<PAGE>
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---------------------------------
[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended September 30, 1999
Or
[ ] 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 0-13093
I.R.S. Employer Identification Number 36-3131704
HYPERFEED TECHNOLOGIES, INC.
(a Delaware Corporation)
(FORMERLY PC QUOTE, INC.)
300 S. Wacker
Chicago, Illinois 60606
Telephone (312) 913-2800
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months, (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ____
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date: 15,175,031 shares of the Company's
common stock ($.001 par value) and 47,866 shares of preferred stock ($.001 par
value) were outstanding as of October 28, 1999.
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. Financial Information
Item 1. Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the nine month periods
ended September 30, 1999 and 1998 5
Consolidated Statements of Operations for the three month periods
ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition 13
Liquidity and Capital Resources 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 6. Exhibits and Reports on Form 8-K 23
Company's Signature Page 24
</TABLE>
Page 2
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS (Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,061,185 $ 1,139,785
Accounts receivable, less allowance for doubtful
accounts of: 1999: $622,758;1998: $443,037 2,267,021 1,490,139
Prepaid license fees, current 1,680,000 ---
Prepaid expenses and other current assets 1,745,595 114,011
----------- -----------
TOTAL CURRENT ASSETS 7,753,801 2,743,935
----------- -----------
Property and equipment
Satellite receiving equipment 436,759 525,730
Computer equipment 3,958,232 4,260,589
Communication equipment 1,079,032 1,254,010
Furniture and fixtures 261,808 252,050
Leasehold improvements 402,692 402,692
----------- -----------
6,138,523 6,695,071
Less: Accumulated depreciation and amortization 3,794,164 4,613,526
----------- -----------
Net property and equipment 2,344,359 2,081,545
----------- -----------
Prepaid license fees, net of accumulated amortization of $770,000 3,430,000 --
----------- -----------
Software development costs, net of accumulated
amortization of: 1999: $6,239,657; 1998: $4,442,673 4,120,511 5,012,971
----------- -----------
Deposits and other assets 82,207 214,916
----------- -----------
TOTAL ASSETS $ 17,730,878 $ 10,053,367
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
Consolidated Balance Sheets (continued)
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Current Liabilities
Notes payable, current $ 800,000 $ 300,000
Accounts payable 2,491,045 4,138,517
Accrued expenses 2,405,363 218,866
Accrued compensation 360,497 313,838
Accrued satellite termination expense, current 679,245 ---
Accrued income taxes payable --- 3,161
Unearned revenue, current 1,988,409 1,241,933
------------ ------------
TOTAL CURRENT LIABILITIES 8,724,559 6,216,315
------------ ------------
Notes payable, noncurrent 1,774,634 499,634
Unearned revenue, noncurrent 79,773 261,027
Accrued expenses, noncurrent 141,300 161,120
Accrued satellite termination expense, noncurrent 732,000 ---
Minority interests 43,425 ---
------------ ------------
TOTAL NONCURRENT LIABILITIES 2,771,132 921,781
------------ ------------
TOTAL LIABILITIES 11,495,691 7,138,096
------------ ------------
Stockholders' Equity
Preferred Stock, $.001 par value; authorized 5,000,000 shares; issued and
outstanding:
Series A 5% convertible: 19,075 shares at
September 30, 1999 and December 31, 1998 19 19
Series B 5% convertible: 28,791 shares at
September 30, 1999 and December 31, 1998 29 29
Common stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 15,160,123 shares at
September 30,1999 and 14,183,183 shares at December 31, 1998 15,160 14,183
Additional paid-in capital - Series A 5% convertible preferred stock 3,086,013 3,086,013
Additional paid-in capital - Series B 5% convertible preferred stock 4,664,891 4,664,891
Additional paid-in capital - common stock 23,432,738 19,950,981
Additional paid-in capital - convertible subordinated
debenture and warrants 8,630,491 2,750,491
Accumulated deficit (33,594,154) (27,551,336)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,235,187 2,915,271
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,730,878 $ 10,053,367
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 4
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
- ---------------------------------------------------------------------------------------------------
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
HyperFeed Services $ 13,089,419 $ 9,819,798
Internet Services 10,955,571 7,154,217
------------- --------------
TOTAL REVENUE 24,044,990 16,974,015
------------- --------------
DIRECT COST OF SERVICES
HyperFeed Services 9,685,148 7,573,430
Internet Services 9,124,242 4,949,049
------------- --------------
TOTAL DIRECT COST OF SERVICES 18,809,390 12,522,479
------------- --------------
GROSS MARGIN 5,235,600 4,451,536
------------- --------------
OPERATING EXPENSES
Sales 2,669,883 2,990,670
General and administrative 3,771,312 2,430,265
Product and market development 2,496,573 1,700,278
Depreciation and amortization 855,446 907,325
Satellite termination expense 1,411,245 ---
------------- --------------
TOTAL OPERATING EXPENSES 11,204,459 8,028,538
------------- --------------
LOSS FROM OPERATIONS (5,968,859) (3,577,002)
------------- --------------
OTHER INCOME (EXPENSE)
Interest income 36,967 14,904
Interest expense (67,501) (1,596,187)
Loss on sale of minority interest in PCQuote.com, Inc. (88,386) ---
------------- --------------
NET OTHER EXPENSE (118,920) (1,581,283)
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (6,087,779) (5,158,285)
INCOME TAXES --- ---
------------- --------------
LOSS BEFORE MINORITY INTEREST (6,087,779) (5,158,285)
Minority interest in loss 44,961 ---
------------- --------------
NET LOSS ($ 6,042,818) ($ 5,185,285)
------------- --------------
------------- --------------
Basic net loss per share ($0.41) ($0.40)
Diluted net loss per share ($0.41) ($0.40)
Weighted-average common shares outstanding 14,735,037 12,841,886
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
Page 5
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
- -----------------------------------------------------------------------------------------
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
HyperFeed Services $ 4,560,911 $ 3,459,645
Internet Services 4,011,770 2,778,065
--------------- --------------
TOTAL REVENUE 8,572,681 6,237,710
--------------- --------------
DIRECT COST OF SERVICES
HyperFeed Services 3,093,519 2,539,195
Internet Services 3,335,118 1,812,479
--------------- --------------
TOTAL DIRECT COST OF SERVICES 6,428,637 4,351,674
--------------- --------------
GROSS MARGIN 2,144,044 1,886,036
--------------- --------------
OPERATING EXPENSES
Sales 877,794 954,462
General and administrative 1,381,085 794,920
Product and market development 1,345,896 561,726
Depreciation and amortization 329,811 312,307
Satellite termination expense 1,411,245 ---
--------------- --------------
TOTAL OPERATING EXPENSES 5,345,831 2,623,415
--------------- --------------
LOSS FROM OPERATIONS (3,201,787) (737,379)
--------------- --------------
OTHER INCOME (EXPENSE)
Interest income 14,383 2,948
Interest expense (38,604) (176,624)
--------------- --------------
NET OTHER EXPENSE (24,221) (173,676)
--------------- --------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (3,226,008) (911,055)
INCOME TAXES --- ---
--------------- --------------
LOSS BEFORE MINORITY INTEREST (3,226,008) (911,055)
Minority interest in loss 23,139 ---
--------------- --------------
NET LOSS ($ 3,202,869) ($ 911,055)
--------------- --------------
--------------- --------------
Basic net loss per share ($0.22) ($0.07)
Diluted net loss per share ($0.22) ($0.07)
Weighted-average common shares outstanding 15,022,593 13,284,274
