SCREAMING MEDIA COM INC, 10-Q, 2000-11-14

SCREAMING MEDIA COM INC
10-Q, 2000-11-14
BUSINESS SERVICES, NEC

Previous: DWC INSTALLATIONS, 10QSB, EX-27, 2000-11-14

Next: SCREAMING MEDIA COM INC, 10-Q, EX-27.1, 2000-11-14

<PAGE> 1

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000

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

FOR THE TRANSITION PERIOD FROM ____ TO ____

COMMISSION FILE NUMBER: 0-30309

SCREAMINGMEDIA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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

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

(FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:)
NOT APPLICABLE

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

Yes X No
----- ------

As of November 8, 2000 there were 37,974,270 shares of the Registrant's common
stock outstanding.
<PAGE> 2

SCREAMINGMEDIA INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2000

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets -- September 30, 2000
(unaudited) and December 31, 1999........................... 3

Consolidated Statements of Operations -- Three and nine
months ended September 30, 2000 (unaudited) and 1999
(unaudited)................................................. 4

Consolidated Statements of Cash Flows -- Nine months ended
September 30, 2000 (unaudited) and 1999 (unaudited)......... 5

Notes to Consolidated Financial Statements.................. 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9

Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 27

Item 2. Changes in Securities and Use of Proceeds................... 27

Item 3. Defaults upon Senior Securities............................. 27

Item 4. Submission of Matters to a Vote of Security Holders......... 27

Item 5. Other Information........................................... 28

Item 6. Exhibits and Reports on Form 8-K............................ 28
</TABLE>
<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SCREAMINGMEDIA INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents................................. $ 86,191,509 $ 22,121,667
Marketable securities..................................... 21,516,511 --
Accounts receivable, net of allowance for doubtful
accounts of $500,000 and $138,802 as of September 30,
2000 and December 31, 1999, respectively................ 4,052,327 1,398,980
Prepaid expenses.......................................... 2,065,637 3,248,295
------------ ------------
Total current assets............................... 113,825,984 26,768,942

PROPERTY AND EQUIPMENT -- Net of accumulated depreciation... 15,288,389 4,552,495
INVESTMENTS................................................. 349,987 349,987
OTHER ASSETS................................................ 1,722,548 698,751
------------ ------------
TOTAL ASSETS....................................... $131,186,908 $ 32,370,175
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 7,005,800 $ 3,273,527
Deferred revenue.......................................... 2,640,351 873,360
Current portion of capital lease obligations.............. 2,007,523 691,643
------------ ------------
Total current liabilities.......................... 11,653,674 4,838,530
------------ ------------
NONCURRENT LIABILITIES:
Capital lease obligations, less current portion........... 4,932,191 646,586
------------ ------------
Total liabilities.................................. 16,585,865 5,485,116
------------ ------------
COMMITMENTS
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series B convertible preferred stock, $0.01 par value, no
shares authorized, issued and outstanding at September
30, 2000, and 2,678,572 shares authorized, issued, and
outstanding at December 31, 1999........................ -- 27,433,838
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series A convertible preferred stock, $0.01 par value, no
shares authorized, issued and outstanding at September
30, 2000, and 1,527,085 shares authorized, issued, and
outstanding at December 31, 1999........................ -- 15,271
Common stock, $0.01 par value, 100,000,000 shares
authorized and 39,539,351 and 14,040,600 issued and
37,906,812 and 12,475,521 outstanding at September 30,
2000 and December 31, 1999.............................. 395,394 140,406
Additional paid-in capital................................ 223,872,535 22,820,644
Warrants.................................................. 787,102 787,000
Deferred compensation..................................... (14,255,563) (10,379,049)
Treasury stock............................................ (1,019,311) (19,311)
Accumulated deficit....................................... (95,314,046) (13,913,740)
Unrealized gain on securities............................. 155,403 --
Unrealized loss on foreign currency translation........... (20,471) --
------------ ------------
Total stockholders' equity (deficiency)............ 114,601,043 (548,779)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)..... $131,186,908 $ 32,370,175
============ ============
</TABLE>

See accompanying notes to financial statements.
3
<PAGE> 4

SCREAMINGMEDIA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Services................................................ $ 5,505,595 $ 680,776 $ 11,765,953 $ 1,238,818
Set-up fee.............................................. 1,059,302 134,895 2,138,027 229,603
Other................................................... 18,922 2,736 104,005 11,254
------------ ----------- ------------ -----------
Total revenue..................................... 6,583,819 818,407 14,007,985 1,479,675
------------ ----------- ------------ -----------
OPERATING EXPENSES:
Cost of services (excluding depreciation of $256,420,
$31,428, $505,632 and $33,000 for the three months
ended September 30, 2000 and 1999 and the nine months
ended September 30, 2000 and 1999, respectively, shown
below)................................................ 1,881,619 282,815 4,191,215 438,918
Research and development (excluding stock-based
compensation of $439,243, $0, $1,589,279 and $0, for
the three months ended September 30, 2000 and 1999 and
the nine months ended September 30, 2000 and 1999,
respectively, shown below)............................ 1,459,522 196,463 3,413,821 514,749
Sales and marketing (excluding stock-based compensation
of $1,171,250, $700,450, $3,707,478 and $712,380 for
the three months ended September 30, 2000 and 1999 and
the nine months ended September 30, 2000 and 1999,
respectively, shown below)............................ 5,211,407 1,390,183 12,436,879 1,910,266
General and administrative (excluding stock-based
compensation of $2,498,431, $987,281, $8,662,828 and
$1,108,717 for the three months ended September 30,
2000 and 1999 and the nine months ended September 30,
2000 and 1999, respectively, shown below)............. 3,622,556 1,034,894 10,344,088 1,853,837
Depreciation and amortization........................... 935,847 125,422 2,216,771 172,695
Stock-based compensation................................ 4,108,924 1,686,731 13,959,585 1,821,097
------------ ----------- ------------ -----------
Total operating expenses.......................... 17,219,875 4,716,508 46,562,359 6,711,562
------------ ----------- ------------ -----------
OPERATING LOSS............................................ (10,636,056) (3,898,101) (32,554,374) (5,231,887)
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest income......................................... 1,285,489 30,537 1,724,449 61,326
Interest expense........................................ (149,185) (6,171) (226,208) (6,171)
Foreign currency translation............................ 24,521 -- 24,411 --
------------ ----------- ------------ -----------
Total other income (expense)...................... 1,160,825 24,366 1,522,652 55,155
------------ ----------- ------------ -----------
NET LOSS.................................................. (9,475,231) (3,873,735) (31,031,722) (5,176,732)
Preferred stock dividends................................. (50,214,834) -- (50,214,834) --
------------ ----------- ------------ -----------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................. $(59,690,065) $(3,873,735) $(81,246,556) $(5,176,732)
============ =========== ============ ===========
Basic and diluted net loss per share...................... $ (2.16) $ (0.31) $ (4.63) $ (0.42)
============ =========== ============ ===========
Weighted-average number of shares of common stock
outstanding (in thousands).............................. 27,594 12,474 17,559 12,239
============ =========== ============ ===========
</TABLE>

