** **

**FORM 10-Q**

** **

**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**ý****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED: September 30,2003**

** **

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIODFROM            TO            **

 

**COMMISSION FILE NUMBER: 0-30309**

 

**PINNACOR INC.**

(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **DELAWARE**                                                                  |   | **13-4042678**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR  ORGANIZATION)              |   | (I.R.S. EMPLOYER IDENTIFICATION  NO.) |
|                                                                          |   |                                  |
| **601 WEST 26TH ST., NEW YORK, NY 10001**                                     |
| (ADDRESS  OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)                        |
|                                                                          |   |                                  |
| REGISTRANT’S  TELEPHONE NUMBER, INCLUDING AREA CODE: **(212)  691-7900** |
|                                                                          |   |                                  |
| (FORMER  NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes ý No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2 of theExchange Act)

Yes o  No ý

As of November 6, 2003 therewere 40,902,178 shares of the Registrant’s common stock outstanding.

 

 

----

 

**PINNACOR INC.**

 

**FORM 10-Q**

 

**QUARTER ENDED SEPTEMBER 30, 2003**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                                    |   |
|----------|------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                                     |   |
| Item  1. | Condensed  Consolidated Financial Statements                                                                                             |   |
|     |                                                                                                                                     |   |
|     | Condensed  Consolidated Balance Sheets (unaudited) – September 30, 2003 and December 31,  2002                                      |   |
|     |                                                                                                                                     |   |
|     | Condensed  Consolidated Statements of Operations – Three and nine months ended September  30, 2003 (unaudited) and 2002 (unaudited) |   |
|     |                                                                                                                                     |   |
|     | Condensed  Consolidated Statements of Cash Flows – Nine months ended September 30, 2003  (unaudited) and 2002 (unaudited)           |   |
|     |                                                                                                                                     |   |
|     | Notes  to Condensed Consolidated Financial Statements                                                                                    |   |
|     |                                                                                                                                     |   |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                              |   |
|     |                                                                                                                                     |   |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                                              |   |
|     |                                                                                                                                     |   |
| Item 4.  | Controls and Procedures                                                                                                                  |   |
|     |                                                                                                                                     |   |
| PART II. | OTHER INFORMATION                                                                                                                        |   |
|     |                                                                                                                                     |   |
| Item  1. | Legal  Proceedings                                                                                                                       |   |
|     |                                                                                                                                     |   |
| Item  2. | Changes  in Securities and Use of Proceeds                                                                                               |   |
|     |                                                                                                                                     |   |
| Item 3.  | Defaults upon  Senior Securities                                                                                                         |   |
|     |                                                                                                                                     |   |
| Item  4. | Submission  of Matters to a Vote of Security Holders                                                                                     |   |
|     |                                                                                                                                     |   |
| Item  5. | Other  Information                                                                                                                       |   |
|     |                                                                                                                                     |   |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                                                                        |   |

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**PINNACOR INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(UNAUDITED)

** **
|                                                                                                                                                                                       |   | **September 30,****2003** |       | **December 31,****2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|--------------------------|--------|
|                                                                                                                                                                                       |   |                      |       |                     |   |
| ASSETS                                                                                                                                                                                     |   |                      |       |                     |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| CURRENT ASSETS:                                                                                                                                                                            |   |                      |       |                     |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Cash and cash equivalents                                                                                                                                                                  |   | $                         | 29,040,526 |                     | $      | 15,098,184 |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Marketable securities                                                                                                                                                                      |   | 18,690,656                |       | 35,611,212               |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Accounts receivable, net of  allowance for doubtful accounts of $570,000 and $620,000 as of September 30,  2003 and December 31, 2002, respectively                                        |   | 4,262,244                 |       | 5,253,667                |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Prepaid expenses                                                                                                                                                                           |   | 1,865,368                 |       | 1,142,691                |   |
| Total current assets                                                                                                                                                                       |   | 53,858,794                |       | 57,105,754               |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| PROPERTY AND EQUIPMENT-Net of  accumulated depreciation and amortization                                                                                                                   |   | 4,530,796                 |       | 5,791,930                |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| GOODWILL                                                                                                                                                                                   |   | 34,887,862                |       | 34,874,692               |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| OTHER INTANGIBLE ASSETS-Net of  accumulated amortization                                                                                                                                   |   | 1,945,833                 |       | 2,302,083                |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| OTHER ASSETS                                                                                                                                                                               |   | 612,585                   |       | 793,866                  |   |
| TOTAL ASSETS                                                                                                                                                                               |   | $                         | 95,835,870 |                     | $      | 100,868,325 |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                 |   |                      |       |                     |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| CURRENT LIABILITIES:                                                                                                                                                                       |   |                      |       |                     |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Accounts payable and accrued  expenses                                                                                                                                                     |   | $                         | 5,445,409  |                     | $      | 4,610,897 |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Accrued restructuring and other  expenses                                                                                                                                                  |   | 550,413                   |       | 765,292                  |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Deferred revenue                                                                                                                                                                           |   | 4,869,331                 |       | 8,333,593                |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Current portion of capital lease  obligations                                                                                                                                              |   | 1,058,875                 |       | 1,576,174                |   |
| Total current liabilities                                                                                                                                                                  |   | 11,924,028                |       | 15,285,956               |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| NONCURRENT LIABILITIES:                                                                                                                                                                    |   |                      |       |                     |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Capital lease obligations, less  current portion                                                                                                                                           |   | 417,938                   |       | 1,181,496                |   |
| Total liabilities                                                                                                                                                                          |   | 12,341,966                |       | 16,467,452               |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                 |   |                      |       |                     |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Common stock, $0.01 par value,  100,000,000 shares authorized and 45,310,095 and 44,848,386 issued and  40,885,316 and 40,539,207 outstanding at September 30, 2003 and December 31,  2002 |   | 453,101                   |       | 448,484                  |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Additional paid-in capital                                                                                                                                                                 |   | 225,591,769               |       | 225,121,104              |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Warrants                                                                                                                                                                                   |   | 1,708,304                 |       | 1,708,304                |   |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Deferred compensation                                                                                                                                                                      |   | (315,799                  | )          | (118,233                 | )      |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Treasury stock, 4,424,779 and  4,309,179 shares at September 30, 2003 and December 31, 2002, respectively,  at cost                                                                        |   | (4,301,299                | )          | (4,146,680               | )      |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Accumulated deficit                                                                                                                                                                        |   | (139,798,581              | )          | (138,962,620             | )      |
|                                                                                                                                                                                       |   |                      |       |                     |   |
| Accumulated other comprehensive  income                                                                                                                                                    |   | 156,409                   |       | 350,514                  |   |
| Total stockholders’ equity                                                                                                                                                            |   | 83,493,904                |       | 84,400,873               |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                           |   | $                         | 95,835,870 |                     | $      | 100,868,325 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**PINNACOR INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(UNAUDITED)

