500)
----------- -----------
Net deferred tax asset................................ 7,691,200 7,858,200
Valuation allowance................................... (7,691,200) (7,858,200)
----------- -----------
Net deferred tax asset recognized..................... $ -- $ --
=========== ===========
</TABLE>
F-15
<PAGE> 78
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999, the Company has a net operating loss carryforward
for federal and state income tax purposes of approximately $20,623,000. The net
operating loss carryforward will expire from 2008 to 2014.
4. PREFERRED STOCK
The Board of Directors has the authority to issue preferred stock in one or
more series and to determine the price, voting powers, preferences, dividend
rights, conversion rights, and other rights or restrictions without further
stockholder approval.
The Company sold 320,000 shares of Series A preferred stock in April 1993
and 282,720 shares of Series B preferred stock in June 1994 at a price of $6.25
per share. The Series A and Series B preferred stock stockholders are entitled
to vote with the common stock stockholders as a single class with each share of
Series A and Series B preferred stock being entitled to the number of votes
equal to the number of shares of common stock into which it is convertible. Each
share of Series A and Series B preferred stock is convertible, at the holder's
option, into 2.34375 shares of common stock. Antidilution rights also exist for
the Series A and Series B preferred stock stockholders.
The Series A or Series B preferred stock will also automatically convert
into common stock (a) immediately upon the closing of an initial public offering
of common stock if the aggregate proceeds are greater than or equal to
$5,000,000 or (b) upon approval of the holders of two-thirds or more of the
outstanding Series A or Series B preferred stock. No dividends are payable on
the Series A and Series B preferred stock unless the Company, in its sole
discretion, declares a dividend with respect to its common stock, or on any
series of preferred stock ranking equal to or junior to the Series A and Series
B preferred stock. Upon liquidation, dissolution, or winding up, after the
payment of any amounts in respect of any series of preferred stock entitled to a
liquidation preference over the Series A and Series B preferred stock, the
holders of the Series A and Series B preferred stock are entitled to receive an
amount per share equal to $6.25 plus any declared but unpaid dividends on such
shares, prior to any payment to the holders of the common stock. If assets
available for distribution are insufficient to pay holders of Series A and B
stock, then such holders shall share ratably in any distribution of assets of
the Company in proportion to amounts that would have been payable with respect
to their shares if all amounts were paid.
The Company sold 694,618 and 78,636 shares of Series C preferred stock
during 1997 and 1998, respectively, at a price of $7.63 per share. The holders
of the Series C preferred stock are entitled to vote, on the basis of one vote
for each share of common stock issuable upon conversion, with the holders of the
common stock, Series A preferred stock, and Series B preferred stock, on all
matters upon which shareholders have the right to vote. In addition, the
approval of the holders of at least a majority of the Series C preferred stock
will be required (i) to authorize or issue any shares of any class or series of
the Company's capital stock (or securities convertible into shares of the
Company's capital stock) having a preference as to dividends or liquidation
senior to the Series C preferred stock, (ii) to merge or consolidate with any
corporation where the surviving corporation has any class of stock that would
rank prior to the Series C preferred stock, (iii) to amend, alter or repeal any
provisions of the certificate of designation governing the
F-16
<PAGE> 79
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series C preferred stock, so as to adversely affect the rights or preferences of
Series C preferred stock, (iv) to declare or pay any dividend or make any other
distribution on any class of capital stock of the Company other than a dividend
paid on the Series C preferred stock and (v) to issue any convertible debt
security that provides for the payment of interest or other distributions.
In the event of the dissolution, liquidation or winding up of the Company,
holders of the Series C preferred stock will be entitled to receive $7.63 per
share plus all accumulated and unpaid dividends, before any distribution is made
to holders of the common stock or preferred stock ranking junior to the Series C
preferred stock. The Series C preferred stock will rank on a par with the Series
A preferred stock and Series B preferred stock in the event of liquidation,
however, the Series C preferred stock is senior to the Series A and B preferred
stock with respect to dividends.
The Series C preferred stock bears dividends, cumulative whether or not
earned, at the rate of $0.534 per share per annum. Such dividends will be
payable, if and when declared out of funds legally available, on March 31 and
September 30 of each year. Dividends not paid on the date when due will not
thereafter be payable in cash, subject to optional redemption, as described
below, but shall thereafter only be convertible into shares of common stock, as
described below. The aggregate cumulative unpaid dividends at December 31, 1999
were $862,602.
The Series C preferred stock, with an initial conversion value of $5.09 per
share, and all accumulated but unpaid dividends on the Series C preferred stock,
will be convertible, at the option of the holder at any time after issuance,
into common stock at the rate of $5.09 per common share. The conversion rate for
the Series C preferred stock is subject to adjustment from time to time in the
event of certain stock dividends, stock divisions and combinations of the common
stock, and the issuance of any common stock at a price, or of any other
securities convertible into or exercisable to purchase common stock at a price,
less than the conversion price then in effect. If the Company issues securities
at a price less than the conversion price then in effect, the conversion price
adjusts based on a weighted average of the stock outstanding. In the case of a
consolidation or merger of the Company with or into any other corporation, or in
case of any sale or transfer of all or substantially all of the assets of the
Company, a holder of Series C preferred stock is entitled, thereafter, to
receive upon conversion the consideration which the holder would have received
had he or she converted immediately prior to the occurrence of the event. The
conversion price of the Series C preferred stock at December 31, 1999 is $5.03.
The Series C preferred stock, and any dividends accumulated thereon, will
be automatically converted into common stock at the then current conversion rate
in the event of (i) the closing of an underwritten public offering of the common
stock at a price of not less than $5.33 per share that generates net proceeds to
the Company of not less than $15,000,000, or (ii) the vote of holders of at
least two-thirds of the outstanding shares of Series C preferred stock.
On or after September 30, 2004, the Company may, at its option, redeem all
or any portion of the Series C preferred stock at a cash redemption price equal
to $7.63 per share plus all accumulated but unpaid dividends to the date fixed
for redemption. In case of the
F-17
<PAGE> 80
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
redemption of less than all of the then outstanding shares of Series C preferred
stock, the Company shall effect such redemption pro rata. Any holder of Series C
preferred stock may elect to convert such shares into common stock up to the
date fixed for redemption.
Each holder of the Series A, Series B and Series C preferred stock is also
a party to a Registration Rights Agreement granting to such holder the right to
require the Company to register the common stock issuable upon conversion of the
Series A, Series B and Series C preferred stock upon completion of an initial
public offering of the Company's common stock. All expenses of the registration,
other than underwriting discounts and commissions, incurred in connection with
such registration shall be borne by the Company.
5. COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends, as may be declared from time to time
by the Board of Directors out of funds legally available therefor, and will be
entitled to receive pro rata all assets of the Company available for
distribution, after payment of liabilities and any prior distribution rights of
preferred stock, upon liquidation.
6. STOCK OPTIONS
During April 1993, the Board of Directors adopted the 1993 Stock Incentive
Plan (the "1993 Plan"). Under the 1993 Plan, options or other awards may be
granted to purchase up to an aggregate of 750,000 shares of the Company's common
stock. During December 1995, the Company's stockholders approved the 1995 Long
Term Incentive and Stock Option Plan (the "1995 Plan"). Under the 1995 Plan,
options or other awards may be granted to purchase up to 878,018 shares of the
Company's common stock. Awards granted under the 1993 and 1995 Plans may be
options that are intended to qualify as incentive stock options, options that
are not intended to so qualify, stock appreciation rights ("SARs"), restricted
stock or performance awards. Incentive stock options may only be granted to
full-time or part-time employees; other awards may be granted to full-time or
part-time employees, officers, consultants, directors (other than nonemployee
directors) or independent contractors. A committee appointed by the Board of
Directors determines the exercise price (subject to the restriction that the
exercise price of incentive stock options must be not less than 100% of fair
market value on the date of grant), term (provided that the term of options may
not exceed ten years) and other conditions of all awards under the 1993 and 1995
Plans.
On July 20, 1998, the 1993 Stock Incentive Plan was rescinded, upon the
exchange of all outstanding options granted under the 1993 Plan for options in
an identical number, at an exercise price of $1.00 per share, and on a vesting
schedule identical to that of the options previously granted under the 1993
Plan. At the same time, the Board of Directors amended the 1995 Plan to increase
the number of shares of common stock on which options or other awards may be
exercised from 878,018 to 1,500,000. Also, on July 20, 1998, the Company
cancelled all outstanding options granted under the 1995 Plan and
F-18
<PAGE> 81
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued options in an identical number, and on a vesting schedule identical to
that of the options previously granted, at an exercise price of $1.00 per share.
In September 1999, the Board of Directors amended the 1995 Plan to change
the authorized number of shares of common stock on which options or other awards
may be exercised to 3,000,000 plus shares equal to one and one-half percent of
the number of shares of common stock outstanding as of the December 31
immediately preceding the year in which such options may be granted and to
change the vesting schedule for all outstanding options and future awards of
options with 20% of the total grant to vest on the first anniversary of the
award and 1.67% of the total grant to vest each month thereafter until fully
vested.
The fair value of the Company's common stock for 1997, as determined in
good faith by the Company's Board of Directors, was equal to or below the
exercise price of options granted in 1997 and, therefore, no compensation
expense was recognized related to stock options. The fair value of the Company's
common stock as of July 20, 1998 and as of the date of other options granted
during the remainder of 1998 and through August 31, 1999, as determined in good
faith by the Company's Board of Directors, was $4.00 per share. The fair value
of the Company's common stock as of September 15, 1999, as determined by an
independent appraisal, was $4.80 per share which the Company has used to value
stock options granted from September 1, 1999 through December 31, 1999. The
Company has recognized compensation expense of $896,670 and $661,352 during 1998
and 1999 (including amounts allocated to discontinued operations of $230,400 and
$49,050), respectively, based on the vesting period of the options and the
difference between the exercise price of the options and the fair value of the
Company's common stock.
Options outstanding and exercisable at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING OPTIONS EXERCISABLE
CONTRACTUAL -------------------
EXERCISE PRICE SHARES LIFE (IN YEARS) SHARES
-------------- --------- --------------- -------------------
<S> <C> <C> <C>
$1.00................................ 1,239,450 8.18 409,338
$4.00................................ 170,250 9.59 --
$4.80................................ 1,008,750 9.71 154,800
--------- ---- -------
2,418,450 8.91 564,138
========= ==== =======
</TABLE>
F-19
<PAGE> 82
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option activity under the 1993 and 1995 Plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR OPTION OPTION
OPTIONS OPTION PRICE VALUE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE PER SHARE EXERCISABLE PER SHARE
----------- ------------ ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996........... 455,468 $ 2.67 $2.67 134,850 $ 2.67
Granted at
premium......... 247,500 5.33 $ 4.00 5.33
Cancelled.......... (114,743) 2.67-5.33 3.37
---------
Balance at December
31, 1997........... 588,225 2.67-5.33 3.65 171,300 3.09
Cancelled.......... (588,225) 2.67-5.33 3.65
Reissued at
discount........ 588,225 1.00 4.00 1.00
Granted at
discount........ 315,000 1.00 4.00 1.00
Cancelled.......... (72,750) 1.00 1.00
---------
Balance at December
31, 1998........... 830,475 1.00 1.00 298,890 1.00
Granted at
discount........ 660,075 1.00 4.00 1.00
Granted at
market.......... 147,750 4.00 4.00 4.00
Granted at
discount........ 22,500 4.00 4.80 4.00
Granted at
market.......... 1,008,750 4.80 4.80 4.80
Exercised.......... (7,125) 1.00 1.00
Cancelled.......... (243,975) 1.00 1.00
---------
Balance at December
31, 1999........... 2,418,450 1.00-4.80 2.79 564,138 2.05
Granted at
market.......... 200,250 5.00 5.00 5.00
Granted at
market.......... 13,500 5.33 5.33 5.33
Granted at
market.......... 49,500 6.00 6.00 6.00
Granted at
market.......... 204,750 6.67 6.67 6.67
</TABLE>
F-20
<PAGE> 83
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
FAIR OPTION OPTION
OPTIONS OPTION PRICE VALUE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE PER SHARE EXERCISABLE PER SHARE
----------- ------------ ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Granted at
discount........ 36,750 6.67 8.50 6.67
Cancelled.......... (138,150) 1.00-4.80 3.14
---------
Balance at June 30,
2000 (unaudited)... 2,785,050 1.00-6.67 3.41 708,522 2.11
=========
</TABLE>
At December 31, 1999, an additional 629,469 are available for future grants
under the 1995 Plan.
The Board of Directors also granted to the members of the Company's former
Scientific Advisory Board options to purchase a total of 37,500 shares of the
Company's common stock at a purchase price of $2.67 per share which expire in
August 2000.