See accompanying notes to financial statements.
4
<PAGE> 5

SCREAMINGMEDIA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(31,031,722) $ (5,176,732)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,216,771 172,695
Stock-based compensation................................ 13,959,585 1,821,097
Changes in operating assets and liabilities:
(Increase) in account receivable...................... (2,653,347) (932,071)
Decrease (increase) in prepaid expenses and other
assets............................................... 1,316,102 (439,579)
Increase in account payable and accrued expenses...... 3,732,276 1,563,247
Increase in deferred revenue.......................... 1,766,991 412,491
------------ ------------
Net cash used in operating activities.............. (10,693,344) (2,578,852)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (6,032,583) (1,705,069)
Purchase of investments................................... (21,610,630) (349,987)
------------ ------------
Net cash used in investing activities.............. (27,643,213) (2,055,056)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Series C Preferred Stock,
net..................................................... 46,183,048 --
Proceeds from the issuance of common stock upon completion
of IPO.................................................. 58,000,032 --
Borrowings from directors and officers.................... -- 275,000
Repayments of loans to stockholders....................... -- (19,350)
Repayment of capital lease obligation..................... (1,316,619) (64,154)
Proceeds from the issuance of Series A Preferred Stock.... -- 5,468,822
Payments for the repurchase of treasury stock............. (1,000,000) --
Net unrealized gain from investments and foreign currency
translation............................................. 134,932 --
Proceeds from exercise of warrants and stock options...... 405,006 --
------------ ------------
Net cash provided by financing activities.......... 102,406,399 5,660,318
------------ ------------
NET INCREASE IN CASH........................................ 64,069,842 1,026,410
CASH, BEGINNING OF YEAR..................................... 22,121,667 120,357
------------ ------------
CASH, END OF PERIOD......................................... $ 86,191,509 $ 1,146,767
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 226,208 $ 6,171
============ ============
Cash paid for income taxes................................ $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Fixed assets acquired under capital leases.............. $ 6,918,301 $ 841,703
============ ============
Conversion of promissory notes into common stock........ $ -- $ 550,000
============ ============
Warrant issued for common stock to sublessor in
connection with new lease.............................. $ 740,000 $ --
============ ============
Warrant granted for legal services...................... $ -- $ 50,000
============ ============
Warrant granted for architectural services.............. $ -- $ 50,000
============ ============
</TABLE>

See accompanying notes to financial statements.
5
<PAGE> 6

SCREAMINGMEDIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial statements at September 30, 2000 and for the three and nine month
periods ended September 30, 2000 and 1999 have been included.

The consolidated financial statements include the accounts of
ScreamingMedia Inc. (the "Company") and its wholly owned subsidiary, Screaming
Media (UK) Ltd. All significant intercompany balances and transactions have been
eliminated in consolidation.

Results for the three and nine months ended September 30, 2000 are not
necessarily indicative of results for the entire fiscal year or future periods.
These financial statements should be read in conjunction with the consolidated
financial statements and the accompanying notes included in the Company's
Registration Statement on Form S-1 (No. 333-30548), including the related
prospectus dated August 2, 2000 as filed with the United States Securities and
Exchange Commission.

2. FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's wholly owned subsidiary in the UK
is the local currency. Accordingly, all assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at period-end exchange rates.
Revenues and expenses are translated using the average rates during the period.
The effects of foreign currency translation adjustments have been recorded as a
separate component of stockholders' equity. Foreign currency transactions gains
and losses are included in consolidated net loss.

3. OTHER COMPREHENSIVE INCOME (LOSS)

The Company reports other comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 130, which requires the
disclosure of comprehensive income (loss). SFAS No. 130 requires that in
addition to net income (loss), a Company should report other comprehensive
income (loss) consisting of gains and losses which bypass the traditional income
statement and are recorded directly into stockholders' equity (deficiency) on
the balance sheet. The components of other comprehensive income for the Company
consist of unrealized gains and losses relating to the translation of foreign
currency and unrealized gains and losses relating to the Company's investments
in marketable securities. Comprehensive loss was $59.6 million and $81.1 million
and $3.9 million and $5.2 million for the three and nine months ended September
30, 2000 and 1999, respectively.

4. CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.

5. INVESTMENTS IN MARKETABLE SECURITIES

The Company classifies all of its short term investments in marketable
securities as available for sale securities. Such short term investments consist
primarily of corporate notes and bonds, which are stated at market value, with
unrealized gains and losses on such securities reflected as other comprehensive
income (unrealized gain on securities) in stockholders' equity. Realized gains
and losses on short term investments
6
<PAGE> 7
SCREAMINGMEDIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000

5. INVESTMENTS IN MARKETABLE SECURITIES -- (CONTINUED)
are included in earnings and are derived using the specific identification
method for determining the cost of securities. It is the Company's intent to
maintain a liquid portfolio to take advantage of investment opportunities;
therefore, all securities are considered to be available for sale and are
classified as current assets.

Short term marketable securities investments consist of the following:

<TABLE>
<CAPTION>
UNREALIZED
HOLDING
(LOSSES) FAIR
COST GAINS VALUE
----------- ---------- -----------
<S> <C> <C> <C>
As of September 30, 2000:
Corporate Notes and Bonds..................... $21,361,108 $155,403 $21,516,511
----------- -------- -----------
</TABLE>

Maturities of short term investments at September 30, 2000 were as follows:

<TABLE>
<CAPTION>
FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due within one year....................................... $ 5,685,633 $ 5,685,406
Due after one year through five years..................... $15,675,475 $15,831,105
----------- -----------
</TABLE>

6. NET LOSS PER SHARE

Basic net loss per share was computed using the weighted average number of
common shares outstanding. Options, warrants, restricted stock and preferred
stock were not included in the computation of diluted net loss per share because
the effect would be antidilutive.

7. STOCK SPLIT

On July 17, 2000, the Board of Directors of the Company and the Company's
stockholders approved a one for 1.26 reverse stock split. As a result of such
stock split, one share of Series A Preferred Stock or Series B Preferred Stock
became convertible into 2.6984 shares of common stock. The Company's financial
statements have been retroactively adjusted to show the effect of this stock
split for all periods presented.

8. STOCKHOLDER'S EQUITY

On July 17, 2000, the Company issued and sold 8,254,227 shares of our
Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock") at
a price of $5.81 per share to a group of institutional accredited investors,
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2). This private placement resulted in net proceeds to us of
$46,180,259. Each share of Series C Preferred Stock was convertible, at any
time, at the option of the holder, into one share of Common Stock. The Series C
Preferred Stock was recorded at $46,180,259, which reflects the face amount of
the preferred stock reduced by all issuance costs, resulting in a discount of
$1,776,800.

On August 2, 2000, we completed an initial public offering that ultimately,
after inclusion of the exercise of the 481,700 share underwriter's
over-allotment, resulted in the issuance of 5,481,700 shares of common stock.
Simultaneously with the consummation of the initial public offering, each
outstanding share of our Series A, Series B and Series C Convertible Preferred
Stock automatically converted into common stock, resulting in an additional
19,602,785 shares of common stock.

At the time of its initial public offering, the Company recorded a $50.2
million preferred stock dividend comprising (a) $4.0 million representing the
issuance costs of the Series B and Series C preferred stock that
7
<PAGE> 8
SCREAMINGMEDIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000

8. STOCKHOLDER'S EQUITY -- (CONTINUED)
remained unaccreted as of August 2, 2000 and (b) $46.2 million representing the
unamortized portion of the amount by which the value of the common stock issued
on conversion of the Series C preferred stock exceeded the proceeds the Company
received on its issuance.

9. LEASE COMMITMENT

On July 14, 2000, the Company entered into a lease modification agreement
whereby it leased additional space form its primary landlord through March 2009.
As a result, the Company will incur additional straight-line rent expense of
approximately $725,000 per year.

In connection with such lease, the Company granted the landlord a warrant
to purchase 79,365 shares of Common Stock at an exercise price of $12.60 per
share. The warrant may be exercised at any time prior to July 14, 2003. The
exercise price and the number and type of securities for which the warrant is
exercisable are subject to adjustment in the event the Company issues any stock
dividends, combines or splits its Common Stock or issues rights to acquire
Common Stock under certain circumstances. The fair value at the time of issuance
was $12.00 per share. The value of the warrant has been determined to be
$221,823. Such value was derived by using the Black-Scholes option pricing model
with the following assumptions: no dividend yield, a volatility factor of 80%, a
risk free interest rate of 5.32% and an expected life of seven months. The value
of the warrant will be amortized ratably over the life of the lease.