 
|                                                                                                                                                                                                                                                                  |   | **Three months ended********September 30,** |      | **Nine months ended********September 30,** |   |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|--------------------------------------------|--------|------------|
|                                                                                                                                                                                                                                                                  |   | **2003**                                    |      | **2002**                                   |   | **2003**   |   | **2002** | ** ** |   |
| NET REVENUE                                                                                                                                                                                                                                                           |   | $                                           | 8,346,782 |                                       | $      | 8,050,994  |   | $ | 25,128,321 |   | $ | 26,363,796 |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| OPERATING EXPENSES:                                                                                                                                                                                                                                                   |   |                                        |      |                                       |   |       |   |   |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Cost of services  (excluding depreciation of $102,310, $164,354, $307,443 and $640,647 for the  three months ended September 30, 2003 and 2002 and the nine months ended  September 30, 2003 and 2002, respectively, shown below)                                |   | 2,801,918                                   |      | 2,719,283                                  |   | 8,689,643  |   | 8,558,395 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Research and  development (excluding stock-based compensation of $5,619, $(39,026), $5,977  and $(115,608) for the three months ended September 30, 2003 and 2002 and the  nine months ended September 30, 2003 and 2002, respectively, shown  below)            |   | 1,850,813                                   |      | 1,760,370                                  |   | 5,425,367  |   | 5,737,187 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Sales and  marketing (excluding stock-based compensation of $(16,427),  $(66,615),  $(6,337) and $(662,332) for the three months ended September  30, 2003 and 2002 and the nine months ended September 30, 2003 and 2002,  respectively, shown below) |   | 1,476,709                                   |      | 1,972,508                                  |   | 4,657,663  |   | 7,501,287 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| General and  administrative (excluding stock-based compensation of $17,936, $139,083,  $40,684 and $421,866 for the three months ended September 30, 2003 and 2002  and the nine months ended September 30, 2003 and 2002, respectively, shown  below)                |   | 2,542,173                                   |      | 1,511,281                                  |   | 5,541,586  |   | 5,397,298 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Depreciation and amortization                                                                                                                                                                                                                                         |   | 702,756                                     |      | 906,287                                    |   | 2,389,292  |   | 3,234,014 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Stock-based compensation                                                                                                                                                                                                                                              |   | 7,128                                       |      | 33,442                                     |   | 40,324     |   | (356,075 | ) |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Restructuring and asset abandonment  charge                                                                                                                                                                                                                           |   | —                                      |      | (2,182,600                                 | )      | —     |   | 2,462,744 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Total operating expenses                                                                                                                                                                                                                                              |   | 9,381,497                                   |      | 6,720,571                                  |   | 26,743,875 |   | 32,534,850 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| OPERATING INCOME (LOSS)                                                                                                                                                                                                                                               |   | (1,034,715                                  | )         | 1,330,423                                  |   | (1,615,554 | ) | (6,171,054 | ) |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                                                                                                                                                                                               |   |                                        |      |                                       |   |       |   |   |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Interest income                                                                                                                                                                                                                                                       |   | 249,463                                     |      | 399,242                                    |   | 912,425    |   | 1,570,728 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Interest expense                                                                                                                                                                                                                                                      |   | (32,306                                     | )         | (59,485                                    | )      | (132,832   | ) | (242,106 | ) |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Total other income, net                                                                                                                                                                                                                                               |   | 217,157                                     |      | 339,757                                    |   | 779,593    |   | 1,328,622 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| NET INCOME (LOSS)                                                                                                                                                                                                                                                     |   | $                                           | (817,558  | )                                          | $      | 1,670,180  |   | $ | (835,961 | ) | $ | (4,842,432 | ) |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Basic net income (loss) per common  share                                                                                                                                                                                                                             |   | $                                           | (0.02     | )                                          | $      | 0.04       |   | $ | (0.02 | ) | $ | (0.11 | ) |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Diluted net income (loss) per  common share                                                                                                                                                                                                                           |   | $                                           | (0.02     | )                                          | $      | 0.04       |   | $ | (0.02 | ) | $ | (0.11 | ) |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Basic weighted-average number of  shares of common stock outstanding                                                                                                                                                                                                  |   | 40,584,120                                  |      | 42,754,640                                 |   | 40,533,744 |   | 42,528,508 |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Effect of dilutive stock options  and restricted stock                                                                                                                                                                                                                |   | —                                      |      | 71,566                                     |   | —     |   | — |   |   |
|                                                                                                                                                                                                                                                                  |   |                                        |      |                                       |   |       |   |   |   |   |
| Diluted weighted-average number of  shares of common stock outstanding                                                                                                                                                                                                |   | 40,584,120                                  |      | 42,826,206                                 |   | 40,533,744 |   | 42,528,508 |   |   |
|                                                                                                                                                                                                                                                                       |        |                                             |           |                                            |        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