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 6
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For The Nine Months Ended
-------------------------------
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($6,042,818) ($5,158,285)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and equipment 855,446 907,325
Provision for doubtful accounts 509,394 292,873
Amortization of software development costs 1,796,985 1,502,000
Amortization of deferred discount on convertible
subordinated debenture --- 1,096,402
Amortization of value assigned to common stock warrant
issued in lieu of cash license fees 770,000 ---
Common stock issued in lieu of cash compensation 70,204 74,009
Minority interest in loss (44,961) ---
Loss on sale of minority interest in PCQuote.com, Inc. 88,386 ---
Changes in assets and liabilities:
Accounts receivable (1,286,276) (1,453,904)
Prepaid expenses and other current assets (1,631,584) (18,743)
Deposits and other assets 132,709 52,736
Accounts payable (1,647,472) 1,756,772
Accrued expenses 2,213,336 (108,300)
Accrued income taxes payable (3,161) (5,192)
Accrued satellite termination expense 1,411,245 ---
Unearned revenue 565,222 312,692
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,243,345) (749,615)
------------ ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (1,118,260) (676,258)
Software development costs capitalized (904,525) (1,485,082)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,022,785) (2,161,340)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net 3,412,530 4,182,686
Purchase and retirement of common stock --- (2,988,949)
Proceeds from issuance of notes payable, net 3,500,000 ---
Net borrowings under credit facility --- 1,000,000
Principal payments on notes payable (1,725,000) (225,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,187,530 1,968,737
------------ ------------
Net increase (decrease) in cash and cash equivalents 921,400 (942,218)
Cash and cash equivalents:
Beginning of the period 1,139,785 1,113,130
------------ ------------
End of the period $ 2,061,185 $ 170,912
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 7
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION: The accompanying interim consolidated financial
statements include the accounts of HyperFeed Technologies, Inc. (the
"Company", formerly PC Quote, Inc.) and its subsidiary, PCQuote.com, Inc.,
and have been prepared in accordance with generally accepted accounting
principles for interim financial information and in conjunction with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The interim consolidated financial statements include all adjustments,
including the elimination of all significant intercompany transactions in
consolidation, which, in the opinion of management, are necessary in order to
make the financial statements not misleading. The amounts indicated as
"audited" have been extracted from the Company's December 31, 1998 annual
report. For further information, refer to the financial statements and
footnotes included in PC Quote's annual report on Form 10-K for the year
ended December 31, 1998.
SOFTWARE DEVELOPMENT COSTS: The Company's continuing investment in software
development consists primarily of enhancements to its existing Windows-based
private network and Internet services, development of new data analysis
software and programmer tools designed to afford easy access to its data-feed
for data retrieval and analysis purposes, and application of new technology
to increase the data volume and delivery speed of its distribution system and
network.
Costs associated with the planning and design phase of software development,
including coding and testing activities necessary to establish technological
feasibility of computer software products to be licensed or otherwise marketed,
are charged to research and development as incurred. Once technological
feasibility has been determined, costs incurred in the construction phase of
software development including coding, testing, and product quality assurance
are capitalized.
Amortization commences at the time of capitalization or, in the case of a new
service offering, at the time the service becomes available for use.
Unamortized capitalized costs determined to be in excess of the net
realizable value of the product are expensed at the date of such
determination. The accumulated amortization and related software development
costs are removed from the respective accounts in the year following full
amortization.
HyperFeed Technologies, Inc.'s policy is to amortize capitalized software
costs by the greater of (a) the ratio that current gross revenue for a
product bear to the total of current and anticipated future gross revenue for
that product or (b) the straight line method over the remaining estimated
economic life of the product including the period being reported on,
principally three to five years. The Company assesses the recoverability of
its software development costs against estimated future undiscounted cash
flows. Given the highly competitive environment and technological changes, it
is reasonably possible that those estimates of anticipated future gross
revenue, the remaining estimated economic life of the product, or both may be
reduced significantly.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
SOP provides guidance on accounting for the costs of computer software
developed or obtained for internal use and provides guidance for determining
whether computer software is for internal use. The Company adopted the
provisions of SOP 98-1 effective January 1, 1999.
FINANCIAL INSTRUMENTS: The Company has no financial instruments for which the
carrying value materially differs from fair value.
Page 8
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
REVENUE RECOGNITION: The Company principally derives its revenue from service
contracts for the provision of market data only ("HyperFeed license fees"),
service contracts for the provision of market data together with analytical
software ("PC Quote 6.0 license fees"), and the sale of advertising on its
web-site www.pcquote.com. Revenue from service contracts is recognized using
the percentage-of-completion method, ratably over the contract term as the
contracted services are rendered. Revenue from the sale of advertising is
recognized as the advertising is displayed on the web-site. HyperFeed license
fees and PC Quote 6.0 license fees for satellite and landline services are
generally billed one month in advance with 30-day payment terms. License fees
for PC Quote 6.0 on the Internet are generally paid by credit card within
five days prior to the month of service. These and other payments received
prior to services being rendered are classified as unearned revenue on the
balance sheet. Revenue and the related receivable for advance billings are
not reflected in the financial statements. Customers' deposits on service
contracts are classified as either current unearned revenue, if the contract
expires in one year or less, or non-current unearned revenue, if the contract
expiration date is greater than one year.
The Company adopted the provisions of Statement of Position 97-2, "Software
Revenue Recognition," on January 1, 1998. SOP 97-2 specifies the following
four criteria that must be met prior to recognizing revenue: (1) persuasive
evidence of the existence of an arrangement, (2) delivery, (3) fixed or
determinable fee, and (4) probable collection. In addition, revenue earned on
software arrangements involving multiple elements is allocated to each
element based on the relative fair value of the elements. When applicable,
revenue allocated to the Company's software products (including specified
upgrades/enhancements) is recognized upon delivery of the products. Revenue
allocated to post contract customer support is recognized ratably over the
term of the support and revenue allocated to service elements (such as
training and installation) is recognized as the services are performed.