8
<PAGE> 9

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

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes contained herein and the information
contained in our Registration Statement on Form S-1 (No. 333-30548), including
the related prospectus dated August 2, 2000 as filed with the United States
Securities and Exchange Commission. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. We
may identify these statements by the use of words such as "believe", "expect",
"anticipate", "intend", "plan" and similar expressions. These forward-looking
statements involve several risks and uncertainties. Our actual results may
differ materially from those set forth in these forward-looking statements as a
result of a number of factors, including those described under the caption "Risk
Factors" herein and in our Registration Statement on Form S-1 (No. 333-30548),
including the related prospectus dated August 2, 2000 as filed with the United
States Securities and Exchange Commission. These forward-looking statements
speak only as of the date of this quarterly report, and we caution you not to
rely on these statements without also considering the risks and uncertainties
associated with these statements and our business as addressed elsewhere in this
quarterly report and in our Registration Statement on Form S-1 (No. 333-30548),
including the related prospectus dated August 2, 2000 as filed with the United
States Securities and Exchange Commission.

OVERVIEW

We have developed proprietary technologies that enable Web sites,
intranets, extranets and wireless networks to cost-effectively meet the growing
need to provide targeted, high-quality content to their users. We aggregate
digital content from a wide range of content providers and filter, deliver and
efficiently integrate this content into our customers' platforms almost
instantaneously. Our technologies enable us to deliver content to customers who
use any of the major Web site server and database technologies, including those
used to support wireless access devices. Our technology platform can presently
deliver text, photographs, audio and video and is designed to enable us to add
new forms of content such as flash animation and pdf documents. Participation in
our rapidly growing network of content providers and customers offers Web sites
access to timely and relevant content and offers our content providers an
efficient means of syndicating their content to third parties.

As of September 30, 2000, we had 1,230 customers and obtained content from
2,978 publications, supplied by over 520 partners. We refer to this network of
customers and content providers as our "digital content network." We have a
growing international presence, with 148 of our customers and 139 of our content
providers based outside the United States, primarily in Latin America, the
United Kingdom and Canada.

Our technology consists of two principal elements of software, the Content
Engine(R) and SiteWare(TM). Content from a range of sources is delivered in a
variety of formats to our servers where the Content Engine(R) processes and
filters it, then sends to our customers any items that match their requirements.
SiteWare(TM), which resides on our customers' servers, receives the content over
the Internet and integrates it seamlessly into the customer's Web site.
SiteWare(TM) easily integrates into existing business systems including
proprietary and third-party applications. SiteWare(TM) is also available in many
languages including Spanish and Portuguese.

We enter into contracts with our customers, typically for an initial period
of one year, that provide for an upfront set-up fee and recurring monthly
services fee for the delivery of content. Customers include General Electric,
Hewlett-Packard, First Union, IBM, Sun Microsystems, Sony, InteliHealth, MSN
Money Central and Omnisky. Our content providers range from traditional news
services to new media sources and include Astrology.com, AP Online, Deutsche
Press-Agentur, EFE, Knight-Ridder Tribune, Knoxville New-Sentinel, The New York
Times Syndicate, Red Herring.com and RollingStone.com.

Revenue

Our revenue is composed of services revenue, set-up fees and other revenue.
We derive our services revenue primarily from distributing content directly to
our customers' Web sites. Our contracts typically have
9
<PAGE> 10

an initial term of one year. We charge our customers a minimum monthly fee based
on a contractually specified volume of content. We charge our customers
additional monthly fees for content delivered in excess of the contracted volume
of content. We recognize revenue for contracted minimum monthly fee in equal
amounts each month over the life of the contract. We recognize revenue from
content used in excess of the contracted volume as the services are delivered.
We report our revenue net of allowances and rebates.

We generally charge our customers an up front set-up fee. Set-up fees are
charged for installing our proprietary SiteWare(TM) software, building custom
filters and enabling the customer to receive customized content. The amount of
the set-up fee varies according to the number of custom filters created, the
functionality of SiteWare(TM), and other factors. We recognize set-up fee
revenue in equal amounts over the initial term of the contract, commencing with
the service start date specified in the contract.

Cost of Services

Cost of services consists of the content royalty fees we pay to content
providers for the usage of their content by our customers, the server hosting
and connectivity costs associated with the aggregation and distribution of that
content, and the cost of personnel involved in building the customized filters
for our customers. Monthly royalty fees are calculated based on the volume of a
provider's content used by our customers. Under existing contracts with content
providers, we only pay royalties on content that is used by our customers. In
certain cases, the content arrangement is based on fixed fees or subject to a
minimum charge.

Research and Development Expenses

Our research and development expenses consist primarily of personnel costs
and outside consulting services for research, design and development of the
software applications supporting our business. Research and development costs
are expensed as incurred.

Sales and Marketing Expenses

Our sales and marketing expenses consist mainly of advertising costs,
personnel costs and sales commissions, as well as related trade show,
promotional and public relations expenses. Our success in increasing revenues
depends on our ability to increase our customer base as well as our range of
content providers.

General and Administrative Expenses

General and administrative expenses consist primarily of management,
network operations and administrative personnel costs and shared costs for
employee benefits, insurance, professional services, facilities and
telecommunications.

Stock-Based Compensation

Stock-based compensation is a result of the issuance of stock options to
employees, directors and affiliated parties with exercise prices per share
subsequently determined for financial reporting purposes to be below the fair
market value per share of our common stock at the date of the applicable grant.
This difference is recorded as a reduction of stockholders' equity and amortized
as non-cash compensation expense on an accelerated basis over the vesting period
of the related options.

10
<PAGE> 11

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Services.................................................. 84% 83% 84% 84%
Set-up fee................................................ 16 17 16 15
Other..................................................... -- -- -- 1
---- ---- ---- ----
Total revenue.......................................... 100% 100% 100% 100%
==== ==== ==== ====
Operating expenses:
Cost of services (excluding depreciation of 4%, 4%, 4% and
2%, for the three months ended September 30, 2000 and
1999, and nine months ended September 30, 2000 and
1999, respectively, shown below)....................... 29% 35% 30% 30%
Research and development (excluding stock-based
compensation of 7%, 0%, 11% and 0%, for the three
months ended September 30, 2000 and 1999, and nine
months ended September 30, 2000 and 1999, respectively,
shown below)........................................... 22 24 24 35
Sales and marketing (excluding stock-based compensation of
18%, 86%, 26% and 48% for the three months ended
September 30, 2000 and 1999, and nine months ended
September 30, 2000 and 1999, respectively, shown
below)................................................. 79 170 89 129
General and administrative (excluding stock-based
compensation of 38%, 121%, 62% and 75% for the three
months ended September 30, 2000 and 1999, and nine
months ended September 30, 2000 and 1999, respectively,
shown below)........................................... 55 126 74 125
Depreciation and amortization............................. 14 15 16 12
Stock-based compensation.................................. 62 206 100 123
---- ---- ---- ----
Total operating expenses............................... 261 577 333 454
---- ---- ---- ----
Operating income (loss)..................................... (161) (477) (233) (354)
Other income (expense), net................................. 18 3 11 4
---- ---- ---- ----
Net income (loss)...................................... (143)% (474)% (222)% (350)%
==== ==== ==== ====
</TABLE>

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999

Revenue. Total revenue increased to $6.6 million for the three months
ended September 30, 2000 from $818,000 for the three months ended September 30,
1999. This was due to an increase in our customer base to 1,230 customers at
September 30, 2000 from 225 at September 30, 1999, as well as higher average
monthly services revenue per customer and higher average set-up fees for new
customers. International revenue grew to 12% of total revenue, or $803,000 for
the three months ended September 30, 2000 from 9% and $77,000 for the three
months ended September 30, 1999. For the three months ended September 30, 2000,
no customer accounted for more than 10% of our total revenues.