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**PINNACOR INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(UNAUDITED)

 
|                                                                                              |   | **For the nine months  ended September 30,** |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                              |   | **2003**                                     |       | **2002** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                            |   |                                         |       |   |   |
| Net loss                                                                                          |   | $                                            | (835,961   | ) | $ | (4,842,432 | ) |
|                                                                                              |   |                                         |       |   |   |
| Adjustments to reconcile net loss  to net cash and cash equivalents used in operating activities: |   |                                         |       |   |   |
|                                                                                              |   |                                         |       |   |   |
| Depreciation and amortization                                                                     |   | 2,389,292                                    |       | 3,234,014 |   |
|                                                                                              |   |                                         |       |   |   |
| Stock-based compensation                                                                          |   | 40,324                                       |       | (356,075 | ) |
|                                                                                              |   |                                         |       |   |   |
| Provision for bad debts                                                                           |   | (49,762                                      | )          | — |   |
|                                                                                              |   |                                         |       |   |   |
| Non-cash portion of restructuring charge                                                          |   | —                                       |       | 3,425,560 |   |
|                                                                                              |   |                                         |       |   |   |
| Changes in operating assets and  liabilities:                                                     |   |                                         |       |   |   |
|                                                                                              |   |                                         |       |   |   |
| Decrease in accounts receivable                                                                   |   | 1,038,016                                    |       | 2,196,879 |   |
|                                                                                              |   |                                         |       |   |   |
| (Increase) decrease in prepaid  expenses and other assets                                         |   | (541,396                                     | )          | 658,257 |   |
|                                                                                              |   |                                         |       |   |   |
| Increase (decrease) in accounts  payable and accrued expenses                                     |   | 1,173,867                                    |       | (1,087,682 | ) |
|                                                                                              |   |                                         |       |   |   |
| Decrease in deferred revenue                                                                      |   | (3,464,261                                   | )          | (3,747,137 | ) |
|                                                                                              |   |                                         |       |   |   |
| Decrease in accrued restructuring  expenses                                                       |   | (214,879                                     | )          | (3,539,387 | ) |
|                                                                                              |   |                                         |       |   |   |
| Net cash used in operating  activities                                                            |   | (464,760                                     | )          | (4,058,003 | ) |
|                                                                                              |   |                                         |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                            |   |                                         |       |   |   |
|                                                                                              |   |                                         |       |   |   |
| Purchase of property and equipment                                                                |   | (771,451                                     | )          | (493,680 | ) |
|                                                                                              |   |                                         |       |   |   |
| Sale of investments and marketable  securities                                                    |   | 16,719,628                                   |       | 9,814,184 |   |
|                                                                                              |   |                                         |       |   |   |
| Payment for business acquired, net of cash received                                               |   | —                                       |       | (105,650 | ) |
| Payment of severance, transaction  and other exit costs related to businesses acquired            |   | (349,821                                     | )          | (338,586 | ) |
|                                                                                              |   |                                         |       |   |   |
| Net cash provided by investing  activities                                                        |   | 15,598,356                                   |       | 8,876,268 |   |
|                                                                                              |   |                                         |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                            |   |                                         |       |   |   |
|                                                                                              |   |                                         |       |   |   |
| Payment of capital lease  obligations                                                             |   | (1,280,857                                   | )          | (1,890,667 | ) |
| Proceeds from exercise of stock  options and stock issued under employee stock purchase plan      |   | 237,399                                      |       | 548,220 |   |
|                                                                                              |   |                                         |       |   |   |
| Payment for the repurchase of  treasury stock                                                     |   | (154,618                                     | )          | (3,105,851 | ) |
|                                                                                              |   |                                         |       |   |   |
| Net cash used in financing  activities                                                            |   | (1,198,076                                   | )          | (4,448,298 | ) |
| Effect of exchange rate changes on  cash and cash equivalents                                     |   | 6,822                                        |       | 119,911 |   |
|                                                                                              |   |                                         |       |   |   |
| NET INCREASE IN CASH AND CASH  EQUIVALENTS                                                        |   | 13,942,342                                   |       | 489,878 |   |
|                                                                                              |   |                                         |       |   |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD                                                   |   | 15,098,184                                   |       | 15,189,440 |   |
|                                                                                              |   |                                         |       |   |   |
| CASH AND CASH EQUIVALENTS, END OF  PERIOD                                                         |   | $                                            | 29,040,526 |   | $ | 15,679,318 |   |
|                                                                                              |   |                                         |       |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                               |   |                                         |       |   |   |
| Cash paid for interest and income  taxes are as follows:                                          |   |                                         |       |   |   |
|                                                                                              |   |                                         |       |   |   |
| Interest                                                                                          |   | $                                            | 132,832    |   | $ | 242,106 |   |
| Income taxes                                                                                      |   | $                                            | —     |   | $ | — |   |
| SUPPLEMENTAL SCHEDULE OF NONCASH  INVESTING AND FINANCING ACTIVITIES:                             |   |                                         |       |   |   |
| Fixed assets acquired under capital  lease arrangements                                           |   | $                                            | —     |   | 1,060,137 |   |
| Issuance of restricted stock grant                                                                |   | $                                            | 330,900    |   | $ | — |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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**PINNACOR INC.****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003**(UNAUDITED)