(2) RECLASSIFICATIONS
The statement of operations has been modified to enhance information to the
stockholder. The 1998 statements of operations and cash flows have been
reclassified to conform to the 1999 presentation.
(3) INCOME TAXES
At December 31, 1998, the Company had federal income tax net operating loss
carryforwards of approximately $26,005,000 for federal income tax purposes and
approximately $24,843,000 for the alternative minimum tax. Approximately
$1,058,000 of these net operating losses relate to the exercise of incentive
employee stock options and will be credited directly to stockholders' equity
when realized. The Company also had research and development credits of $106,000
which will expire in years 2010 to 2011 if not previously utilized. The future
utilization of these net operating losses and research and development credits
will be limited due to changes in Company ownership. The net operating loss
carryforwards will expire, if not previously utilized, as follows: 1999:
$546,000; 2000: $1,370,000; 2001: $1,539,000; 2002: $560,000; 2003: $79,000;
2004: $576,000; 2005: $1,557,000 and thereafter $19,778,000.
Page 9
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) TRANSACTIONS WITH AFFILIATES
On January 23, 1998, the Company completed a rights offering that entitled
stockholders of record as of November 21, 1997 to purchase one additional
share of common stock for each right at a price of $1.00 per share. The
Company received approximately $3.0 million in gross proceeds from the sale
of shares underlying exercised rights. Pursuant to the Stock and Warrant
Purchase Agreement dated October 15, 1997 (the "Purchase Agreement"), between
PC Quote and Imprimis Investors LLC and Wexford Spectrum Investors LLC
(collectively, the "Wexford Affiliates"), the entire proceeds were used to
fulfill the Company's obligation to repurchase shares from the Wexford
Affiliates.
During the second quarter of 1998, the Wexford Affiliates exercised 143,300
warrants, previously acquired pursuant to the Purchase Agreement, and
purchased 143,300 shares of Common Stock of the Company for $286,600.
In February 1999, the Wexford Affiliates exercised 267,200 warrants,
previously acquired pursuant to the Purchase Agreement, and purchased 267,200
shares of Common Stock for $534,400.
On May 19, 1998, PICO Holdings, Inc. ("PICO") exercised a portion of its
warrant, acquired in connection with a May 1997 financing transaction with
the Company, and purchased 320,000 shares of Common Stock of the Company for
$500,000.
On July 31, 1998, the Company and PICO increased the amount of the secured
loan from PICO to the Company from $2.25 million to $3.25 million.
(5) FINANCING AND EQUITY TRANSACTIONS
On April 19, 1999, a third-party investor exercised its warrant, acquired in
connection with a December 1998 private placement, and acquired 80,000 shares of
the Company's common stock in exchange for $150,000.
On April 22, 1999, the Company entered into Stock Purchase Agreements with four
third-party investors. On April 23, 1999, the investors purchased 190,476 shares
of common stock in exchange for $1,999,998. The investors acquired the common
stock for investment purposes.
On June 11, 1999, a third-party investor exercised its warrant, acquired in
connection with a December 1998 private placement, and acquired 120,000 shares
of the Company's common stock in exchange for $225,000.
On August 31, 1999, the Company borrowed $1.5 million, on an unsecured basis,
and subsequently repaid the loan on September 30, 1999. The loan had an interest
rate of 3% over the prime rate as quoted in the Wall Street Journal.
On September 15, 1999, a third-party investor exercised its warrant, acquired in
connection with a December 1998 private placement, and acquired 120,000 shares
of the Company's common stock in exchange for $225,000.
Page 10
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 16, 1999, the stockholders of the Company approved the 1999 Combined
Incentive and Non-statutory Stock Option Plan, previously approved by the
Company's Board of Directors in March 1999. There are 4,000,000 shares
reserved for issuance under this plan. The plan terminates in March 2009,
unless terminated sooner by the Company's Board of Directors. The plan
authorizes the award of options and restricted stock purchase rights. The
plan will be administered by the Company's Board of Directors or a committee
appointed by the Company's Board of Directors. The administrator has the
authority to interpret the plan, grant awards and make all other
determinations necessary to administer the plan. Stock options are
exercisable for a period not to exceed ten years from the date of the grant
and, to the extent determined at the time of grant, may be paid for in cash
or by a reduction in the number of shares issuable upon exercise of the
option.
In December 1998, the Company segregated its Internet related services into a
separate business unit within the Company. The Company is transferring its
Internet-related services to PCQuote.com, Inc., which was incorporated in
March 1999 as a wholly-owned subsidiary.
On April 12, 1999, PCQuote.com, Inc. entered into a 3 1/2 year agreement with
CNNfn. Under the limited exclusive licensing agreement, CNNfn granted
PCQuote.com a license to display on PCQuote.com's web sites certain headlines
from CNNfn original stories published on the CNNfn Web site at cnnfn.com. In
connection with the agreement, PCQuote.com issued to CNNfn a warrant to
acquire 515,790 shares (after giving effect to the 9,800-for-one stock split
approved by PCQuote.com's Board of Directors) of common stock, representing a
five percent interest in the common stock of PCQuote.com outstanding prior to
its planned initial public offering. On June 9, 1999, PCQuote.com filed a
registration statement with the Securities and Exchange Commission relating
to a planned initial public offering. The Company estimated that the warrant
had a fair value of $5.88 million. The fair value was recorded as additional
paid in capital and current and non-current prepaid license fees, which will
be amortized over the term of the agreement. The warrant vests 25% upon
execution of the agreement with an additional 25% vested on each of the three
succeeding anniversary dates after execution, and has an aggregate exercise
price of $.52.
On April 29, 1999, CNNFN exercised the vested portion of its warrant and
acquired 128,948 shares of common stock. The minority interest owned by CNNFN
as of and for the nine months ended September 30, 1999 has been included in the
accompanying consolidated financial statements.
PCQuote.com adopted its 1999 Combined Incentive and Non-statutory Stock
Option Plan in May 1999. There are 1,538,600 shares of common stock reserved
for issuance under this plan. The plan terminates in September 2009, unless
terminated sooner by PCQuote.com's Board of Directors. The plan authorizes
the award of options and restricted stock purchase rights. The plan will be
administered by PCQuote.com's Board of Directors or a committee appointed by
PCQuote.com's Board of Directors. The administrator has the authority to
interpret the plan, grant awards and make all other determinations necessary
to administer the plan. Stock options are exercisable for a period not to
exceed ten years from the date of the grant and, to the extent determined at
the time of grant, may be paid for in cash or by a reduction in the number of
shares issuable upon exercise of the option.