Cost of Services. Cost of services increased to $1.9 million for the three
months ended September 30, 2000 from $283,000 for the three months ended
September 30, 1999. As a percentage of revenue, cost of

11
<PAGE> 12

services decreased from 35% to 29%, due to our ability to negotiate lower
average royalty fees or fixed-fee contracts with certain of our content
providers.

Research and Development. Research and development expenses increased to
$1.5 million for the three months ended September 30, 2000 from $196,000 for the
three months ended September 30, 1999. As a percentage of revenue, research and
development expenses decreased to approximately 22% for the three months ended
September 30, 2000 from approximately 24% for the three months ended September
30, 1999. Approximately $1.0 million of this increase was due to costs
associated with increasing our research and development personnel to 53 at
September 30, 2000 from 19 at September 30, 1999.

Sales and Marketing. Sales and marketing expenses increased to $5.2
million for the three months ended September 30, 2000 from $1.4 million for the
three months ended September 30, 1999. As a percentage of revenue, sales and
marketing expenses decreased to approximately 79% for the three months ended
September 30, 2000 from approximately 170% for the three months ended September
30, 1999. Approximately $1.4 million of the increase was the result of the
increase in staff employed in our United States and United Kingdom sales,
customer service, business development and marketing departments to 146 at
September 30, 2000 from 38 at September 30, 1999. Approximately $382,000 of the
increase was due to the formation of our global content acquisition group, which
consisted of 15 employees as at September 30, 2000. Approximately $2.0 million
of the increase was due to increased expenditures related to traditional
marketing and brand-building activities.

General and Administrative. General and administrative expenses increased
to $3.6 million for the three months ended September 30, 2000 from $1.0 million
for the three months ended September 30, 1999. As a percentage of revenue,
general and administrative expenses decreased to approximately 55% for the three
months ended September 30, 2000 from approximately 126% for the three months
ended September 30, 1999. Approximately $1.3 million of the increase was a
result of increasing our general and administrative staff to 50 at September 30,
2000 from 9 at September 30, 1999. Approximately $345,000 of the increase was a
result of increasing our network operations department staff to 26 at September
30, 2000 from 5 at September 30, 1999. A further $550,000 of the increase was
due to the increased cost of rent, utilities, supplies and telecommunications to
support our growth. Approximately $426,000 was due to an increase in bad debt
expense.

Stock-Based Compensation. We recognized stock-based compensation expense
of $4.1 million and $1.7 million for the three months ended September 30, 2000
and 1999, respectively. As a percentage of revenue, stock based compensation
decreased to approximately 62% for the three months ended September 30, 2000
from approximately 206% for the three months ended September 30, 1999.

Other Income, Net. Other income, net, includes interest income from cash
and cash equivalents and marketable securities offset by interest on capital
leases. Other income, net, increased to $1.2 million for the three months ended
September 30, 2000 from $24,000 for the three months ended September 30, 1999.
As a percentage of revenue, other income, net increased to approximately 18% for
the three months ended September 30, 2000 from approximately 3% for the three
months ended September 30, 1999. The increase was due to interest income from
increased cash balances and marketable securities.

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999

Revenue. Total revenue increased to $14.0 million for the nine months
ended September 30, 2000, from $1.5 million for the nine months ended September
30, 1999. This increase was mostly due to an increase in our customers to 1,230
at September 30, 2000 from 225 at September 30, 1999, as well as higher average
monthly services revenue per customer and higher average set-up fees for new
customers. For the nine months ended September 30, 2000 no one customer
accounted for more than 10% of total revenues.

Cost of Services. Cost of services increased to $4.2 million for the nine
months ended September 30, 2000, from $439,000 for the nine months ended
September 30, 1999. As a percentage of revenue, cost of services remained at 30%
for the nine months ending September 30, 2000 and 1999. The dollar increase was

12
<PAGE> 13

due to increases in services revenue resulting in increased content royalty fees
paid to content providers. We anticipate that the cost of services will continue
to grow in absolute dollars as we expand our business.

Research and Development. Research and development expenses increased to
$3.4 million for the nine months ended September 30, 2000 from $515,000 for the
three months ended September 30, 1999. As a percentage of revenue, research and
development expenses decreased to approximately 24% for the nine months ended
September 30, 2000 from approximately 35% for the nine months ended September
30, 1999. This dollar increase was due to direct personnel and consulting costs
incurred in further development of our content filtering, aggregation and
distribution software and the development of new products. We believe that
significant investments in research and development expenses will be required to
enhance and expand our products and services. Accordingly, we expect that our
research and development expenses will continue to increase in absolute dollars
for the forseeable future, although we expect the amount as a percentage of
revenue to decrease as the revenue base increases.

Sales and Marketing. Sales and marketing expenses increased to $12.4
million for the nine months ended September 30, 2000, from $1.9 million for the
nine months ended September 30, 1999. As a percentage of revenue, sales and
marketing expenses decreased to approximately 89% for the nine months ended
September 30, 2000 from approximately 129% for the nine months ended September
30, 1999. The increase in sales and marketing expense was due to a $4.6 million
increase in compensation expense associated with the growth of our sales,
content acquisition, customer support, business development and marketing
departments. Approximately $603,000 of the increase was due to the formation of
our global content acquisition group. Approximately 4.0 million of the increase
was attributable to significant investments in traditional marketing and brand
building activities. We intend to continue expanding our sales staff, both
domestically and internationally, in order to sell our services. Accordingly, we
expect our sales and marketing expenses to continue to increase in absolute
dollars, although we expect the amount as a percentage of revenue to decrease as
the revenue base increases.

General and Administrative. General and administrative expenses increased
to $10.3 million for the nine months ended September 30, 2000, from $1.9 million
for the nine months ended September 30, 1999. As a percentage of revenue,
general and administrative expenses decreased to approximately 74% for the nine
months ended September 30, 2000 from approximately 125% for the nine months
ended September 30, 1999. This dollar increase resulted from an increase in
personnel costs of approximately $3.5 million associated with a significant
increase in the number of administrative personnel, including network operations
staff, as well as increased facilities expenses, legal and consulting fees which
in aggregate totaled approximately $1.4 million. The remainder of the increase
was mostly attributable to employee and office related costs of approximately
$1.5 million and $1.5 million for an increase in bad debt expense.

Stock-Based Compensation. We recognized stock-based compensation expense
of $14.0 million and $1.8 million for the nine months ended September 30, 2000
and 1999, respectively. As a percentage of revenue, stock based compensation
decreased to approximately 100% for the nine months ended September 30, 2000
from approximately 123% for the nine months ended September 30, 1999.

Other Income, Net. Other income, net, includes interest income from cash
and cash equivalents and marketable securities offset by interest paid on
capital leases. Other income, net, increased to $1.5 million for the nine months
ended September 30, 2000 from $55,000 for the nine months ended September 30,
1999. As a percentage of revenue, other income, net increased to approximately
11% for the nine months ended September 30, 2000 from approximately 4% for the
nine months ended September 30, 1999. The increase was primarily due to interest
income from increased cash balances and marketable securities.