During December 1996, the Company's stockholders approved the Nonemployee
Director Stock Option Plan (the "Directors' Plan"). The Company has reserved
75,000 shares of common stock for issuance upon exercise of options granted
under the Directors' Plan. Only nonemployee directors of the Company are
eligible to participate in the Directors' Plan and only non-qualified stock
options may be granted. Each director eligible to participate in the Directors'
Plan is automatically granted an option to purchase 7,500 shares of common stock
on the date such person first becomes a director; this option vests in three
equal installments beginning on the first anniversary of grant. Each director
eligible to participate in the Directors' Plan who has served since the date of
the last annual meeting of stockholders and will continue to serve is
automatically granted an option to purchase 7,500 shares of common stock on the
date of each annual meeting of stockholders; this option vests in its entirety
on the date one year after the date of grant. All options granted under the
Directors' Plan have terms of ten years and a per share exercise price equal to
the fair market value of a share of common stock on the date of grant. At
December 31, 1999, options to purchase 22,500 shares of common stock have been
granted under the Directors' Plan at an exercise price of $2.67-$4.00, with
12,500 shares exercisable at December 31, 1999.
F-21
<PAGE> 84
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMON STOCK WARRANTS
A summary of common stock warrant activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WARRANT WARRANT
WARRANT PRICE PRICE
SHARES PER SHARE PER SHARE
------- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1996..................... 2,062,125 $ 2.67 $2.67
Warrants granted to six employees and
consultants in connection with the merger
with Ethos Corporation (see Note 11)........ 468,000 5.33 5.33
----------
Balance at December 31, 1997..................... 2,530,125 2.67-5.33 3.16
Warrants granted to the Company's former chief
executive officer in consideration of his
pledge of marketable securities as security
for the irrevocable letter of credit, which
serves as collateral for the debentures
(Note 2).................................... 750,000 5.33 5.33
Warrants granted to the Company's former chief
executive officer in consideration of his
pledge of marketable securities as
collateral for prior bank lines of credit
(Note 2).................................... 150,000 5.33 5.33
Warrants granted to placement agent in
consideration of services provided related
to the debenture/preferred stock private
placement................................... 45,209 5.33 5.33
Warrants expired............................... (15,000) 2.67 2.67
Warrants exercised............................. (180,000) 2.67 2.67
----------
Balance at December 31, 1998..................... 3,280,334 2.67-5.33 3.81
Warrants granted to the Company's former chief
executive officer in consideration of his
pledge of marketable securities as
collateral for prior bank lines of credit
(Note 2).................................... 150,000 5.33 5.33
Warrants granted to financial consultant for
services rendered........................... 45,000 2.67 2.67
Warrants granted to consultant for consulting
contract.................................... 187,500 4.00 4.00
Warrants granted for guarantee on new line of
credit (Note 2)............................. 750,000 5.00 5.00
Warrants expired............................... (140,625) 2.67 2.67
Warrants exercised............................. (187,500) 2.67 2.67
Warrants to the Company's former chief
executive officer cancelled................. (1,368,750) 2.67-5.33 4.71
----------
Balance at December 31, 1999..................... 2,715,959 2.67-5.33 3.91
Warrants granted for guarantee on new line of
credit (Note 16)............................... 200,000 5.00 5.00
Warrants expired................................. (1,500) 2.67 2.67
Warrants exercised............................... (187,500) 2.67 2.67
----------
Balance at June 30, 2000 (unaudited)............. 2,726,959 $2.67-5.33 $4.07
==========
</TABLE>
F-22
<PAGE> 85
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the weighted average remaining life of the warrants
is 3.9 years and 2,715,959 warrants were exercisable at a weighted average price
of $3.91 per share. The warrants also provide for registration rights similar to
those granted the preferred stockholders (see Note 4) and antidilution rights.
The Company has valued warrants issued to consultants during 1999 at
approximately $280,000 and has recognized expense over the term of the
consulting agreements of $197,458 for the year ended December 31, 1999 for the
difference between the exercise price of the warrants and the fair value of
warrants granted.
The warrants exercised during 1998 and 1999 provided for a cashless
exercise under which the warrant holder received 60,000 and 62,501 shares of
common stock, respectively, based on the $4.00 per share fair value of the
Company's common stock.
In December 1999, the Company entered into a settlement and general release
agreement with its former chairman of the board and chief executive officer
("executive"). The agreement cancels warrants held by the executive to purchase
1,050,000 and 318,750 shares of the Company's stock at $5.33 and $2.67 per
share, respectively (the executive retained 750,000 warrants at $2.67 per
share); cancels the executive's right to receive 450,000 of additional warrants
at an exercise price of $5.33 per share (150,000 of which would have been
granted on January 1, 2000); requires the Company to pay the executive $60,000
at the earliest of an initial public offering or June 30, 2001 in consideration
of the executive entering into the agreement; and provides both the Company and
the executive a general release from all claims between the parties. The
executive is also required to place all common stock and Series B preferred
stock of the Company owned by the executive, and any shares of stock in the
Company acquired by the executive upon exercise of warrants, into a voting trust
controlled by an independent third party. The agreement has been filed with the
bankruptcy court as the executive is in involuntary bankruptcy, however, a
creditor of the executive has filed a motion in the bankruptcy proceedings to
set aside the settlement agreement.
8. LEASES
The Company leases its offices and certain equipment under operating
leases. Rental expense incurred under operating leases was $390,534, $398,500
and $401,769 for the years ended December 31, 1997, 1998, and 1999,
respectively.
In October 1993, the Company entered into an operating lease with Liberty
Growth, L.C., ("Liberty") for the lease of a 25,600 square foot building (the
"Facility") which was completed in July 1994. Liberty erected the Facility in
accordance with plans and specifications agreed upon between Liberty and the
Company and provided furniture, fixtures, and equipment in the Facility as
specified in the lease. The lease was for an initial term of five years,
beginning September 1994, with options given to the Company to extend for two
additional terms of five years each. The Company exercised the first renewal
option in September 1998. The monthly rental upon renewal will be adjusted to
reflect Liberty's actual mortgage interest cost as discussed below. The lease
provides that the Company will pay for all taxes, insurance, utilities,
alterations and improvements, and repair and maintenance on or with respect to
the Facility, furniture, fixtures and
F-23
<PAGE> 86
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
equipment. The monthly rental of $23,248 effective March 1999 ($23,840
previously) is the sum of the following:
a. payments of principal (based on a 20 year loan amortization period)
and interest on Liberty's mortgage loan on the Facility (the "Mortgage
Loan"); the interest rate under the mortgage loan is 8% for the first
five years and on the fifth and tenth anniversaries of the loan is
subject to adjustment by the bank based on comparable interest rates
with a 7% minimum and 12% maximum rate;
b. the amount of the annual land lease rental on the underlying real
estate; and
c. an amount equal to 14% times the difference between (i) the cost to
Liberty of all improvements constructed or purchased by Liberty and
the furniture, fixtures and equipment, and (ii) the original
principal amount of the Mortgage Loan.