On June 8, 1999, the Board of Directors approved a 9,800-for-one stock split
of PCQuote.com's outstanding common stock. On August 30, 1999, PCQuote.com
amended its articles of incorporation to increase its authorized common stock
to 74,000,000 shares and authorized 1,000,000 shares of $.01 par value
preferred stock for future issuance.
Page 11
<PAGE>
HYPERFEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 7, 1999, PCQuote.com borrowed $2.0 million from Motorola, Inc.
evidenced by a promissory note. The note bears interest at the prime rate
from time to time as announced in the Wall Street Journal. Payments are due
on a quarterly basis commencing June 30, 2000 through March 31, 2002, subject
to early repayment upon the closing of PCQuote.com's planned offering. The
promissory note provides that PCQuote.com is required to pay Motorola a
prepayment fee of $140,000 if it prepays the note on or before June 30, 2000,
including as a result of the closing of its planned offering.
(6) COMMITMENTS AND CONTINGENCIES
In connection with the formation and transfer of its Internet business to its
subsidiary, PCQuote.com, on May 28, 1999, the Company and Townsend Analytics,
Ltd. ("Townsend") entered into an agreement to terminate their Software
Distributor Agreement dated December 4, 1995. Pursuant to the terms of the
termination agreement, the Company was obligated to pay Townsend $1.0 million
within ninety days after execution of the agreement. The Company paid the
$1.0 million to Townsend in the third quarter of 1999. The Company and
PCQuote.com subsequently entered into separate new license agreements with
Townsend Analytics for the right to use the LAN and Internet versions,
respectively, of the software application which is marketed as PCQuote 6.0
RealTick. The new agreements replaced the prior agreement between Townsend
Analytics and the Company. The initial term of the agreements ends December
4, 2000. Pursuant to the terms of the new agreements, the Company and
PCQuote.com are each required to pay a minimum royalty to Townsend of
$220,000 per month and a cumulative minimum royalty of $5,000,000 each over
the initial term of the agreements. Under the terms of its new agreement with
Townsend, the Company guarantees the obligation of its subsidiary,
PCQuote.com, and receives a credit towards its minimum commitment obligations
to the extent that PCQuote.com's actual royalty payments exceed its minimum
commitments.
The Company is a party to various legal proceedings incidental to its
business operations, none of which is expected to have a material effect on
the financial condition or results of operations of the Company.
(7) Subsequent Events
On October 18, 1999, PCQuote.com announced that it has postponed its initial
public offering of common stock due to market conditions. PCQuote.com has
incurred approximately $1.6 million of expenses related to the planned
offering, which it has included within prepaid expenses and other current
assets at September 30, 1999 until such time as they can properly be netted
against the proceeds from the offering. If the offering does not occur within
90 days of the postponement, these expenses will be charged against current
results of operations.
The Company and Spacecom Systems, Inc. ("Spacecom") entered into a settlement
agreement as of November 1, 1999 related to the lease of satellite
transmission space by the Company from Spacecom. The lease was for 112
kilobits ("kb") of transmission capacity for payment of approximately $56,000
per month until, under certain circumstances, either August 1, 2002 or
January 1, 2006. The Company and Spacecom agreed to terminate the lease, and
any and all claims or obligations thereunder, in exchange for the Company's
agreement to pay Spacecom an aggregate of $1,411,245 as follows: $179,245 on
November 1, 1999, and ten equal monthly installments of $50,000 each from
December 1, 1999 through September 1, 2000, and twelve equal monthly
installments of $36,000 each from October 1, 2000 through September 1, 2001,
and twelve equal monthly installments of $25,000 each from October 1, 2001
and ending on September 1, 2002. The Company ceased utilizing the Spacecom
satellite transmission services in the third quarter of 1999, and accordingly
recorded the entire settlement amount as a charge against operations and the
related payment liability as current and non-current accrued satellite
termination expense.
Page 12
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition
INTRODUCTION - SAFE HARBOR DISCLOSURE
The following discussion and analysis contains historical information. It
also contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
particularly in reference to statements regarding our expectations, plans and
objectives. You can generally identify forward-looking statements by the use
of the words "may," "will," "expect," "intend," "estimate," "anticipate,"
"believe," or "continue," or similar language. Forward-looking statements
involve substantial risks and uncertainties. You should give careful
consideration to cautionary statements made in this discussion and analysis.
We base our statements on our current expectations. Forward-looking
statements may be impacted by a number of factors, risks and uncertainties
that could cause actual results to differ materially from those described in
the forward-looking statements. Our filings with the Securities and Exchange
Commission identify factors that could cause material differences. Among
these factors are our ability to:
(i) fund our current and future business strategies as a going-concern
either through continuing operations or external financing;
(ii) attract and retain key employees;
(iii) compete successfully against competitive products and services;
(iv) maintain relationships with key suppliers and providers of market
data; and
(v) respond to the effect of economic and business conditions generally.
RECENT BUSINESS DEVELOPMENTS
HYPERFEED'S PCQUOTE.COM SUBSIDIARY POSTPONES OFFERING
On October 18, 1999, PCQuote.com, Inc. announced that it has postponed its
initial public offering of common stock due to market conditions.
HYPERFEED APPROVED FOR LISTING ON THE NASDAQ NATIONAL MARKET
On September 16, 1999, we publicly announced that we have received approval
for listing on the Nasdaq National Market. We commenced trading of our common
stock on the Nasdaq National Market on September 23, 1999 under the symbol
HYPR. Concurrent with the listing on the Nasdaq National Market, trading in
our common stock on the American Stock Exchange under the symbol PQT was
suspended.
PC QUOTE CHANGES NAME TO HYPERFEED TECHNOLOGIES
On June 16, 1999, at their annual meeting, shareholders of PC Quote, Inc.
considered, voted on, and approved the proposal to change the corporate name
to HyperFeed Technologies, Inc. As previously reported, the reason for the
name change was to further differentiate HyperFeed and its subsidiary,
PCQuote.com, Inc., and eliminate potential confusion in the marketplace.
Page 13
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
HYPERFEED INCORPORATES SUBSIDIARY PCQUOTE.COM, INC.