13
<PAGE> 14

QUARTERLY OPERATING RESULTS

The following table sets forth our unaudited quarterly operating results
for the year ended December 31, 1999 and the three months ended March 31, June
30 and September 30, 2000. This information has been derived from our unaudited
interim financial statements. In our opinion, this unaudited information has
been prepared on a basis consistent with our audited financial statements
contained in our prospectus filed August 2, 2000 and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented. Historical results
for any quarter are not necessarily indicative of the results to be expected for
any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 1999 1999 1999 2000 2000 2000
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Services.......................... $ 234 $ 324 $ 681 $ 1,241 $ 2,231 $ 4,030 $ 5,506
Set-up fee........................ 25 69 135 263 412 667 1,059
Other............................. 8 -- 2 3 76 8 19
------- ------- ------- ------- -------- -------- --------
Total revenue.............. 267 393 818 1,507 2,719 4,705 6,584
Operating expenses:
Cost of services (excluding
depreciation of $0, $2, $31,
$86, $123, $126 and $256 in the
first quarter of 1999 through
the third quarter of 2000,
respectively, as shown below)... 60 96 283 535 929 1,381 1,882
Research and development
(excluding stock-based
compensation of $0, $0, $0, $64,
$493, $657 and $439 in the first
quarter of 1999 through the
third quarter of 2000,
respectively, as shown below)... 137 182 196 379 916 1,039 1,460
Sales and marketing (excludes
stock-based compensation of $0,
$12, $700, $1,110, $1,162,
$1,374 and $1,171 in the first
quarter of 1999 through the
third quarter of 2000,
respectively, as shown below)... 75 445 1,389 1,859 3,502 3,724 5,211
General and administrative
(excludes stock-based
compensation of $0, $122, $987,
$3,067, $2,946, $3,219 and
$2,499 in the first quarter of
1999 through the third quarter
of 2000, respectively, as shown
below).......................... 270 549 1,036 2,475 3,380 3,341 3,622
Depreciation and amortization..... 12 35 125 279 549 732 936
Stock-based compensation.......... -- 134 1,687 4,241 4,601 5,249 4,109
------- ------- ------- ------- -------- -------- --------
Total operating expenses... 554 1,441 4,716 9,768 13,877 15,466 17,220
------- ------- ------- ------- -------- -------- --------
Operating loss...................... (287) (1,048) (3,898) (8,261) (11,158) (10,761) (10,636)
------- ------- ------- ------- -------- -------- --------
Other income (expenses), net........ -- 31 24 273 250 113 1,161
------- ------- ------- ------- -------- -------- --------
Net loss............................ (287) (1,017) (3,874) (7,988) (10,908) (10,648) (9,475)
======= ======= ======= ======= ======== ======== ========
Preferred stock dividends........... -- -- -- 102 154 155 (50,215)
------- ------- ------- ------- -------- -------- --------
Loss attributable to common
stockholders...................... $ (287) $(1,017) $(3,874) $(8,090) $(11,062) $(10,803) $(59,690)
======= ======= ======= ======= ======== ======== ========
Basic and diluted net loss per
share............................. (0.02) (0.08) (0.31) (0.65) (0.88) (0.85) (2.16)
Weighted-average number of shares
used in computation of basic and
diluted net loss per share........ 11,927 12,302 12,474 12,476 12,526 12,773 27,594
PRO-FORMA BASIC NET LOSS PER SHARE
Loss attributable to common
stockholders...................... (287) (1,017) (3,874) (8,090) (11,062) (10,803) (59,690)
</TABLE>

14
<PAGE> 15

NET LOSS PER SHARE

Pro forma basic net loss excludes the amortization of deferred stock
compensation and preferred stock dividends of $4,108,924 and $50,214,834,
$1,686,731 and $0, $13,959,585 and $50,214,834 and $1,821,103 and $0 for the
three months ending September 30, 2000 and 1999 and the nine months ending
September 30, 2000 and 1999, respectively.

Pro forma basic net loss per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
preferred stock as if such conversion had occurred at the beginning of the
period or at the date of original issuance, if later.

The following table presents the computation of basic and pro forma basic
net loss per share (in thousands, except per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss........................................... $(59,690) $(3,874) $(81,247) $(5,177)
======== ======= ======== =======
Weighted-average number of shares used in
computation of basic net loss per share.......... 27,594 12,474 17,559 12,239
======== ======= ======== =======
Basic and diluted net loss per share............... $ (2.16) $ (0.31) $ (4.63) $ (0.42)
======== ======= ======== =======
Net loss........................................... $(59,690) $(3,874) $(81,247) $(5,177)
Add amortization of deferred stock compensation.... 4,109 1,687 13,960 1,821
Add preferred stock dividends...................... 50,215 -- 50,215 --
-------- ------- -------- -------
Net loss used in computing pro forma basic net loss
per share........................................ $ (5,366) $(2,187) $(17,072) $(3,356)
Shares used in computation of basic net loss per
share............................................ 27,594 12,474 17,559 12,239
Add pro forma adjustment to reflect
weighted-average effect of the assumed conversion
of convertible preferred stock................... 6,958 4,121 9,906 4,121
-------- ------- -------- -------
Shares used in computing pro forma basic net loss
per share........................................ 34,552 16,595 27,465 16,360
======== ======= ======== =======
Pro forma basic net loss per share................. $ (0.16) $ (0.13) $ (0.62) $ (0.21)
======== ======= ======== =======
</TABLE>

15
<PAGE> 16

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations through private sales of equity and debt
securities and through our initial public offering. Recent sales of equity
securities include $58.0 million of net proceeds from our August 2000 initial
public offering of common stock and $46.2 million of net proceeds received from
the July 2000 private placement of convertible preferred stock, which converted
into common stock upon the completion of our initial public offering. As of
September 30, 2000 we had cash and cash equivalents and marketable securities of
approximately $108.0 million.

As of September 30, 2000, our principal commitments consisted of
obligations outstanding under a series of capital leases of computer and
networking equipment and our facilities leases. During the year ended December
31, 1999 and the nine months ended September 30, 2000, we entered into capital
lease arrangements for computer, network and telephony equipment. Additionally,
we entered into other capital leases for the design and implementation of our
new financial systems. A leasing company is the beneficiary of a $3.6 million
standby letter of credit with a bank securing our lease arrangement with them.
In aggregate, the gross asset value of the equipment subject to these leases is
approximately $8.5 million. At the end of each lease term, we have the option to
purchase the equipment, typically at the lesser of fair market value or 10% of
gross asset value. We presently intend to exercise the purchase option for the
majority of the leases.

We operate from leased premises in New York, San Francisco, Miami and
London. Our current aggregate annual rental obligations under these leases are
approximately $1.5 million for 2000 and $2.1 million for 2001. During the nine
months ended September 30, 2000 and 1999, our capital expenditures were $6.0
million and $1.7 million, respectively, consisting principally of computers,
hardware, software and professional services to design our new financial
systems, networking equipment and the build-out of our headquarters.

For the nine months ended September 30, 2000 and 1999, respectively, net
cash used in operating activities was $10.7 million and $2.6 million,
respectively. The net cash used in operating activities for the nine months
ended September 30, 2000 resulted primarily from net losses of $31.0 million and
an increase in trade accounts receivable of $2.7 million. This was offset by
$16.2 million in non-cash charges, of which stock-based compensation accounted
for $14.0 million, an increase of $3.7 million in accounts payable and accrued
expenses, a $1.8 million increase in deferred revenue and a $1.3 million
increase in prepaid expenses and other assets. The net cash used in operating
activities for the nine months ended September 30, 1999 resulted primarily from
net losses of $5.2 million, an increase in prepaid expenses and other assets of
$440,000 and an increase in trade accounts receivable of $932,000, offset by a
$1.8 million non-cash charge for stock-based compensation, a $1.6 million
increase in accounts payable and accrued expenses and a $412,000 increase in
deferred revenue.

For the nine months ended September 30, 2000 and 1999, respectively, net
cash used in investing activities was $27.6 million and $2.1 million,
respectively. The net cash used in investing activities for the nine months
ended September 30, 2000 was principally for the purchase of equipment,
leasehold improvements, the initial phase of the rollout of our new financial
system and the purchase of investment securities. The net cash used in investing
activities for the nine months ended September 30, 1999 was principally for the
purchase of equipment and leasehold improvements.