1. BASIS OF PRESENTATION

 

The Condensed ConsolidatedFinancial Statements of which these notes are part have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission (the“SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations; however, in the opinion of our management, the CondensedConsolidated Financial Statements include all adjustments, consisting only ofnormal recurring accruals, necessary to present fairly the financialinformation for such periods. These Condensed Consolidated Financial Statementsshould be read in conjunction with our Consolidated Financial Statements andthe notes thereto included in our Annual Report on Form 10-K, for the yearended December 31, 2002.

 

2. IMPACT OF RECENTLY ISSUEDACCOUNTING STANDARDS

 

InNovember 2002, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness to Others” whichelaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued. It also clarifies that a guarantor is required to recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and measurementprovisions of FIN 45 are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002. The disclosure requirements inthis Interpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. The adoption of FIN 45 as ofJanuary 1, 2003 has not had a material effect on our financial position andoperating results.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN46”). FIN 46 requires that companies that control another entity throughinterests other than voting interests should consolidate the controlled entity.FIN 46 applies to variable interest entities created after January 31, 2003,and to variable interest entities in which an enterprise obtains an interest inafter that date. The related disclosure requirements are effective immediately.The adoption of this interpretation has not had a significant impact on ourconsolidated financial position and results of operations.

 

InNovember 2002, the Emerging Issues Task Force (“EITF”) reached a consensuson Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”EITF Issue 00-21 addresses certain aspects of the accounting by a vendorfor arrangements under which the vendor will perform multiple revenuegenerating activities. The EITF will be effective for fiscal years beginningafter June 15, 2003. The Company is currently evaluating the effects of thischange on their consolidated financial position and operating results.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure-an amendment of FASBStatement No. 123”. SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation” to provide alternative methods toaccount for the transition from the intrinsic value method of recognition ofstock-based employee compensation in accordance with APB Opinion No. 25,“Accounting for Stock Issued to Employees” to the fair value recognitionprovisions under SFAS No. 123. SFAS No. 148 provides two additionalmethods of transition and will no longer permit the SFAS No. 123prospective method to be used for fiscal years beginning afterDecember 15, 2003. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the pro-forma effects had the fair valuerecognition provisions of SFAS No. 123 been used for all periodspresented. The Company has adopted the disclosure provisions of SFAS

 

6

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No. 148as of December 31, 2002 (see below). The adoption of SFAS No. 148 didnot have a significant impact on the Company’s financial position and resultsof operations.

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” This Statement amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under FASB Statement No.133, “Accounting for Derivative Instruments and Hedging Activities” and iseffective for contracts entered into or modified after June 30, 2003. Theadoption of this Statement did not have a material effect on our financialposition and operating results.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”. SFAS No. 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity. It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). Many of those instruments werepreviously classified as equity. This Statement will become effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise shall be effective at the beginning of the first interim periodbeginning after June 15, 2003. For financial instruments created before the issuancedate of this Statement and still existing at the beginning of the interimperiod of adoption, transition shall be achieved by reporting the cumulativeeffect of a change in an accounting principle by initially measuring thefinancial instruments at fair value or other measurement attribute required bythis Statement. The adoption of this Statement did not have a material impacton the Company’s consolidated financial position or results of operations.

 

STOCK-BASED COMPENSATION

 

In connection with the grant ofstock options and restricted stock to employees, we recognized (reversed)deferred stock-based compensation expense of approximately $7,000, $33,000,$40,000 and ($356,000) for the three and nine months ended September 30, 2003and 2002, respectively. Stock-based compensation is a result of the issuance ofstock options to employees, directors and affiliated parties with exerciseprices per share determined for financial reporting purposes to be below thefair market value per share of our common stock at the date of the applicablegrant. This difference is recorded as a reduction of stockholders’ equity andamortized as non-cash compensation expense on an accelerated basis over thevesting period of the related options. Stock-based compensation for restricted shares is recognized on astraight-line basis. The reversal for thenine months ended September 30, 2002 relates to previously recognized butunearned stock-based compensation of forfeited, unvested stock options grantedto terminated employees. Grants of restricted stock are included incommon stock outstanding.