In December 1998, the Company segregated its Internet related services into a
separate business unit within the Company. HyperFeed is transferring its
Internet-related services to PCQuote.com, Inc., which was incorporated in
March 1999 as a wholly-owned subsidiary. Management believes that formally
separating the two entities will permit the parent and subsidiary to focus on
their relative strengths. In management's opinion, the separation will permit
each entity to better (i) attract and retain key employees by relating
compensation to relevant business performance, (ii) enter into strategic
relationships with business partners, and (iii) permit each entity to pursue
its own financing avenues.
PCQUOTE.COM FILES FOR INITIAL PUBLIC OFFERING
On June 9, 1999, PCQuote.com filed a registration statement with the
Securities and Exchange Commission relating to a planned initial public
offering of 7,750,000 shares of its common stock. The planned common stock
offering consisted of 5,800,000 shares to be issued by PCQuote.com and
1,950,000 shares to be sold by HyperFeed. The initial filing range of the
public offering price for the common stock was between $12.00 and $14.00 per
share.
We and our subsidiary, PCQuote.com, entered into agreements, effective March
31, 1999, governing interim and ongoing relationships, including a
Contribution and Separation Agreement, Maintenance Agreement, DataFeed
License Agreement, Services Agreement, Non-Competition Agreement,
Registration Rights Agreement and Tax Indemnification and Allocation
Agreement. Under the Contribution and Separation Agreement, HyperFeed
transferred assets related to its Internet operations to PCQuote.com and
PCQuote.com assumed the liabilities related to those Internet operations.
Under the Services Agreement, HyperFeed will perform transitional services
for, and provide office space to PCQuote.com for $213,500 per month through
September 1999, $163,500 per month thereafter through December 1999, $138,500
per month thereafter through March 2000 and $113,500 per month thereafter
through June 30, 2000. Under the Maintenance Agreement, PCQuote.com will
receive software features, upgrades and enhancements to PCQuote Orbit and
will pay HyperFeed 3% of gross revenues obtained from use or sublicensing of
PCQuote Orbit. Under the Data Feed Agreement, PCQuote.com will be entitled to
use HyperFeed 2000 for a monthly fee based on the number of users and quotes
accessed.
HYPERFEED 2000 NOW AVAILABLE FOR OMEGA RESEARCH PRODUCTS
On March 22, 1999, we announced the culmination of our previously announced
agreement with Omega Research, Inc. (NASDAQ: OMGA). Omega Research's new
2000i series of software products is now fully compatible with HyperFeed
2000, our recently released premier datafeed. The products are available for
delivery via broadcast and Internet. Our datafeed is now available for some
of the most popular high-end trading software on the market. Omega Research
software users can subscribe to HyperFeed 2000 online at www.pcquote.com.
HYPERFEED 2000
Page 14
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
In March 1999, we released HyperFeed 2000, the next generation in market data
technology. Combining advanced IP Multicast technologies with a new
proprietary compression technique, HyperFeed 2000 boasts the flexibility and
expandability to consistently deliver massive volumes of market data in true
real-time. Our proprietary compression technology actually reduces bandwidth
consumption allowing HyperFeed 2000 recipients to enjoy the benefits of the
full T-1 HyperFeed with over 350,000 equity, option and commodity issues,
including full option chains, at a fraction of the current communications
cost. Our product introduction came at a time when an increasing number of
data vendors were faced with imminent threats to their capacity and bandwidth
capabilities. We are committed to delivering execution-quality, complete,
real-time market data faster, more reliably, and cost-effectively than our
competition.
RESULTS OF OPERATIONS:
FOR THE NINE MONTHS AND QUARTER ENDED SEPTEMBER 30, 1999
Total revenue increased $7.1 million, or 41.7%, to $24.0 million for the nine
months ended September 30, 1999, and $2.3 million, or 37.4%, to $8.6 million
for the quarter ended September 30, 1999 versus the comparable prior year
periods. Our HyperFeed services and Internet services both posted increases
for the first nine months of 1999 over 1998 and for the quarter ended
September 30, 1999 over 1998. For the first nine months of 1999, HyperFeed
service revenue increased $3.3 million, or 33.3%, from $9.8 million in same
period in 1998 to $13.1 million in 1999. For the quarter ended September 30,
1999, HyperFeed service revenue increased $1.1 million, or 31.8%, from $3.5
million in 1998 to $4.6 million in 1999. Revenue growth was experienced
through increases in PC Quote 6.0 subscriptions and datafeed sales. Revenue
from our Internet services increased $3.8 million, or 53.1%, to $11.0 million
for the first nine months of 1999 from $7.2 million for the same period in
1998. For the third quarter in 1999, revenue from Internet services increased
$1.2 million, or 44.4%, from $2.8 million in 1998 to $4.0 million in 1999.
The increase is directly attributable to the growth in the number of
subscribers to our PC Quote 6.0 Internet service offering.
Direct costs of services increased $6.3 million, or 50.2%, to $18.8 million
for the nine months ended September 30, 1999 from $12.5 million for the
comparable 1998 period, and increased $2.1 million, or 47.7%, to $6.4 million
for the quarter ended September 30, 1999 as compared to $4.4 million for the
comparable 1998 period. Principal components of the increase were royalties
and payments to providers of market data, directly attributable to the growth
in subscribers to both of our PC Quote 6.0 services, Internet and HyperFeed,
in addition to a one-time $1.0 million second quarter charge incurred in
connection with the termination of our software distributor agreement with
Townsend Analytics and entering into two separate new agreements between
Townsend and ourselves and our subsidiary, PCQuote.com. Amortization of
software development costs increased for the nine months from $1.5 million in
1998 to $1.8 million in 1999. Also included in direct costs for the quarter
and nine months ended September 30, 1999 is a non-cash charge of $420,000 for
the quarter and $770,000 for the nine months for amortization of prepaid
license fees as a result of the value assigned to the warrant issued to CNNFN
in exchange for the 3 1/2 year license agreement with PCQuote.com.
For the first nine months of 1999, resulting gross margin increased 17.6% to
$5.2 million in 1999 from $4.5 million in 1998. For the quarter ended
September 30, 1999, the resulting gross margin was $2.1 million, an increase
of 13.7% from $1.9 million in the third quarter of 1998. Excluding the
one-time $1.0 million charge and the $770,000 non-cash amortization of
prepaid license fees, the gross margin increased $2.6 million, or 57.4%, to
an adjusted $7.0 million for the nine months ended September 30, 1999 as
compared to the same period in 1998.