For the nine months ended September 30, 2000, net cash provided by
financing activities was $102.4 million. Net cash provided by financing
activities in the nine months ended September 30, 2000 was primarily the result
of net proceeds from the sale of convertible preferred stock of $46.2 million
and the net proceeds from the sale of common stock upon completion of our
initial public offering of $58.0 million. This was offset by repayments of our
capital lease obligations of $1.3 million and payment for the repurchase of
treasury stock for $1.0 million, offset by proceeds from the exercise of a
warrant and stock options of $405,000. For the nine months ended September 30,
1999, net cash provided by financing activities amounted to $5.7 million. Net
cash provided by financing activities for the nine months ended September 30,
1999 was provided substantially by net proceeds generated from our offering of
capital stock, which totaled $5.4 million. On March 30, 1999 and on April 7 and
9, 1999, we received a total of $5.5 million in gross

16
<PAGE> 17

proceeds from the sale of our Series A preferred stock in a private offering
under Regulation D to accredited investors.

We believe that the net proceeds from our initial public offering, together
with the net proceeds from the Series C preferred stock offering and our current
cash and cash equivalents, will be sufficient to meet our operating expenses,
including our planned increases in our expenditures on sales and marketing,
research and development and international expansion, for at least the next
eighteen months. In addition, if we undertake significant acquisitions or make
large strategic investments, we may need to raise additional funds within that
time. We may also need to raise additional funds if competitive pressures force
us to make unforseen expenditures, such as to acquire or develop new technology.
If we need to raise additional funds, we will likely do so through the issuance
and sale of equity securities. If this were to occur, the percentage ownership
of our stockholders could be reduced, our stockholders may experience additional
dilution and these securities may have rights, preferences or privileges senior
to those of our stockholders. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. Our business, results of operations and financial
condition could be materially adversely affected by these limitations.

17
<PAGE> 18

RISK FACTORS

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

RISKS RELATED TO OUR BUSINESS

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

It is difficult to value our business and evaluate our prospects because of
our limited operating history. We began our current line of business at the end
of 1997 and began focusing exclusively on this business in the latter part of
1998. Accordingly, we have limited financial and operating data that is relevant
to our current business. Our business model is unproven, which creates a risk
that our performance will not meet the expectations of investors and that the
value of our common stock will decline.

WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.

We expect to incur operating losses and experience negative cash flow for
the foreseeable future. We have incurred significant losses since we began our
current line of business in 1997. As of September 30, 2000, we had an
accumulated deficit of $95.3 million. We incurred net losses of $13.2 million
and $31.0 million for the year ended December 31, 1999 and the nine months ended
September 30, 2000, respectively, not including preferred stock dividends
relating to the sale and conversion of preferred stock. We anticipate our losses
will also increase significantly from current levels as we incur additional
costs and expenses related to:

- sales and marketing activities;

- employing additional personnel;

- funding our international operations;

- software and product development;

- establishing strategic relationships; and

- increasing the number of content providers.

We cannot predict when we will operate profitably, if ever. Our ability to
achieve profitability will depend on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. We
cannot be certain that if we were to achieve profitability, we would be able to
sustain or increase profitability.

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

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

- the demand for our services;

- the value, timing and renewal of contracts with customers and content
providers;

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

- the performance of our technology.
18
<PAGE> 19

These factors, which are largely beyond our control, together with our
limited operating history and unproven business model, make it difficult to
forecast our future revenues or results of operations accurately. We also have
limited meaningful historical financial data upon which to base planned
operating expenses. A substantial portion of our operating expenses is related
to personnel costs, marketing programs and overhead,
which cannot be adjusted quickly. Our operating expense levels reflect, in part,
our expectations of future revenues. If actual revenues on a quarterly basis are
below management's expectations, or if our expenses precede increased revenues,
both gross margins and results of operations would be materially adversely
affected.

LOSING MAJOR CONTENT PROVIDERS MAY LEAVE US WITH INSUFFICIENT BREADTH OF CONTENT
TO RETAIN AND ATTRACT CUSTOMERS.

We do not generate original content and are therefore highly dependent upon
third-party content providers. If we were to lose one of our major content
providers and were not able to obtain similar content from another source, our
services would be less attractive to customers. In addition, we cannot be
certain that we will be able to license content from our current or new
providers on favorable terms in the future, if at all. If we are unable to add
content providers to our network, we may not be able to attract new customers in
sufficient numbers to expand our business.

FAILURE TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD ADVERSELY AFFECT
OUR BUSINESS AND OPERATING RESULTS.

We have grown quickly in the last year and we anticipate continuing to
expand. Any failure to manage our growth effectively will result in our
operations being less than optimally efficient, which will adversely affect our
operating and financial results.

Our number of full-time employees increased from eight on December 31, 1998
to 279 on September 30, 2000. We expect to continue to add employees, although
the exact figure will depend on a number of factors including our domestic and
international growth and our ability to increase the productivity of our
employees. This growth may place strains on our resources, management and
operating systems. To effectively manage our growth, we must, among other
things:

- accurately estimate the number of employees we will require and the areas
in which they will be required;

- upgrade and expand our office infrastructure so that it is appropriate
for our level of activity;

- manage expansion into additional geographic areas; and

- improve and refine our operating and financial systems.

We expect to devote considerable resources and management time to improving
our operating and financial systems to manage our growth.

OUR MANAGEMENT TEAM HAS LIMITED EXPERIENCE WORKING TOGETHER AND IF THEY FAIL TO
FUNCTION EFFECTIVELY AS A UNIT, OUR OPERATING PERFORMANCE MAY BE ADVERSELY
EFFECTED.

Our chief executive officer has only been employed by us since November
1999 and our chief financial officer joined us in March 2000. Our chief
operating officer joined us in February 2000 as president, international and
assumed the role of chief operating officer in June 2000. Additionally, several
of our other senior managers joined us in the last six months. Therefore, there
has been little opportunity to evaluate the effectiveness of our senior
management team as a unit. The failure of our senior management to function
effectively as a team may have an adverse effect on our ability to maintain a
cohesive culture and compete effectively.

IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PROFESSIONAL STAFF, OUR GROWTH
WILL BE LIMITED.

Our ability to grow, increase our market share and develop our products
depends in large part on our ability to hire, retain and manage highly skilled
employees, including technical, sales, marketing and business development
personnel. Companies in our industry and similar industries compete intensely to
hire and retain qualified personnel, and we cannot assure you that we will be
able to attract the employees we need, or that

19
<PAGE> 20

we will be able to retain the services of those we have hired. We cannot assure
you that we will be able to prevent the unauthorized use or disclosure of our
proprietary knowledge, practices and procedures if our employees leave us.

IF WE LOSE ANY OF OUR SENIOR MANAGERS OR OTHER KEY PERSONNEL, OUR BUSINESS MAY
BE OPERATED LESS EFFECTIVELY.

We depend on the continued services and performance of our senior
management and other key personnel including technical and sales personnel. If
we lose the services of our senior managers or any of our other executive
officers or key employees, we may not be able to operate our business as
effectively as we anticipate, and our operating results may suffer.

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

The market for Internet products and services is characterized by rapidly
changing technology, evolving industry standards and customer demands and
frequent new product introductions and enhancements. To be successful, we will
have to continually improve the performance, features and reliability of our
products and services. We cannot assure you that our technological development
will advance at the pace necessary to sustain our growth. Additionally, new
Internet or telecommunications technologies may require us to alter our
technology and products to avoid them becoming obsolete. Improving our current
products and developing and introducing new products will require significant
research and development.

OUR LIMITED EXPERIENCE SELLING AND MARKETING OUR SERVICES MAY IMPEDE EXPANSION
OF OUR BUSINESS.

We have had relatively little experience marketing our services and may not
be able to successfully implement our sales and marketing initiatives. Marketing
our services in order to expand our customer base is crucial to the success of
our business. The majority of our sales people were hired since the beginning of
1999. We may be unable to hire, retain, integrate and motivate sales and
marketing personnel. New sales and marketing personnel may also require a
substantial period of time to become effective. Unsuccessful sales or marketing
efforts or a material lengthening of our sales cycle could have material adverse
effects on our revenues.