 

At September 30, 2003, the Company hastwo stock-based employee compensation plans. The Company accounts for thoseplans under the recognition and measurement principles of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”*,*and related Interpretations. Stock-based employee compensation cost iscalculated when certain options were granted under those plans with exerciseprices below the fair market value to the market value of the underlying commonstock on the date of grant. Stock-based compensation for restricted shares isrecognized on a straight-line basis. Stock- based compensation is deferred and amortized to expense generallyover the vesting period of such option grants.

 

SFASNo. 123, “Accounting for Stock-Based Compensation,” provides for a fairvalue based method of accounting for employee options and options granted tonon-employees and measures compensation expense using an option valuation modelthat takes into account, as of the grant date, the exercise price and expectedlife of the option, the current price of the underlying stock and its expectedvolatility, expected dividends on the underlying stock and its expectedvolatility, expected dividends on the stock, and the risk-free interest ratefor the expected term of the options.

 

7

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Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of SFASNo. 123, “Accounting for Stock-Based Compensation”*,* to stock-based employeecompensation.

 
|                                                                                                                                                                                                                                                                                |   | **For the three months ended September  30,** |       | **For the nine months ended September  30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|------------|----------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                |   | **2003**                                      |       | **2002**                                     |   | **2003** |   | **2002** |   |
| Net income (loss) applicable  to common stockholders as reported                                                                                                                                                                                                                    |   | $                                             | (817,558   | )                                            | $      | 1,670,180 |   | $ | (835,961 | ) | $ | (4,842,432 | ) |
|                                                                                                                                                                                                                                                                                |   |                                          |       |                                         |   |   |   |   |   |
| Add (deduct): Stock-based  employee compensation expenses included in reported net income (loss), less  stock-based compensation expense related to restricted stock of $27,575, $0,  $74,892 and $0 for the three and nine months ended September 30, 2003 and  2002, respectively |   | (20,447                                       | )          | 33,442                                       |   | (34,568 | ) | (356,075 | ) |
|                                                                                                                                                                                                                                                                                |   |                                          |       |                                         |   |   |   |   |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects                                                                                                                                       |   | (586,937                                      | )          | (431,985                                     | )      | (969,113 | ) | (1,379,271 | ) |
|                                                                                                                                                                                                                                                                                |   |                                          |       |                                         |   |   |   |   |   |
| Net income (loss) applicable  to common stockholders, pro forma                                                                                                                                                                                                                     |   | $                                             | (1,406,942 | )                                            | $      | 1,271,637 |   | $ | (1,839,642 | ) | $ | (6,577,778 | ) |
| Earnings per share:                                                                                                                                                                                                                                                                 |   |                                          |       |                                         |   |   |   |   |   |
| Net income (loss) per common  share as reported                                                                                                                                                                                                                                     |   | $                                             | (0.02      | )                                            | $      | 0.04 |   | $ | (0.02 | ) | $ | (0.11 | ) |
| Net income (loss) per common  share, pro-forma                                                                                                                                                                                                                                      |   | $                                             | (0.03      | )                                            | $      | 0.03 |   | $ | (0.05 | ) | $ | (0.15 | ) |

 

The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model using the following weighted-averageassumptions:

 
|                    |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|-------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                    |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
|                    |   |                                 |   |                                |   |   |   |   |   |
| Risk-free interest rate |   | 1.99                                 | %      | 3.82                                | %      | 2.83 | % | 3.82 | % |
| Expected lives          |   | 3                                    |   | 5                                   |   | 3 |   | 5 |   |
| Expected Volatility     |   | 57                                   | %      | 100                                 | %      | 47 | % | 100 | % |
| Expected Dividend Yield |   | 0                                    | %      | 0                                   | %      | 2.87 | % | 0 | % |

 

3. OTHER COMPREHENSIVE INCOME(LOSS)

 

The Company reports othercomprehensive income (loss) in accordance with SFAS No. 130, “ReportingComprehensive Income” which requires the disclosure of comprehensive income(loss).  SFAS No. 130 requires that inaddition to net income (loss), a Company should report other comprehensive income(loss) consisting of gains and losses that bypass the traditional incomestatement and are recorded directly into stockholders’ equity on the balancesheet.  The components of othercomprehensive income (loss) for the Company consist of unrealized gains andlosses relating to the translation of foreign currency and unrealized gains andlosses relating to the Company’s investments in available-for-sale marketablesecurities.  Comprehensive income (loss)was approximately $(900,000), $1.7 million, $(1.0) million and $(4.8) million for thethree months ended September 30, 2003 and 2002 and the nine months endedSeptember 30, 2003 and 2002, respectively.