Page 15
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
Direct costs associated with HyperFeed services increased from $7.6 million
for the nine months ended September 30, 1998 to $9.7 million for the first
nine months of 1999, a 27.9% increase. For the quarter ended September 30,
1999, direct costs associated with HyperFeed services were $3.1 million, a
21.8% increase from $2.5 million in the same period of 1998. Volume increases
in license and exchange fees, including $500,000 of the $1.0 million second
quarter termination payment, were offset to a degree by cost-savings related
to leased equipment and personnel costs effected in customer service and
support, in addition to distribution systems efficiencies effected in
data-feed operations. Amortization of software development costs increased
9.2% to $983,000 for the first nine months of 1999 from $900,000 for the same
period in 1998. For the quarter ended September 30, 1999, amortization of
software development costs increased 12.1% to $353,000, from $315,000 in the
third quarter of 1998. For the first nine months of 1999, resulting gross
margin increased 51.5% to $3.4 million in 1999 from $2.2 million in 1998. For
the quarter ended September 30, 1999, the resulting gross margin for
HyperFeed services was $1.5 million, an increase of 59.4% from $920,000 in
the third quarter of 1998.
Direct costs associated with Internet services increased to $9.1 million for
the first nine months of 1999 from $4.9 million in the comparable 1998
period, an 84.4% increase. For the quarter ended September 30, 1999, direct
costs associated with Internet services were $3.3 million, an 84.0% increase
from $1.8 million in the same period of 1998. The significant growth we
experienced caused us to incur increases in license and exchange fees and
data acquisition and distribution costs. Also contributing to the nine-month
increase was $500,000 of the $1.0 million second quarter termination charge.
Software amortization increased 35.2% for the first nine months to $814,000
in 1999 from $602,000 in 1998, as a result of the increase in development
resources directed to this portion of our business. Software amortization
increased for the third quarter from $210,000 in 1998 to $273,000 in 1999.
The gross margin on Internet services decreased 17.0% from $2.2 million for
the first nine months of 1998 to $1.8 million for the same period of 1999.
Internet services gross margin decreased from $966,000 in the third quarter
of 1998 to $677,000 for the same period in 1999. Gross margins actually
increased slightly for the quarter to $1.1 million after discounting the
effects of the non-cash amortization of prepaid license fees and for the nine
months increased $900,000, or 40.6%, to $3.1 million when adjusting for both
the license fee amortization and one-time termination charge.
Total operating expense, including a $1.4 million charge related to
terminating a satellite services agreement, increased $3.2 million, or 39.6%,
to $11.2 million for the nine months ended September 30, 1999 from $8.0
million for the comparable 1998 period, and increased $2.7 million to $5.3
million for the quarter ended September 30, 1999 as compared to $2.6 million
for the comparable 1998 period. Excluding the one-time satellite termination
charge, total operating expense increased $1.8 million, or 22.1%, for the
nine-month period and $1.3 million for the quarter as compared to the prior
year periods.
Sales costs decreased 10.7% to $2.7 million for the first nine months of 1999
as compared to $3.0 million for the same 1998 period. For the third quarter
of 1999, sales costs were $878,000, an 8.0% decrease from the prior year
period of $954,000. The decrease was the result of a change in our previous
sales incentive compensation structure, in addition to lower sales support
costs.
General and administrative expenses increased 55.2% to $3.8 million in the
first nine months of 1999 from $2.4 million for the first nine months of
1998. For the quarter ended September 30, 1999, general and administrative
expenses increased 73.7% to $1.4 million from $795,000 in the same period in
1998. The increase was principally due to additional personnel and related
costs required in support of the increase in business, an increase in the
provision for bad debts, reflective of the higher sales level, increases in
professional and additional management personnel and related costs associated
with the staffing of PCQuote.com as a separate entity.
Page 16
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
Product and market development costs increased $796,000, or 46.8%, to $2.5
million for the nine months ended September 30, 1999 from $1.7 million for
the comparable 1998 period, and increased $784,000 to $1.3 million for the
quarter ended September 30, 1999 as compared to the same 1998 period. The
increases were due to an increase in the number of development personnel and
related costs, in addition to a significant increase in advertising and
promotional activities in the third quarter, as compared to the prior year.
Depreciation and amortization decreased 5.7% to $855,000 for the first nine
months of 1999 from $907,000 for the comparable 1998 period, and increased
5.6% to $330,000 in the third quarter of 1999 from $312,000 for the
comparable 1998 period. The decrease for the nine months is a result of a
combination of lower overall equipment purchases in recent years and lower
prices for equipment additions. The increase in the quarter is the result of
communications and equipment purchases for increased growth and new service
offerings.
Interest expense was $68,000 for the first nine months of 1999 or $1.5
million less than the first nine months of 1998. For the third quarter of
1999, interest expense was $39,000 compared to $177,000 in the same period of
1998. The decrease is the result of the conversion of the convertible
subordinated debenture and borrowings on the credit facility into equity in
December 1998.
LIQUIDITY AND CAPITAL RESOURCES:
FOR THE NINE MONTHS AND QUARTER ENDED SEPTEMBER 30, 1999
Net cash and cash equivalents increased $921,000 from year-end 1998 to
$2,061,000 at the end of the third quarter of 1999. Prepaid expenses and
other current assets increased $1.6 million for the nine months ended
September 30, 1999 compared to $19,000 for the same period of 1998. The
principal reason for this increase was expenditures relating to our planned
stock offering of our subsidiary, PCQuote.com, Inc. Expenditures for new
equipment were $1.1 million, an increase of $442,000, or 65.4%, from $676,000
for the same period in 1998. The increase in expenditures was to support the
growth in our business, as well as to improve our communications and ticker
processing infrastructure. Capitalized software costs of $905,000 were
$581,000, or 39.1%, lower for the nine months ended September 30, 1999,
compared to the same period for 1998, principally as a result of lower
development costs associated with capitalized projects. We borrowed and
repaid $1.5 million during the quarter, and also for the nine months repaid
$225,000 of the principal balance on the bank term loan. Additionally, our
subsidiary, PCQuote.com, Inc., borrowed $2.0 million from Motorola, Inc.,
evidenced by a demand note. The note bears interest at the prime rate from
time to time as announced in the Wall Street Journal. Payments are due on a
quarterly basis commencing June 30, 2000 through March 31, 2002, subject to
early repayment upon the closing of PCQuote.com's offering. We received
approximately $3.4 million in net proceeds from (i) the sale of common stock
to four third-party investors in a private placement, (ii) the purchase of
common stock by two third-party investors through exercise of previously
issued warrants, (iii) the sale of shares of common stock to employees
pursuant to the Company's Employee Stock Purchase Plan and (iv) the sale of
shares of common stock to employees who exercised options previously granted
to them under the Company's Employee Incentive Stock Option Plan.