Under the terms of the lease, the Company has an option, exercisable
effective January 1, 1998 and continuing through the termination or expiration
of the lease, to purchase the Facility and furniture, fixtures and equipment at
a purchase price to be determined by appraisal, but in no event less than
Liberty's cost as established for purposes of calculating the rent payable under
the lease.
In May of 1999, the Company subleased part of the building rented from
Liberty. The sublease is for an eighteen month term, terminating October 31,
2000. Sublease receipts were $50,400 the year ended December 31, 1999.
The Company's capital lease, its estimated aggregate minimum annual
payments under all operating leases with initial noncancellable lease terms in
excess of one year and its noncancellable sublease receipts are as follows as of
December 31, 1999:
<TABLE>
<CAPTION>
NONCANCELLABLE NONCANCELLABLE
CAPITAL OPERATING SUBLEASE
YEAR ENDED DECEMBER 31, LEASES LEASES RECEIPTS
----------------------- ------- -------------- --------------
<S> <C> <C> <C>
2000....................................... $ 9,529 $ 687,003 $72,000
2001....................................... 9,529 390,639 --
2002....................................... 9,529 282,435 --
2003....................................... 9,529 278,976 --
2004....................................... 6,353 185,984 --
------- ---------- -------
Minimum lease payments..................... 44,469 $1,825,037 $72,000
========== =======
Less amounts representing interest......... 10,388
-------
Present value of minimum lease payments.... 34,081
Current portion of capital lease
obligations.............................. 5,821
-------
Capital lease obligations due after one
year..................................... $28,260
=======
</TABLE>
9. COMMITMENTS AND CONTINGENT LIABILITIES
On June 10, 1994, the Company entered into an Agreement For Private
Development with the City of Coralville, Iowa (the "City"). The Company and
Liberty jointly received a $175,000 Economic Development Grant from the City
during 1994. According to the
F-24
<PAGE> 87
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement, these proceeds were used by Liberty to reduce the costs of the
building (see Note 8). The Company pays property taxes to the City based on the
assessed value of the property and the City will use such property taxes to pay
debt service on the bonds which were issued by the City for this grant. The
Company has guaranteed that commencing January 1, 1998 to January 1, 2004, it
will make every effort to maintain an employment level of at least 100 full time
jobs. The Company at December 31, 1999 maintained an employment level of 79 full
time jobs. If the Company is in default of any terms of the agreement, the City
may take action to recover the grant paid to the Company. As of December 31,
1999, management believes that the Company was in compliance with the terms of
the agreement. The Company anticipates that its property tax payments will be
sufficient to pay the debt service costs on the bonds.
On June 30, 1994, the Company entered into an Industrial New Jobs Training
Agreement with Kirkwood Community College ("Kirkwood"). The term of the
agreement is ten years. Based on an estimate of new jobs that the Company would
create ("New Employees"), Kirkwood issued bonds in the amount of $200,000 and
the proceeds were to be used to reimburse approximately $150,000 of the
Company's training costs incurred between June 30, 1994 and August 1, 1997 with
the remaining $50,000 to be used by Kirkwood to cover administrative costs of
the agreement. Any amounts received by the Company under this agreement are to
be repaid using a portion of the New Employees' state income taxes which have
been withheld by the Company ("New Jobs Withholding Credits"). The New Jobs
Withholding Credits are credits available under the New Jobs Training Act of the
State of Iowa and are not the result of any additional costs incurred by the
Company, but are a defined portion of the Company's current tax withholding
obligation. The Company will make repayments by paying New Jobs Withholding
Credits to Kirkwood for ten years and Kirkwood will use the New Jobs Withholding
Credits to pay the debt service on the bonds. As of December 31, 1999, the
Company has received $77,224 from Kirkwood, Kirkwood has incurred $47,353 of
administrative costs, and the Company has repaid $145,455 through New Jobs
Withholding Credits.
If the Company is in default of any terms of the agreement, Kirkwood may
take action to collect any payments due under the agreement. Kirkwood has a lien
on certain Company assets including accounts receivable, equipment, patents and
contract rights. The lien is subordinated to the security interests granted
under the notes payable to the Iowa Department of Economic Development.
The Company has employment agreements with Mr. Staib, Mr. Yamauchi, Mr.
Porter, Ms. Cox and Mr. Dominguez, the Company's Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Executive Vice President, Sales and
Executive Vice President, respectively, which provide for annual base salaries
of $130,000, $150,000, $135,000, $150,000 and $150,000, respectively, and
additional annual incentive compensation. The agreements also provide that, upon
completion of an initial public offering, Mr. Staib, Mr. Yamauchi, Mr. Porter,
Ms. Cox and Mr. Dominguez will receive cash bonus payments of $60,000, $45,000,
$29,000, $30,000 and $30,000, respectively, and that Mr. Staib's salary will be
increased to $180,000. The agreements with Mr. Staib, Mr. Yamauchi, Ms. Cox and
Mr. Dominguez expire in December 2000, subject to automatic annual renewals
absent a 90-day notice of nonrenewal by either party. The
F-25
<PAGE> 88
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement with Mr. Porter expires in March 2001, subject to automatic annual
renewal absent a 90-day notice of nonrenewal by either party.
In the event the employment of Messrs. Staib, Yamauchi or Dominguez is
terminated without cause or as a result of a constructive termination, the
officer will continue to receive annual salary and health benefits for a period
of nine months after termination and 40% of those options granted in September
1999 which remain unvested will vest. In the event the employment of Mr. Porter
is terminated without cause or as a result of a constructive termination, Mr.
Porter will continue to receive annual salary and health benefits for a period
of nine months after termination. In the event of the termination of Ms. Cox's
employment without cause or as a result of constructive termination, she
receives $450,000 plus nine months of benefits. In addition, if termination
occurs within 12 months following a change in control, the annual salary and
health benefits of each of Messrs. Staib, Yamauchi, and Dominguez will continue
for a period of 18 months. The employment agreements with Mr. Staib, Mr.