IF EQUIPMENT FAILURES INTERRUPT THE DISTRIBUTION OF CONTENT TO OUR CUSTOMERS, WE
MAY LOSE CUSTOMERS AND OUR REPUTATION MAY BE ADVERSELY AFFECTED.

Our services will only be attractive to current and prospective customers
if we are able to process and distribute content quickly and reliably. Any
failure of the computer equipment we use or the third-party telecommunications
networks on which we rely for distribution could interrupt or delay our service.
This could lead to customers cancelling contracts and could damage our
reputation, which could limit our ability to attract additional customers and
lead to a drop in the value of our common stock.

Substantially all of our own computer and communications hardware is
located in our headquarters and on the premises of our server hosting providers
located in New York City. We also depend on the Internet to distribute our
content. All of these systems are vulnerable to damage or interruption from
fire, flood, power loss, earthquake, malicious damage, including hacking and
computer viruses, telecommunications failure and similar events.

WE MAY BE UNABLE TO EXPAND OUR COMPUTER SYSTEMS QUICKLY ENOUGH TO SUPPORT DEMAND
FOR OUR SERVICES.

Our future success will depend in part on our ability to expand our
computer systems rapidly in order to accommodate significant increases in
content processing volume. We may be unable to expand the capacity of our
existing systems or develop new systems to enable us to process a larger amount
of content, or to provide our services to a larger number of customers. If we
are unable to expand our systems, we may suffer service interruptions that could
make our services less attractive to customers.

20
<PAGE> 21

Most of our software systems are internally developed, and we rely on our
employees and third-party contractors to develop and maintain these systems. If
any of our software developers or these contractors become unavailable to us, we
may experience difficulty in improving and maintaining our systems. Although we
are continually enhancing and expanding our infrastructure, we have experienced
periodic systems interruptions, which we believe may continue to occur. Failure
to maintain high-capacity data transmission would adversely affect our
reputation and business.

WE FACE INTENSE COMPETITION THAT COULD IMPAIR OUR ABILITY TO GROW AND ACHIEVE
PROFITABILITY.

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

We compete with companies that are focused on aggregating third-party
content and distributing it to online customers. We also compete with
traditional wire services that have adapted their own content for use by Web
sites. We also compete with a wide range of providers of different types of
content that can be used on Web sites, such as directories, maps, photographs,
stock tickers and video clips. Finally, we compete with companies that create
and sell software that enables their customers to aggregate and distribute
digital content and/or to integrate digital content from external sources into
their web platforms. We do not believe that any of these competitors is
currently dominant.

Some of our competitors offer products with different pricing models,
delivery systems and types of content, and these differences could prove
attractive to potential customers. In the future, these competitors or others
might offer products with the features we currently provide, or other features
desired by potential customers.

Many of our current and potential competitors have longer operating
histories, larger customer or user bases, and significantly greater financial,
marketing and other resources than we do. These competitors can devote
substantially more resources than we can to business development and may adopt
aggressive pricing policies. In addition, larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with our
competitors as the use of the Internet and other online services increases.
Increased competition from these or other competitors could adversely affect our
business.

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

The publication or dissemination of content that we have distributed may
give rise to liability for defamation, negligence, breach of copyright, patent,
trade secret or trademark infringement or other claims or charges based on the
nature of the content. As a distributor of this content, we may be directly or
indirectly liable to claims or charges of this nature.

In addition, we could be exposed to liability arising from the activities
of our customers or their users with respect to the unauthorized duplication of,
or insertion of inappropriate material into, the content we supply. Although we
carry general liability insurance, our insurance may not cover claims of these
types or may be inadequate to indemnify us for all liability that may be imposed
on us.

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

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

21
<PAGE> 22

IF WE ARE UNABLE TO MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION, WE
MAY HAVE DIFFICULTY ATTRACTING NEW BUSINESS AND RETAINING CURRENT CUSTOMERS AND
EMPLOYEES, AND OUR BUSINESS MAY SUFFER.

We believe that establishing and maintaining a good reputation and name
recognition are critical for attracting and retaining customers and employees.
We also believe that the importance of reputation and name recognition is
increasing and will continue to increase due to the growing number of providers
of Internet services. If our reputation is damaged or if potential customers are
not familiar with us or the services we provide, we may be unable to attract
new, or retain existing, customers and employees. Promotion and enhancement of
our name will depend largely on our success in continuing to provide effective
services. If customers do not perceive our services to be effective or of high
quality, our brand name and reputation will suffer.

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

We regard our trademarks, service marks, copyrights, trade secrets and
similar intellectual property as critical to our success. The unauthorized
reproduction or other misappropriation of our trademarks or other intellectual
property could diminish the value of our proprietary rights or reputation. If
this were to occur, our business could be materially and adversely affected.

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

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

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

WE COULD FACE ADDITIONAL RISKS AND CHALLENGES AS WE EXPAND INTERNATIONALLY AND
MAY FACE UNEXPECTED COSTS IN DEVELOPING INTERNATIONAL REVENUES.

We have recently begun to invest financial and managerial resources to
expand our operations in international markets. We recently opened offices in
London, Paris and in Miami in order to service the European and Latin American
markets, respectively. If our revenues from international operations, and
particularly from our operations in Europe and Latin America, do not exceed the
expense of establishing and maintaining these operations, our business,
financial condition and operating results will suffer. We have only limited
experience in international operations, and we may not be able to capitalize on
our investment in these markets.

22
<PAGE> 23

POTENTIAL ACQUISITIONS AND STRATEGIC INVESTMENTS MAY RESULT IN INCREASED
EXPENSES, DIFFICULTIES IN INTEGRATING TARGET COMPANIES AND DIVERSION OF
MANAGEMENT'S ATTENTION.

Although we are not currently in discussions with any party, we anticipate
undertaking one or more acquisitions or strategic investments in the near future
to expand our range of technology and products and to gain access to new
markets. Growth through acquisitions entails many risks, including the
following:

- our management's attention may be diverted during the acquisition and
integration process;

- we may face costs, delays and difficulties of integrating the acquired
company's operations, technologies and personnel into our existing
operations, organization and culture;

- the adverse impact on earnings of amortizing the acquired company's
intangible assets may be significant, particularly in light of the high
valuations of many Internet and other information technology services
companies;

- we may issue new equity securities to pay for acquisitions, which would
dilute the holdings of existing stockholders;

- the timing of the acquisition or our failure to meet operating
expectations for acquired businesses may impact adversely on our
financial condition; and

- we may be adversely affected by expenses of any undisclosed or potential
legal liabilities of the acquired company, including intellectual
property, employment and warranty and product liability-related problems.

If realized, any of these risks could have a material adverse effect on our
business, financial condition and operating results.

RISKS OF DOING BUSINESS OVER THE INTERNET

IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR COMMERCE, WE WILL NOT
SUCCEED.

Because most of our present and anticipated customers are operators of
commercial Web sites, demand for our services will depend in large part on
continued growth in use of the Internet. There are critical issues concerning
the commercial use of the Internet that remain unresolved. If the Internet
develops more slowly than we expect as a commercial or business medium, demand
for our services will be lower than we expect.

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

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

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

23
<PAGE> 24

imposition of various forms of taxation on Internet-related activities.
Regulators continue to evaluate the best telecommunications policy regarding the
transmission of Internet traffic.

RISKS RELATED TO OUR SECURITIES

VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.

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

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

- announcements by us or our competitors of technological innovations;

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

- conditions or trends in the Internet industry;

- changes in the market valuations of other Internet companies;

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

- our entry into strategic partnerships or joint ventures.