Total revenue for the first nine months of 1999 increased 41.7% to $24.0
million versus $17.0 million for the 1998 period, while direct costs of
services increased 50.2% to $18.8 million versus $12.5 million in 1998. The
resulting gross margin increased 17.6% from $4.5 million for the first nine
months of 1998 to $5.2 million for the first nine months of 1999. The
increase in revenue was due to the growth in
Page 17
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
subscriptions to our PC Quote 6.0 services, both HyperFeed and Internet, as
well as an increase in datafeed sales. This together with operating cost
containment contributed to our gross margin improvement. Although cash flows
have improved, they are still negative and insufficient to fund operations
and future growth. Consequently, we have explored, and continue to explore
multiple alternatives that may be available for the purpose of enhancing
stockholder value. These alternatives include a merger, a spin-off or sale of
part of our business, a strategic relationship or joint venture with another
technology or financial services firm and future equity financing to further
fund our business. In December 1998, we segregated our Internet related
services into a separate internal business unit. We incorporated the business
as a wholly-owned subsidiary, PCQuote.com, Inc., on March 19, 1999 and
transferred our Internet-related services to the subsidiary on August 30,
1999. On June 9, 1999, PCQuote.com filed a registration statement with the
Securities and Exchange Commission relating to a planned initial public
offering of 7,750,000 shares of its common stock. The planned common stock
offering consists of 5,800,000 shares to be issued by PCQuote.com and
1,950,000 shares to be sold by us. The initial filing range of the public
offering price for the common stock was between $12.00 and $14.00 per share.
Due to market conditions, we subsequently reduced the size and price of the
offering, and on October 18, 1999 announced that we were postponing the
offering. We currently plan to proceed with the offering once market
conditions are more favorable. We believe net proceeds from the offering will
be sufficient for working capital purposes of both PCQuote.com and Hyperfeed
Technologies.
There can be no assurances, however, that the offering will occur. If the
offering does not occur, we would recognize a charge against operations of
approximately $1.6 million, and we would pursue other alternatives to raise
capital. We raised a substantial amount of capital in 1998 and 1999 through
the debt conversion, exercise of warrants and other sales of common stock.
These transactions have significantly improved our financial condition. In
order to minimize dilution to existing stockholders, our objective is to
raise the minimal amount of capital for operations, if and when necessary. We
believe we have the ability to raise external capital. However, any capital
raised could be costly to us and/or dilutive to stockholders. There can be no
assurances, however, that we will be successful in concluding a transaction.
YEAR 2000 ISSUES
1. Overview
The Company does not have or use mainframe computers in its internal
operations. Consequently, we do not have the extent of Y2K issues other
companies have that depend on what is commonly known as "legacy" systems. We
use PC's and "server class" computers in our operations. Our end-user
applications also run on the same type of hardware. These systems still may
have Y2K issues. We have implemented a plan to attempt to assess, remediate,
and correct any year 2000 critical issues. A "Year 2000" problem will occur
where date-sensitive software uses two digit year date fields, sorting the
year 2000 ("00") before the year 1999 ("99"). The Year 2000 problem may
result in data corruption and processing errors occurring where software,
technology equipment, or any other equipment or process uses date-dependent
software.
Our plan has been structured to address the following areas:
A. Processing Plant and Communications Network
B. Hyperfeed Retail Applications
C. Operational Infrastructure
Page 18
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
2. State of Readiness
We have approached each of the above areas in four phases: assessment,
remediation, testing, and contingency planning. "Assessment" summarizes the
process of issue identification. "Remediation" refers to the process of
taking corrective action to best mitigate identified Year 2000 risks.
"Testing" is the process of validating a specific Company remediation effort
or confirming a third party capability or certification of Year 2000
compliance. "Contingency planning" means the process by which we identify an
alternate course of action and/or procedure in the event we cannot or fail to
remediate or mitigate a known Year 2000 risk. We may or may not engage in
contingency planning for individual subproject components where successful
Year 2000 remediation has been validated through the testing process or other
methods.
The following is a status report on our state of readiness.
A. Processing Plant and Communications Network
Assessment phase has been completed. A full inventory has been taken of
the processing plant, our data-feed input, consolidation and output
process, and communications areas. We are in the final stages of the
remediation and testing phases. This includes verifying Y2K compliance
of outside vendors and suppliers and testing all mission critical
items. Testing also includes all PC's, routers, modems, phone lines,
Internet service providers (ISP's), and production computers, known as
servers, used internally in the communications room. We are also
checking our outbound satellite, phone companies and ISP's distribution
network, in addition to some ISP's that our customers may use.
The compliant numbers as of October 25, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------------- ---------------- --------------------
Areas Equipment/ Compliant
Systems
--------------------------------- ---------------- --------------------
Processing Plant 301 301
--------------------------------- ---------------- --------------------
Communications Network 35 34
--------------------------------- ---------------- --------------------
</TABLE>
On May 1, 1999, the Company participated in the SIA/FIF Year 2000
Market Data Test which tested our production Processing Plant and
Communications Network with quotes dated in the future to January 3,
2000. This data was transmitted to us from all of the major exchanges.
The Company has passed this Y2K test on this "mission critical"
software and hardware. We have finished the upgrades of all other
hardware and software to match the tested components. We have one
remaining internal communications upgrade in process and expect to be
completed by November 30, 1999.
B. Hyperfeed Retail Applications
Our retail applications include proprietary and 3rd party software
applications, licensed to our customers for use only with our
data-feed. These applications include Internet web-site and
browser-based applications, local area network (LAN) based
applications, and Windows NT client/server applications. One OS/2 based
application will become obsolete in 2000. Customers using this
application will be converted to a compliant application.
Page 19
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
We have participated in the full "end-to-end" Year 2000 scenario test
sponsored by the Financial Information Forum in conjunction with the
Securities Industry Association. This industry-wide test provided
securities, options and futures exchanges and market data providers
with the ability to test their systems under simulated Year 2000
conditions. Time was essentially moved forward to January 3, 2000 for
that test day. During this test we had a large Y2K team in-house
monitoring all of our major products. This testing was performed on
several different operating systems, data servers, and methods of
transmission. We compared all final data and reported our results to
the SIA/FIF, which informed us that we had passed the test. We have
release the Y2K simulated data to our customers so they may do their
own internal testing.