Yamauchi, Ms. Cox and Mr. Dominguez also provide that all unvested stock options
held by these individuals will immediately vest upon a change in control.
From time to time the Company has been subject to legal proceedings and
claims in the ordinary course of business. The Company is not aware of any legal
proceedings or claims that management believes will have, individually or in the
aggregate, a material adverse effect on its business, financial condition or
results of operations.
In December 1999, the Company received correspondence from Unisys alleging
that the compression algorithms used to generate Graphic Interchange Format, or
GIF, images requires a license. The Company is currently negotiating with Unisys
to obtain a license agreement and believes that any licensing fee and royalty
payments that may be required to pay for the right to use Unisys' algorithms
would not have a material effect on the business or financial condition. The
Company, however, can provide no assure that Unisys will grant the Company a
license or, if a license is granted, that the licensing arrangement will be on
commercially reasonable terms.
10. MAJOR CUSTOMER SALES
Sales to major customers from continuing operations, comprising 10% or more
of total revenue for the year were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A............................................... -- 10% 14%
Customer B............................................... -- 10 --
Customer C............................................... 25% 16 --
</TABLE>
11. MERGER WITH ETHOS CORPORATION
On March 6, 1997 the Company negotiated an agreement and plan of merger
with Ethos Corporation ("Ethos"), a California corporation engaged in Internet
publication and
F-26
<PAGE> 89
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interactive financial services, to acquire all of the outstanding shares of
common stock of Ethos in exchange for 434,552 shares of the Company's common
stock. Also, the holders of Ethos' redeemable preferred stock were paid $100,000
for the redemption of such preferred stock. The Company also entered into
certain employment/consulting agreements and noncompetition agreements with
Ethos' employees and consultants which involved the issuance of 468,000 warrants
to purchase the Company's common stock exercisable at $5.33 per share, and the
issuance of 97,500 options to purchase the Company's common stock exercisable at
$5.33 per share, all of which will vest over one to five year periods depending
on the agreement. The transaction was accounted for as a pooling of interests.
The financial statements for periods prior to the merger have been restated to
include the combined financial information of the companies for all periods
presented. The following data summarizes the separate results of operations of
the Company and Ethos for the period before the combination was consummated.
<TABLE>
<CAPTION>
REVENUES LOSS
FROM FROM
CONTINUING CONTINUING
OPERATIONS OPERATIONS
---------- ----------
<S> <C> <C>
Period from January 1, 1997 to March 6, 1997:
Stockpoint, Inc........................................ $28,620 $(544,717)
Ethos Corporation...................................... $74,442 $ (6,554)
</TABLE>
12. 401(k) PLAN
The Company maintains a 401(k) retirement plan covering substantially all
of its employees. The Company will match an employee's contribution to the plan
up to 2% of the employee's salary. The Company contributed $49,156 and $47,428
to the plan under the matching program for the years ended December 31, 1998 and
1999, respectively. There were no Company contributions to the plan for the year
ended December 31, 1997.
13. DISCONTINUED OPERATIONS
On May 28, 1999 the Company sold the technology and operational assets
related to products sold to the steelmaking industry (metals segment) for
$750,000. The Company also entered into a royalty agreement with the buyer
whereby royalties, ranging from 6% to 10%, will be paid on sales or licenses of
the software only portions of certain products. Royalties will be paid for 10
years or until $3,000,000 is paid. The asset purchase agreement was retroactive
to April 2, 1999.
The accompanying statements of operations have been reclassified so that
the results for the metals segment's operations are classified as discontinued
operations for all periods presented. The assets and liabilities of the
discontinued operations have been reclassified in the balance sheet as "net
assets of discontinued operations." As the sale closed less than a year
subsequent to December 31, 1998, the net assets of the discontinued operations
have been classified as current assets as of December 31, 1998. The statements
of cash flows and related notes to the consolidated financial statements have
also been reclassified to conform to the discontinued operations presentation.
F-27
<PAGE> 90
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary operating results of the discontinued operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................... $1,708,427 $2,160,104 $1,747,809
Operating expenses.......................... 2,114,149 2,517,050 1,400,134
---------- ---------- ----------
Income (loss) from discontinued
operations................................ $ (405,722) $ (356,946) $ 347,675
========== ========== ==========
</TABLE>
A summary of the net assets of the discontinued operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current assets:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... $126,831
Inventories............................................... 395,908
Prepaid expenses.......................................... 1,000
--------
Net current assets...................................... 523,739
--------
Software and equipment, net................................. 198,895
Patents, net................................................ 68,400
Software development costs, net............................. 13,167
--------
Net noncurrent assets................................... 280,462
--------
Net assets.............................................. $804,201
========
</TABLE>
F-28
<PAGE> 91
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PRO FORMA INFORMATION (UNAUDITED)
The pro forma stockholders' deficiency information presented as of June 30,
2000 has been prepared assuming that the Company's preferred stock had been
converted into common stock as of June 30, 2000 which conversion will occur
automatically upon completion of the initial public offering. The pro forma
income (loss) per common share information presented for the year ended December
31, 1999 and the six months ended June 30, 2000 has been prepared assuming that
the Company's preferred stock had been converted into common stock as of the
beginning of such periods or as of their issuance date for shares of Series C
preferred stock issued in lieu of dividends resulting in the elimination of
dividends. The Company's pro forma net loss per share is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1999 2000
------------ --------------
<S> <C> <C>
Historical net loss:
Loss from continuing operations........................... $(3,947,885) $(3,912,212)
Income from discontinued operations....................... 780,808 --
----------- -----------
Loss before extraordinary item............................ (3,167,077) (3,912,212)
Gain on extinguishment of debt............................ -- 233,600
----------- -----------
Net loss.................................................. $(3,167,077) $(3,678,612)
=========== ===========
Pro forma basic and diluted income (loss) per common share:
Loss from continuing operations........................... $ (0.66) $ (0.65)
Income from discontinued operations....................... 0.13 --
----------- -----------
Loss before extraordinary item............................ (0.53) (0.65)
Gain on extinguishment of debt............................ -- 0.04
----------- -----------
Net loss.................................................. $ (0.53) $ (0.61)
=========== ===========
Weighted average common shares outstanding -- historical.... 3,212,106 3,283,247
Preferred stock converted into common shares -- pro forma... 2,709,566 2,770,329
----------- -----------
Weighted average common shares outstanding -- pro forma..... 5,921,672 6,053,576
=========== ===========
</TABLE>
15. SUBSEQUENT EVENT
On July 20, 2000, the Board of Directors approved an increase in the number
of authorized shares of common stock from 20,000,000 to 75,000,000 and
authorized a three-for-two stock split. The par value of the common stock was
maintained at the pre-split amount of $0.01 per share. Retroactive restatement
has been made in the financial statements and notes to all share and per share
data affected by the three-for-two stock split.