AN AGGREGATE OF APPROXIMATELY 23.6 MILLION SHARES WILL BECOME ELIGIBLE FOR
RESALE IN THE PUBLIC MARKET ON JANUARY 30, 2001, AND FUTURE SALES OF THIS STOCK
MAY CAUSE OUR STOCK PRICE TO DECLINE.

Sales of substantial amounts of our common stock in the public market, or
the perception that these sales could occur, could adversely affect the market
price of our common stock and could materially impair our future ability to
raise capital through offerings of our common stock. An aggregate of 37,974,270
shares of common stock was outstanding at November 8, 2000. Of these, the
5,481,700 shares sold in our initial public offering are freely tradable without
restriction or further registration.

In connection with our initial public offering, we and our officers,
directors and substantially all of our existing stockholders and warrant holders
agreed not to sell or transfer any shares of our common stock for 180 days after
completion of the offering without the underwriters' consent. This period will
expire on January 30, 2001. After that period, 23,607,218 shares of common stock
will become available for sale by their holders pursuant to an exemption from
the registration requirements of the Securities Act. While the underwriters of
our initial public offering may release these shares from the restrictions at
any time, this will be done, if at all, only on a case-by-case basis. The
underwriters do not currently have any intention of consenting to a waiver of
these restrictions. We cannot predict what effect, if any, market sales of
shares held by any stockholder or the availability of these shares for future
sale will have on the market price of our common stock.

WE DO NOT INTEND TO PAY DIVIDENDS

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

24
<PAGE> 25

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

Our executive officers and directors, in the aggregate, beneficially own
approximately 50.3% of our outstanding common stock on a fully-diluted basis. As
a result, these stockholders, if acting together, would be able to exert
considerable influence on any matters requiring approval by our stockholders,
including the election of directors, amendments to our charter and by-laws and
the approval of mergers or other business combination transactions. The
ownership position of these stockholders could delay, deter or prevent a change
in control of ScreamingMedia and could adversely affect the price that investors
might be willing to pay in the future for shares of our common stock.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
DEPRESS OUR STOCK PRICE.

Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could have the effect of delaying, deferring, or
preventing a change in control of ScreamingMedia that stockholders may consider
favorable or beneficial. These provisions could discourage proxy contests and
make it more difficult for you and other stockholders to elect directors and
take other corporate actions. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:

- a staggered board of directors, so that it would take three successive
annual meetings to replace all directors;

- prohibition of stockholder action by written consent; and

- advance notice requirements for the submission by stockholders of
nominations for election to the board of directors and for proposing
matters that can be acted upon by stockholders at a meeting.

In addition, we have entered into a stockholder rights agreement that makes it
more difficult for a third party to acquire us without the support of our board
of directors and principal stockholders.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 was previously amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 to fiscal years commencing after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, and for hedging activities be recorded in the balance sheet as either
an asset or liability measured at its fair value. The Company believes the
adoption of SFAS No. 133, as amended by SFAS No. 138 will not have a material
impact on the financial position or results of operations. The Company does not
currently engage or plan to engage in any derivative or hedging activities.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Staff
Accounting Bulletin No. 101 summarizes certain areas of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We believe that our current revenue recognition principles
comply with Staff Accounting Bulletin No. 101.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity. The primary objective of our investment
activities is to preserve principal while at the same time maximizing the income
we receive from our investments without significantly increasing risk.
Accordingly, we do not enter into financial instrument transactions for trading
purposes. Some

25
<PAGE> 26

of our investments may be subject to market risk which means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate.

Exchange Rate Sensitivity. We consider our exposure to foreign currency
exchange rate fluctuations to be minimal as we currently do not have significant
amount of revenue and assets denominated in a foreign currency and have minimal
expenses paid in a foreign currency. Currently, the exposure is primarily
related to revenue and operating expenses in U.K. We anticipate that in the
future, the proportion of our operating expenses paid in foreign currencies will
increase and that the number of foreign currencies in which we earn our revenue
will also increase. Accordingly, we may be subject to exposure from adverse
movements in foreign currency exchange rates in relation to these revenues and
expenses. We do not currently use derivative financial instruments. As of
September 30, 2000 the effect of foreign exchange rate fluctuations was not
material.

26
<PAGE> 27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no pending legal proceedings to which we are a party.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On July 14, 2000, we issued a warrant to 601 West Associates, LLC for the
issue of 79,365 shares of Common Stock at an exercise price of $12.60 per share,
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2). The warrant is exercisable at any time prior to July 14, 2003.

On July 17, 2000, we issued and sold 8,254,227 shares of our Series C
Convertible Redeemable Preferred Stock ("Series C Preferred Stock") at a price
of $5.81 per share to a group of institutional accredited investors, exempt from
the registration requirements of the Securities Act pursuant to Section 4(2).
This private placement resulted in net proceeds to us of $46,180,259. Each share
of Series C Preferred Stock was convertible, at any time, at the option of the
holder, into one share of Common Stock. We received net proceeds of $46,180,259
which reflects the aggregate proceeds of $47,957,059 reduced by all issuance
costs, totalling $1,776,800.

On August 8, 2000, we completed an initial public offering in which we sold
5,481,700 shares of our common stock, par value $0.01 per share. The shares of
common stock sold in the offering were registered under the Securities Act on a
Registration Statement on Form S-1, Registration Number 333-30548, which was
declared effective by the Securities and Exchange Commission on August 2, 2000.
All 5,481,700 shares of common stock (including 481,700 shares that were issued
and sold upon the exercise of the underwriters' overallotment option) were sold
at a price of $12.00 per share, resulting in aggregate proceeds to us of
approximately $65.8 million. After deducting approximately $4.6 million in
underwriting discounts and commissions and $3.2 million in expenses related to
the offering, we received net proceeds of approximately $58.0 million. The
managing underwriters of the offering were Credit Suisse First Boston
Corporation, Deutsche Bank Securities Inc. and Thomas Weisel Partners LLC.

Simultaneously with the consummation of the initial public offering, each
outstanding share of our Series A, Series B and Series C Convertible Preferred
Stock automatically converted into common stock, resulting in an additional
19,602,785 shares of common stock.

From the date of receipt through September 30, 2000, the net proceeds of
the offering have been used to support our domestic sales and marketing
activities, the expansion of our international operations, product development
and for general corporate purposes. We also may use a portion of the net
proceeds to invest in complementary businesses or technologies, although we have
no present commitments or agreements with respect to any material acquisition or
investment. None of the net proceeds from the offering was paid directly or
indirectly to any director, officer, general partner or their associates, or to
any persons owning 10% or more of any class of equity securities. Pending
application of the net proceeds towards one of the above uses, the net proceeds
have been invested in short-term, interest-bearing, investment-grade securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

A special meeting of stockholders was held on July 17, 2000 to vote on (i)
to increase the number of preferred shares that the Company is authorized to
issue from 10 million to 20 million, (ii) to undertake a reverse stock split of
the Company's Common Stock, and (iii) to amend the designations, rights and
preferences of the Company's Series B Convertible Preferred Stock. All
resolutions were passed by more than a majority of the votes and no votes were
cast against.

27
<PAGE> 28

ITEM 5. OTHER INFORMATION

On September 17, 2000 Brian Little, a Director of the Company passed away.
On October 20, 2000 Kevin O'Connor was appointed as a Director of the Company.
Mr. O'Connor presently serves as Chairman of DoubleClick.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>

28
<PAGE> 29

SIGNATURES

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

SCREAMINGMEDIA INC.
(Registrant)

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ ALAN S. ELLMAN President, Chief Operating November 14, 2000
--------------------------------------------------- Officer and Director
Alan S. Ellman

/s/ KEVIN C. CLARK Chief Executive Officer and November 14, 2000
--------------------------------------------------- Director
Kevin C. Clark

/s/ DAVID M. OBSTLER Chief Financial Officer November 14, 2000
---------------------------------------------------
David M. Obstler
</TABLE>