All of our retail applications are Y2K compliant:
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------- ---------------------- ---------------------
Applications Tested Compliant
--------------------------- ---------------------- ---------------------
Hyperfeed Customer 14 14
Apps
--------------------------- ---------------------- ---------------------
3rd Party Customer 5 5
Apps
--------------------------- ---------------------- ---------------------
</TABLE>
C. Operational Infrastructure
We have assessed our main facility and field offices for compliance in
the security systems, HVAC systems, pagers, phone system, utility
providers and other mission critical systems. We have upgraded, at
minimal cost, non-compliant equipment.
Based on our current assessment, we believe we will be able to meet our
Y2K compliance goals.
3. Costs
As part of the ordinary course of our business, we continually develop major
enhancements to our operating systems and applications. For instance, we spent
three years developing the first 100% Windows NT based processing plant that was
put into production in 1998. In addition to many other benefits, it is fully Y2K
compliant. We have not in the past separately tracked the cost of Y2K
remediation, as these efforts were incorporated into our on-going maintenance
and equipment replacement program. We have started to track costs in 1999 and,
as of October 25, 1999, have spent approximately $124,000 on the cost of Year
2000. This includes internal personnel resources, hardware, software and
equipment replacement and upgrades necessary to be Y2K compliant. We will be
upgrading various administrative systems that use commercial third party
software for accounting, billing and customer management. The total remaining
cost of software, replacement equipment, and internal resources for remediation
and testing to become Y2K compliant is not expected to exceed $500,000.
Based upon currently available information, we do not believe that the cost of
Y2K compliance will have a material impact on our financial condition, results
of operations or liquidity.
Page 20
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
4. Risks
Achieving Y2K compliance depends on many factors. Some factors may be beyond our
control, because we use services of others. Should our internal systems or the
internal system of one of our critical vendors fail to achieve Y2K compliance
and fail in the year 2000, our business and results of operations could be
adversely affected. For example:
A piece of communications equipment has an internal clock that is not
Y2K compliant. Although end-to-end testing is done, for some reason, we
or a vendor of ours fail to detect the non-compliance. Y2K comes and
the clock shuts down, causing an inability to transmit over that
channel. Our customers on that channel do not receive our service. We
or our vendor have the cost of finding and fixing the problem. Our
customer could make a claim against us for the lost service. Many of
our customers have back-up systems in place with us which could
mitigate any damage caused by the disruption. In the event that there
are claims for damages, our contracts with our customers limit our
liability in such instances. However, if there were a large number of
customers affected for a prolonged period of time, we could be put in a
position of either granting credits or risk losing the customers and
our reputation could be adversely effected.
We have customers that use our Quote Tools to access our data-feed for
software applications. Quote Tools is a set of programmer tools known
as application programming interfaces or APIs for short. Our Quote
Tools are written and tested to be Y2K compliant. If for some reason
Y2K came and our Quote Tools did not function properly because of the
date change, we would have to spend money and resources to fix the bug.
If the bug could not be fixed, and we had no alternative solution for
our customers using the service, we could lose the customers and
related revenue. Our contracts with our customers generally limit our
liability to total fees paid over the preceding year, which in 1998 was
under $200,000 for Quote Tools' customers.
5. Contingency Plans
We have completed approximately 99% of the testing related to the Processing
Plant/Communications Network, and Retail Applications. All testing, including
internal infrastructure, is scheduled to be completed by November 30, 1999. We
have started contingency planning and, as a first step, have scheduled
additional personnel for the Y2K weekend.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We will implement the provisions of Statement of Financial Accounting Standards
No. 133, ("Statement 133") "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted for financial statements issued for
the fiscal year ending December 31, 2001. Statement 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring us to recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. We believe that adoption of Statement 133 will not have a material impact
on our financial statements.
Page 21
<PAGE>
PART I. ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the disclosures as reported in Item
7A. of our Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
RICHARD F. CHAPPETTO VS. PC QUOTE INCORPORATED (HYPERFEED) As previously
reported, Richard F. Chappetto filed a complaint against us seeking monetary
damages of approximately $680,000. We filed a Motion to Dismiss a major
portion of the complaint which was granted in 1998. The remaining portion of
the complaint was settled for $25,000 in August 1999.
ITEM 2. CHANGES IN SECURITIES
On February 4, 1999, Imprimis Investors LLC and Wexford Spectrum Investors
LLC exercised the remaining portion of their common stock purchase warrants,
previously acquired pursuant to the Stock and Warrant Purchase Agreement
dated October 15, 1997, and purchased 267,200 shares of common stock for
$534,400.
During the first, second and third quarters of 1999, we issued 32,922, 14,004
and 13,956 shares of our common stock, respectively, to employees, who
purchased the shares under our Employee Stock Purchase Plan.
During the first, second and third quarters of 1999, 61,225, 34,132 and
31,599 shares of our common stock, respectively, were purchased by employees
who exercised stock options granted to them under our Employee Incentive
Stock Option Plan.
During the first, second and third quarters of 1999, we issued 4,746, 2,289
and 4,408 shares of our common stock, respectively, to our Chairman and Chief
Executive Officer, in lieu of cash salary payments, under an agreement
approved by our Board Of Directors in which the Chairman would receive the
shares at market price.
On April 19, 1999, a third-party investor exercised its warrant, acquired in
connection with a December 1998 private placement, and acquired 80,000 shares
of our common stock in exchange for $150,000.
On April 22, 1999, we entered into Stock Purchase Agreements with four
third-party investors. On April 23, 1999, the investors purchased 190,476
shares of our common stock in exchange for $1,999,998. The investors acquired
the common stock for investment purposes.
On June 11, 1999, a third-party investor exercised its warrant, acquired in
connection with a December 1998 private placement, and acquired 120,000 shares
of our common stock in exchange for $225,000.
On September 15, 1999, a third-party investor exercised its warrant, acquired in
connection with a December 1998 private placement, and acquired 120,000 shares
of our common stock in exchange for $225,000.
Page 22
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS and REPORTS on FORM 8-K
(a) FINANCIAL STATEMENTS
The financial statements of the Company are filed herewith in Item 1 of this
report.
(b) REPORTS ON FORM 8-K
In the third quarter of the period covered by this report, we filed a Report on
Form 8-K dated September 22, 1999 reporting in Item 5. Other Events that our
subsidiary, PC Quote.com, Inc., had borrowed $2.0 million from Motorola, Inc.
(c) EXHIBITS
27. Financial Data Schedule
Page 23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the Company caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
HYPERFEED TECHNOLOGIES, INC.
Date: November 12, 1999
By: /s/ Jim R. Porter
-----------------
Jim R. Porter
Chairman and Chief Executive Officer
By: /s/ John E. Juska
-----------------
John E. Juska
Chief Financial Officer and Principal Accounting Officer
Page 24
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 0
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