16. SUBSEQUENT EVENTS (UNAUDITED)
The Company entered into an additional $500,000 line of credit with a bank
on March 30, 2000. The line of credit is collateralized by substantially all of
the Company's assets. The line of credit bears interest at the prime rate and
expires on June 30, 2001. A group of guarantors entered into credit support
agreements with the bank as additional collateral for the line of credit. The
Company granted to the guarantors warrants to
F-29
<PAGE> 92
STOCKPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase 200,000 shares of the Company's common stock at an exercise price of
$5.00 per share as consideration for their credit support. The exercise price,
however, is subject to adjustment to the price, if lower, (1) at which the
Company issues shares of common stock in a private transaction (excluding shares
issued under employee options, outstanding warrants and certain other
instruments), (2) equal to 50% of the price at which the Company conducts a bona
fide public offering or (3) equal to 50% of the consideration received per share
in any business combination (excluding a pooling of interest transaction) in
which the Company engages while the warrants are outstanding. If the exercise
price is adjusted the number of shares covered by each warrant will also be
adjusted to the number obtained by multiplying the number of shares initially
issuable by the initial exercise price and dividing the result by the adjusted
exercise price. The Company assigned a value of $799,730 to the warrants.
In July 2000, the Board of Directors amended the 1995 Long Term Incentive
and Stock Option Plan to increase the authorized number of shares of common
stock on which options or other awards may be exercised by 500,000.
In July 2000, the Board of Directors amended the Nonemployee Director Stock
Option Plan to increase the authorized number of shares of common stock on which
options or other awards may be exercised from 75,000 to 250,000.
In June 2000, the Attorney General of the State of Michigan notified the
Company that it intended to take action against them if they did not agree to
negotiate a settlement of Michigan's claim that the placement, without
notification, of cookies on the computers of consumers that visited the
Company's site violated Michigan's consumer protection statute. Although the
Company has drafted and have now implemented a privacy statement that provides
the notice, and management believes the Company will come to a reasonable
settlement of the Michigan dispute, the Company cannot provide assurance as to
when or if, or the terms upon which, that dispute will be concluded.
There is currently pending a motion filed by the Company's former chairman
of the board and chief executive officer to confirm the validity of the
settlement agreement as discussed in Note 7. Although the court has not issued
an order in such proceedings granting such confirmation, all of the former
executive's significant creditors have consented to the order.
* * * * *
F-30
<PAGE> 93
[STOCKPOINT LOGO]
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by Stockpoint in
connection with the registration of the common stock hereunder. All amounts are
estimated, except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 16,698
NASD filing fee.................................................... 5,000
Nasdaq National Market listing fee................................. 70,000
Legal fees and expenses............................................ 150,000
Accountants' fees and expenses..................................... 70,000
Printing expenses.................................................. 150,000
Blue sky fees and expenses......................................... 5,000
Transfer Agent and Registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 31,602
-----------
Total........................................................ $ 503,300
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our Amended and Restated Bylaws provide for indemnification of
such persons for such liabilities in such manner under such circumstances and to
such extent as permitted by the Delaware General Corporation Law. We have also
purchased directors and officers liability insurance, which covers matters
arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1997, we have issued and sold the following securities that were
not registered under the Securities Act:
(1) From January 1997 through June 2000, we granted options to purchase an
aggregate of 3,024,600 shares of common stock under our stock option
plans to executive officers, directors and employees. We have issued
these options in reliance upon an exemption from registration under
Rule 701 and Section 4(2) of the Securities Act.
(2) In March 1997, in connection with the acquisition of Ethos Corporation,
we issued an aggregate of 434,552 shares of common stock to 8
shareholders of Ethos and warrants to purchase an aggregate of 468,000
shares of common stock to six employees and consultants. No underwriter
was involved in this offering and no commissions were paid. We issued
these shares in reliance upon an exemption from registration under
Section 4(2) of the Securities Act. Based upon representations made to
us and the information we supplied to the investors, all investors had
adequate access to information about our company. The investors
represented their intentions to acquire the securities for investment
only and not with the view to offer for sale in connection with any
distribution and appropriate legends were affixed to the certificates
representing the securities.
(3) Between November 1997 and January 1998, we sold to accredited investors
an aggregate of 773,255 shares of Series C convertible preferred stock
for an aggregate purchase price of $5,900,000 and senior secured
debentures in an aggregate principal amount of $5,900,000. Upon the
closing of this offering, all of the outstanding shares of Series C
convertible preferred stock will convert into an aggregate of 1,369,812
shares of common stock. In addition, in April 1998, we issued warrants
to purchase an aggregate of 45,209 shares of common stock at an
exercise price of $5.33 per share to Donald Muller and Securities
Corporation of Iowa for services provided in
II-1
<PAGE> 95
connection with the sale of the Series C convertible preferred stock.
We issued these securities in reliance upon an exemption from
registration under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. Based upon representations made to us by the investors
and the information we supplied to the investors, all investors had
adequate access to information about our company. In addition, based
upon representations made by the investors to us, the investors were
able to bear the financial risk of the investment. The investors
represented their intentions to acquire the securities for investment
only and not with the view to offer for sale in connection with any
distribution and appropriate legends were affixed to the certificates
representing the securities. We did not make any offer to sell the
securities by means of a general solicitation or general advertising.
(4) In April 1998, we issued warrants to purchase an aggregate of 750,000
shares of common stock at an exercise price of $5.33 per share to
Robert Staib, our former CEO and director, in consideration of his
personal guarantee of a letter of credit supporting our senior secured
debentures and pledge of marketable securities as collateral. No
underwriter was involved in this offering and no commissions were paid.
We issued these warrants in reliance upon an exemption from
registration under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. Based on the information we supplied and the investor's
relationship with our company, the investor had adequate access to
information about our company.
(5) We issued warrants to purchase an aggregate of 468,750 shares of common
stock to John Pappajohn in consideration of his personal guarantee of
our credit agreements from May 1995 through June 1996. In June and
September 1998, we sold 60,000 shares of common stock to John Pappajohn
upon the cashless exercise of his outstanding warrants. No underwriter
was involved in this offering and no commissions were paid. We issued
these warrants in reliance upon an exemption from registration under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. Based
on the information we supplied and the investor's relationship with our
company, the investor had adequate access to information about our
company.