 

4. ACQUISITIONS

 

OnNovember 20, 2002, (the “Acquisition Date”) the Company’s wholly-ownedsubsidiary, Broad Acquisition Corp. completed the acquisition of the operatingassets of Inlumen, Inc., (“Inlumen”) a Delaware corporation. The Companyhas accounted for the combination with Inlumen as a purchase businesscombination in accordance with SFAS No. 141. Inlumen is a provider ofonline financial applications, investment analysis tools and marketinformation.

 

Theresults of Inlumen’s operations have been included in the Company’sconsolidated statement of operations since the Acquisition Date.

 

The total purchase price wasapproximately $2.6 million that consisted of approximately$2.4 million cash paid, net of cash received of approximately $66,000 and$198,000 in acquisition expenses. Included in the $2.6 million of cashpaid and pursuant to the purchase agreement, approximately $500,000 was placedin escrow for possible future purchase price adjustments. The escrow amountwill be released on the anniversary date of the acquisition, pending anypurchase price adjustments.  The Companyfunded the acquisition through the use of its cash and cash equivalents.

 

8

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The Company is in the processof obtaining an independent valuation of the assets and liabilities it hasacquired as well as identifying the intangible assets it has acquired in orderto finalize its allocation of the purchase price of the transaction. TheCompany will finalize its valuation as soon as possible or within one year ofthe acquisition date. The Company’s preliminary allocation of the purchaseprice is subject to refinement based on the final determination of fair value.The following table summarizes management’s preliminary estimated fair valuesof the assets acquired and liabilities assumed at the Acquisition Date.

 

| Current assets                        |   | $         | 470,541   |   |
|---------------------------------------|--------|-----------|-----------|--------|
| Property and equipment                |   | 414,087   |      |
| Goodwill and other intangible  assets |   | 2,278,116 |      |
| Total assets acquired                 |   | 3,162,744 |      |
| Liabilities assumed                   |   | (537,667  | )         |
| Total purchase price                  |   | $         | 2,625,077 |   |

 

The unaudited pro formainformation below represents the consolidated results of operations as if theacquisition of Inlumen occurred on January 1, 2002. The unaudited proforma information has been included for comparative purposes and is notindicative of the results of operations of the consolidated Company had theacquisition of Inlumen occurred as of January 1, 2002, nor is itnecessarily indicative of future results.

 
|                                                                   |   | **Three Months****Ended September 30,  2002** |   | **Nine Months****Ended September 30,  2002** |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                   |   | **(in thousands  except per share  data)**    |   | **(in thousands  except per share  data)**   |   |
|                                                                   |   |                                          |   |                                         |   |
| Net revenue                                                            |   | $                                             | 9,259  |                                         | $      | 30,281 |   |
|                                                                   |   |                                          |   |                                         |   |
| Net income (loss) applicable to common  stockholders                   |   | $                                             | 535    |                                         | $      | (9,391 | ) |
|                                                                   |   |                                          |   |                                         |   |
| Pro forma basic net income (loss) per  common share                    |   | $                                             | 0.01   |                                         | $      | (0.22 | ) |
| Pro forma diluted  net income (loss) per common share                  |   | $                                             | 0.01   |                                         | $      | (0.22 | ) |
| Basic weighted-average number of shares of  common stock outstanding   |   | 42,755                                        |   | 42,529                                       |   |
| Diluted weighted average number of shares  of common stock outstanding |   | 42,826                                        |   | 42,529                                       |   |

 

5. RESTRUCTURING AND ASSETABANDONMENT

 

During the year endedDecember 31, 2002, the Company recorded a restructuring and assetabandonment charge of $2.4 million. This charge consisted of twocomponents (1) the reversal of accrued lease payments of $2.2 millionupon settlement of a property previously restructured in 2001 and (2) a$4.6 million restructuring and asset abandonment charge related tomanagement’s 2002 restructuring plan.

 

The following table summarizesthe components of the Company’s 2002 restructuring and asset abandonment charge:

 
|                      |   | **Cost**  |      | **Cash  Payments  Made** |   | **Non-cash  Charges  Utilized** |   | **Balance  Remaining at  September 30, 2003** |      |
|---------------------------|--------|-----------|-----------|--------------------------|--------|---------------------------------|--------|-----------------------------------------------|-----------|
|                      |   |      |      |                     |   |                            |   |                                          |      |
| Facility shutdowns        |   | $         | 520,430   |                     | $      | 269,771                         |   | $                                             | 7,796     |   | $ | 242,863 |   |
| Workforce reductions      |   | 699,354   |      | 699,354                  |   | —                          |   | —                                        |      |
| Asset abandonment charges |   | 3,425,560 |      | —                   |   | 3,425,560                       |   | —                                        |      |
|                      |   | $         | 4,645,344 |                     | $      | 969,125                         |   | $                                             | 3,433,356 |   | $ | 242,863 |   |

 

9

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The Company recorded charges(reversals) of approximately $0, $(2.2) million, $0 and $2.4 million for thethree and nine months ended September 30, 2003 and 2002, respectively.

 

In September 2002,management of the Company negotiated an early termination of a lease related toa facility previously restructured in 2001. The negotiated terms included acash payment of approximately $690,000, paid during 2002, and the forfeiture ofa $128,000 security deposit. This resulted in a reversal of previouslyrecognized restructuring expense of approximately $2.2 million.