(6) In November 1998 and November 1999, we issued to Robert Staib warrants
to purchase an aggregate of 300,000 shares of common stock at an
exercise price of $5.33 per share in consideration of his guarantee and
pledge relating to the letter of credit supporting our outstanding
debentures. The warrants were subsequently canceled under the terms of
a settlement agreement in December 1999. No underwriter was involved in
this offering and no commissions were paid. We issued these warrants in
reliance upon an exemption from registration under Rule 506 of
Regulation D and Section 4(2) of the Securities Act. Based on the
information we supplied and the investor's relationship with our
company, the investor had adequate access to information about our
company.
(7) In March 1999, we issued warrants to purchase an aggregate of 45,000
shares of common stock at an exercise price of $2.67 per share to
Dominion & Co. for consulting services provided. No underwriter was
involved in this offering and no commissions were paid. We issued these
warrants in reliance upon an exemption from registration under Rule 506
of Regulation D and Section 4(2) of the Securities Act. Based on the
information we supplied and the investor's relationship with our
company, the investor had adequate access to information about our
company.
(8) In August 1999, we issued warrants to purchase an aggregate of 187,500
shares of common stock at an exercise price of $4.00 per share to
Equity Dynamics, Inc. under the terms of a consulting agreement. John
Pappajohn is a principal of Equity Dynamics, Inc. No underwriter was
involved in this offering and no commissions were paid. We issued these
warrants in reliance upon an exemption from registration under Rule 506
of Regulation D and Section 4(2) of the Securities Act. Based on the
information we supplied and the investor's relationship with our
company, the investor had adequate access to information about our
company.
(9) In connection with a bridge financing completed in December 1999, we
issued warrants to purchase an aggregate of 750,000 shares of common
stock at an exercise price of $5.00 per share, subject to adjustment,
to eight investors in consideration of their guarantees and pledges. No
underwriter was involved in this offering and no commissions were paid.
We issued these warrants in reliance upon an exemption from
registration under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. Based on the information we provided to the investors
and their relationship with us, each had adequate access to information
about our company.
(10) In connection with a bridge financing completed in March 2000, we
issued warrants to purchase an aggregate of 150,000 shares of common
stock at an exercise price of $6.67 per share, subject to adjustment,
to three investors in consideration of their guarantees and pledges. No
underwriter was involved in this offering and no
II-2
<PAGE> 96
commissions were paid. We issued these warrants in reliance upon an
exemption from registration under Rule 506 of Regulation D and Section
4(2) of the Securities Act. Based on the information we provided to the
investors and their relationship with us, each had adequate access to
information about our company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
NUMBER DESCRIPTION
------ -----------
1.1* Form of Underwriting Agreement.
2.1** Asset Purchase Agreement dated as of April 2, 1999 among Systems
Alternatives, Inc., Registrant and The David J. Joseph Company.
2.2** Amendment dated as of May 25, 1999 to the Asset Purchase Agreement
dated as of April 2, 1999 among Systems Alternatives, Inc.,
Registrant and The David J. Joseph Company.
3.1** Certificate of Incorporation of the Registrant.
3.2** Amended and Restated Certificate of Incorporation of the Registrant.
3.3** Certificate of Amendment of Certificate of Incorporation of the
Registrant.
3.4** Bylaws of the Registrant.
3.5** Amended and Restated Bylaws of the Registrant.
3.6 Certificate of Amendment of Certificate of Incorporation dated
July 24, 2000.
4.1** Specimen of Common Stock Certificate.
4.2** Registration Rights Agreement dated as of August 15, 1997 among
Registrant and the Purchasers named therein.
4.3** Trust Indenture dated as of August 1, 1997 between Registrant and
First Trust & Savings Bank.
4.4** Robert B. Staib Voting Trust dated December 3, 1999.
4.5** Master Agreement dated as of December 3, 1999 among Registrant and
John Pappajohn, Gerald M. Kirke, Iowa Farm Bureau Federation, Derace
Schaffer, Matthew P. Kinley, Dominion Securities Inc., Michael J.
Richards, Joseph Dunham as the Guarantors, and Equity Dynamics, Inc.,
as the Agent for the Guarantors.
4.6** Form of Stock Purchase Warrant issued December 3, 1999.
4.7** Registration Rights Agreement dated as of December 3, 1999 by and
among the Registrant and the Purchasers listed therein.
4.8** Master Agreement dated as of March 30, 2000 among Registrant and Zeke
Investment Partners, Matthew P. Kinley, Joseph Dunham as the
Guarantors, and Equity Dynamics, Inc., as the Agent for the
Guarantors.
4.9** Form of Stock Purchase Warrant issued March 30, 2000.
4.10** Registration Rights Agreement dated as March 30, 2000 by and among
the Registrant and the Purchasers listed therein.
4.11 Form of Lock-up Agreement.
5.1* Opinion of Dorsey & Whitney LLP.
10.1** 1995 Long-Term Incentive and Stock Option Plan.
II-3
<PAGE> 97
10.2** 1995 Nonemployee Director Stock Option Plan.
10.3** Employment Agreement, dated December 20, 1999, between Registrant
and William E. Staib.
10.4** Employment Agreement, dated December 20, 1999, between Registrant
and Timothy S. Yamauchi.
10.5** Employment Agreement, dated December 20, 1999, between Registrant
and Luan Cox.
10.6** Employment Agreement, dated December 20, 1999, between Registrant
and L. Christopher Dominguez.
10.7** Sublease dated May 24, 1999 between Registrant and Systems
Alternatives International LLC for office space located at 2600
Crosspark Road, Coralville, Iowa.
10.8** Lease dated September 30, 1999 between The Robert Dollar Building
Associates, Ltd. and Registrant for office space located at 311
California Street, San Francisco, California.
10.9** Consulting Agreement dated August 24, 1999 between Registrant and
Equity Dynamics, Inc.
10.10** Master Note dated as of November 28, 1997 of Registrant in favor of
The Northern Trust Company.
10.11** Master Note dated as of September 14, 1998 of Registrant in favor of
The Northern Trust Company.
10.12** Reimbursement and Subordination Agreement dated as of August 1, 1997
between Robert B. Staib and Registrant.
10.13** Indemnification and Hold Harmless Agreement dated February 27, 1996
between Robert B. Staib and Registrant.