 

During the quarter endedJune 30, 2002, the Company recorded a $4.6 million restructuring andasset abandonment charge. This charge consisted of $3.4 million of assetabandonment charges, workforce reduction costs of approximately $700,000, andthe shutdown or other rationalization of certain sales facilities and a datacenter of approximately $520,000. The 2002 Plan was materially completed as ofDecember 31, 2002.

 

Rationalization entails theconsolidation, shutdown or movement of facilities to achieve more efficientoperations. Two locations, a sales office in Europe and a data center in theUnited States, were affected by these actions. Facility shutdown chargesconsisted of approximately $520,000 of lease cancellation payments throughJune 2005.

 

The workforce reduction chargeof $700,000 included involuntary employee separation costs for 34 employeesworldwide. The Company reduced headcount in sales and marketing, research anddevelopment and general and administrative areas. The affected employeesreceived severance benefits pursuant to established severance policies or bygovernmentally mandated labor regulations.

 

As of December 31, 2002,all of the planned employee eliminations were completed. Cash severancepayments of approximately $700,000 were made during the fiscal year endedDecember 31, 2002.

 

The $3.4 million assetabandonment charge consists of approximately $2.0 million for theabandonment of software modules and related professional services incurred inthe design of our computing infrastructure and MIS systems as well as $1.4 millionfor the abandonment of leasehold improvements, furniture and fixtures, andcomputer and network equipment in conjunction with our facility and data centerclosures.

 

The following table summarizesthe components of the Company’s 2001 restructuring charge:

 
|                      |   | **Cost**  |       | **Cash**

**Payments  Made** |   | **Non-cash  Charges  Utilized** |   | **Balance  Remaining at September 30, 2003** |      |
|---------------------------|--------|-----------|------------|------------------------------|--------|---------------------------------|--------|----------------------------------------------|-----------|
|                      |   |      |       |                         |   |                            |   |                                         |      |
| Facility shutdowns        |   | $         | 6,028,201  |                         | $      | 3,290,856                       |   | $                                            | 2,429,795 |   | $ | 307,550 |   |
| Workforce reductions      |   | 1,297,019 |       | 1,297,019                    |   | —                          |   | —                                       |      |
| Asset abandonment charges |   | 4,913,982 |       | —                       |   | 4,913,982                       |   | —                                       |      |
|                      |   | $         | 12,239,202 |                         | $      | 4,587,875                       |   | $                                            | 7,343,777 |   | $ | 307,550 |   |

 

Duringfiscal year 2001, we recorded a $12.2 million restructuring charge. Thischarge consisted of $6.0 million for the shutdown or other rationalizationof certain sales facilities, workforce reduction costs of $1.3 million andasset impairment charges of $4.9 million. The 2001 Plan was materiallycompleted at the end of fiscal year 2001.

 

Rationalizationentails the consolidation, shutdown or movement of facilities to achieve moreefficient operations. Six locations, located in both the United States andEurope, were affected by these actions. Facility shutdown charges consisted of$4.8 million of lease cancellation payments and $1.2 million for expenserecognition related to the termination of warrants issued to lessors.

 

Theworkforce reduction charge of $1.3 million included involuntary employeeseparation costs for 74 employees worldwide. The Company reduced headcount insales and marketing, research and development and general and administrativeareas. The affected employees received severance benefits pursuant toestablished severance policies or by governmentally mandated labor regulations.All of the planned employee eliminations were completed as of December 31,2002. Cash severance payments of approximately $975,000 and $322,000 were madeduring the years ended December 31, 2001 and 2002, respectively.

 

The $4.9 million assetabandonment charge consists of $3.4 million for the abandonment ofsoftware modules and related professional services incurred in the design ofour computing infrastructure and MIS systems as well as $1.5 million forthe

 

10

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abandonment of leaseholdimprovements, furniture and fixtures and computer equipment in conjunction withour facility shutdowns.

 

6. MARKETABLE SECURITIES

 

Marketable securitiesinvestments as of September 30, 2003 consist of the following:

 
|                      |   | **COST** |       | **UNREALIZED****HOLDING  GAINS** |   | **FAIR****VALUE** |   |
|---------------------------|--------|----------|------------|----------------------------------|--------|-------------------|--------|
| Corporate Notes and Bonds |   | $        | 18,646,146 |                             | $      | 44,510            |   | $ | 18,690,656 |   |
|                           |        |          |            |                                  |        |                   |        |  |  |  |

 
|                                  |   | **COST**   |       | **FAIR****VALUE** |   |
|---------------------------------------|--------|------------|------------|-------------------|--------|
| Due within one year                   |   | $          | 8,531,689  |              | $      | 8,569,178 |   |
| Due after one year through five years |   | 10,114,457 |       | 10,121,478        |   |
| Total marketable securities           |   | $          | 18,646,146 |              | $      | 18,690,656 |   |

 

Available-for-sale securitiesare carried at fair value, with unrealized gains and losses reported as aseparate component of stockholders’ equity as of September 30, 2003. TheCompany does not hold these securities for speculative or trading purposes.

 

7. GOODWILL AND OTHERINTANGIBLE ASSETS

 

TheCompany operates in two reporting units, Financial Services and BusinessInformation, under one principal business segment, for purposes of evaluatingthe recoverability of goodwill and indefinite lived intangibles.