10.14** Amendment dated August 1, 1997 to Indemnification and Hold Harmless
Agreement dated February 27, 1996 between Robert B. Staib and
Registrant.
10.15** Restructuring Agreement dated as of December 3, 1999 among
Registrant, The Northern Trust Company and Iowa State Bank & Trust.
10.16** S&P ComStock Information Distribution License Agreement dated
September 23, 1999 between S&P ComStock, Inc. and Registrant.
10.17** Employment Agreement dated March 1, 2000 between Registrant and
Scott D. Porter.
10.18** First Amendment to Restructuring Agreement dated as of March 29,
2000 among the Registrant, The Northern Trust Company and Iowa State
Bank & Trust.
10.19** Settlement Agreement and General Release dated December 3, 1999, by
and between Robert B. Staib and the Registrant.
10.20 First Amendment to Employment Agreement, dated May 15, 2000, between
Registrant and Scott D. Porter
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
---------------
* To be filed by amendment.
** Previously Filed.
(b) Financial Statement Schedules
II-4
<PAGE> 98
Not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreement certificates in those
denominations and registered in those names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Amendment No. 1 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Coralville, State of Iowa, on July 24, 2000.
Stockpoint, Inc.
By: /s/ William E. Staib
----------------------------------------------
William E. Staib
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement on Form S-1 has been signed on July 24, 2000 by
the following persons in the capacities indicated:
SIGNATURE TITLE
/s/ William E. Staib Chief Executive Officer and Director
--------------------------- (principal executive director)
William E. Staib
/s/ Scott D. Porter Chief Financial Officer (principal financial
--------------------------- and accounting officer)
Scott D. Porter
*
--------------------------- Chairman of the Board of Directors
Harry O. Heffer
*
--------------------------- Director
David G. Sengpiel
*By /s/ William E. Staib
------------------------
Attorney-in-Fact
II-6
<PAGE> 100
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
1.1* Form of Underwriting Agreement.
2.1** Asset Purchase Agreement dated as of April 2, 1999 among
Systems Alternatives, Inc., Registrant and The David J. Joseph
Company.
2.2** Amendment dated as of May 25, 1999 to the Asset Purchase
Agreement dated as of April 2, 1999 among Systems
Alternatives, Inc., Registrant and The David J. Joseph
Company.
3.1** Certificate of Incorporation of the Registrant.
3.2** Amended and Restated Certificate of Incorporation of the
Registrant.
3.3** Certificate of Amendment of Certificate of Incorporation of
the Registrant.
3.4** Bylaws of the Registrant.
3.5** Amended and Restated Bylaws of the Registrant.
3.6 Certificate of Amendment of Certificate of Incorporation dated
July 24, 2000.
4.1** Specimen of Common Stock Certificate.
4.2** Registration Rights Agreement dated as of August 15, 1997
among Registrant and the Purchasers named therein.
4.3** Trust Indenture dated as of August 1, 1997 between Registrant
and First Trust & Savings Bank.
4.4** Robert B. Staib Voting Trust dated December 3, 1999.
4.5** Master Agreement dated as of December 3, 1999 among Registrant
and John Pappajohn, Gerald M. Kirke, Iowa Farm Bureau
Federation, Derace Schaffer, Matthew P. Kinley, Dominion
Securities Inc., Michael J. Richards, Joseph Dunham as the
Guarantors, and Equity Dynamics, Inc., as the Agent for the
Guarantors.
4.6** Form of Stock Purchase Warrant issued December 3, 1999.
4.7** Registration Rights Agreement dated as of December 3, 1999 by
and among the Registrant and the Purchasers listed therein.
4.8** Master Agreement dated as of March 30, 2000 among Registrant
and Zeke Investment Partners, Matthew P. Kinley, Joseph Dunham
as the Guarantors, and Equity Dynamics, Inc., as the Agent for
the Guarantors.
4.9** Form of Stock Purchase Warrant issued March 30, 2000.
4.10** Registration Rights Agreement dated as March 30, 2000 by and
among the Registrant and the Purchasers listed therein.
4.11 Form of Lock-up Agreement.
5.1* Opinion of Dorsey & Whitney LLP.
10.1** 1995 Long-Term Incentive and Stock Option Plan.
10.2** 1995 Nonemployee Director Stock Option Plan.
10.3** Employment Agreement, dated December 20, 1999, between
Registrant and William E. Staib.
10.4** Employment Agreement, dated December 20, 1999, between
Registrant and Timothy S. Yamauchi.
II-7
<PAGE> 101
10.5** Employment Agreement, dated December 20, 1999, between
Registrant and Luan Cox.
10.6** Employment Agreement, dated December 20, 1999, between
Registrant and L. Christopher Dominguez.
10.7** Sublease dated May 24, 1999 between Registrant and Systems
Alternatives International LLC for office space located at
2600 Crosspark Road, Coralville, Iowa.
10.8** Lease dated September 30, 1999 between The Robert Dollar
Building Associates, Ltd. and Registrant for office space
located at 311 California Street, San Francisco, California.
10.9** Consulting Agreement dated August 24, 1999 between Registrant
and Equity Dynamics, Inc.
10.10** Master Note dated as of November 28, 1997 of Registrant in
favor of The Northern Trust Company.
10.11** Master Note dated as of September 14, 1998 of Registrant in
favor of The Northern Trust Company.
10.12** Reimbursement and Subordination Agreement dated as of August
1, 1997 between Robert B. Staib and Registrant.
10.13** Indemnification and Hold Harmless Agreement dated February 27,
1996 between Robert B. Staib and Registrant.
10.14** Amendment dated August 1, 1997 to Indemnification and Hold
Harmless Agreement dated February 27, 1996 between Robert B.
Staib and Registrant.
10.15** Restructuring Agreement dated as of December 3, 1999 among
Registrant, The Northern Trust Company and Iowa State Bank &
Trust.
10.16** S&P ComStock Information Distribution License Agreement dated
September 23, 1999 between S&P ComStock, Inc. and Registrant.
10.17** Employment Agreement dated March 1, 2000 between Registrant
and Scott D. Porter.
10.18** First Amendment to Restructuring Agreement dated as of March
29, 2000 among the Registrant, The Northern Trust Company and
Iowa State Bank & Trust.
10.19** Settlement Agreement and General Release dated December 3,
1999, by and between Robert B. Staib and the Registrant.
10.20 First Amendment to Employment Agreement, dated May 15, 2000,
between Registrant and Scott D. Porter
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
---------------
* To be filed by amendment.
** Previously Filed.
II-8