 

The changesin the carrying amount of goodwill for the nine months ended September 30, 2003is as follows:

 
| Balance as of January 1, 2003                                    |   | $      | 34,874,692 |   |
|------------------------------------------------------------------|--------|--------|------------|--------|
| Additional transaction costs  related to the Inlumen acquisition |   | 13,170 |       |
| Balance as of September 30,  2003                                |   | $      | 34,887,862 |   |

 

Goodwillat September 30, 2003 consisted of the following:

 
| Stockpoint acquisition |   | $         | 32,609,746 |   |
|------------------------|--------|-----------|------------|--------|
| Inlumen acquisition    |   | 2,278,116 |       |
|                   |   | $         | 34,887,862 |   |

 

At September 30, 2003other intangible assets identified from the acquisition of Stockpoint consistedof the Customer List, which is being amortized over four years withamortization expense being recorded in depreciation and amortization. Inaddition, the Trade Name, which has an indefinite life is not being amortized,but instead will be assessed for impairment at least annually. The Company hadno other intangible assets as of September 30, 2003. The Company is in theprocess of obtaining an independent valuation and identifying the intangibleassets it has acquired from the acquisition of the operating assets of Inlumen.The Company will finalize its valuation as soon as possible or within one yearof the acquisition date.

 

The Company’s intangible assetsand accumulated amortization consist of the following as of September 30,2003:

 
|                          |   | **As of  September 30, 2003** |      | **As of September 30, 2002**  |   |
|-------------------------------|--------|-------------------------------|-----------|-------------------------------|--------|
|                          |   | **Gross****Carrying  Value**  |      | **Accumulated  Amortization** |   | **Gross****Carrying  Value** |   | **Accumulated  Amortization** |   |
|                          |   |                          |      |                          |   |   |   |   |   |
| Amortized Intangible Assets   |   |                          |      |                          |   |   |   |   |   |
|                          |   |                          |      |                          |   |   |   |   |   |
| Customer List                 |   | $                             | 1,900,000 |                          | $      | 554,167 |   | $ | 1,900,000 |   | $ | 79,197 |   |
|                          |   |                          |      |                          |   |   |   |   |   |
| Unamortized Intangible Assets |   |                          |      |                          |   |   |   |   |   |
|                          |   |                          |      |                          |   |   |   |   |   |
| Trade Name                    |   | $                             | 600,000   |                          | $      | — |   | $ | 600,000 |   | $ | — |   |

 

11

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Amortizationcharged to expense was approximately $119,000 and $356,000 for the three andnine months ended September 30, 2003. Amortization charged to expense was approximately $79,000 for the threeand nine months ended September 30, 2002.

 

At September 30, 2003,estimated amortization expense for other intangible assets for the next fiveyears is as follows

 
| **Year ending December 31,** |   | **Estimated Amortization  Expense:** |    |
|------------------------------|--------|--------------------------------------|---------|
|                         |   |                                 |    |
| 2003                         |   | $                                    | 475,000 |   |
| 2004                         |   | $                                    | 475,000 |   |
| 2005                         |   | $                                    | 475,000 |   |
| 2006                         |   | $                                    | 277,000 |   |

 

The Company’s annual impairmenttest of goodwill and indefinite lived intangible assets under SFAS No. 142 wasconducted as of April 1, 2003.  Theresult of this impairment test determined that these assets were not impaired.

 

8.  BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) pershare was computed by dividing net income (loss) attributable to commonstockholders by the weighted average number of common shares outstanding duringthe period.  Diluted net income pershare is based on the assumption that options and warrants are included in thecalculation of diluted net income per share, except when their effect would beanti-dilutive.  Dilution is computed byapplying the “treasury stock” method. Under this method, options and warrants are assumed to be exercised atthe beginning of the period (or at the time of issuance, if later), and as iffunds obtained thereby were used to purchase common stock at the average marketprice during the period.  Additionally,diluted net income per share also includes the unvested shares of restrictedstock.

 

The conversion of 4,877,622 and4,164,106 outstanding options and warrants outstanding as of September 30, 2003and 2002 were not considered in the calculation of diluted net loss per shareduring the three and nine months ended September 30, 2003 and the nine monthsended September 30, 2002 as the effect would be anti-dilutive.

 

9.TREASURY STOCK

During the fiscal year 2002,the Board of Directors authorized a stock buy-back program to repurchase up to2.0 million shares of the Company’s common stock. During the nine monthsended September 30, 2003 the Company repurchased 115,600 shares of common stockat a cost of approximately $150,000. No shares were repurchased for the threemonths ended September 30, 2003 and the three and six months ended September30, 2002.

 

10.RESTRICTED STOCK

TheCompany granted a total of 30,000 and 225,000 shares of restricted common stock(“Restricted Stock”) to executives of the Company, pursuant to the 2000 Plan,in June 2003 and January 2003, respectively. The Restricted Stock was issuedunder the terms and conditions set forth in the 2000 Plan. The Company did notreceive proceeds from the issuance of the Restricted Stock. One-third of theRestricted Stock vests on the first anniversary of the grant date, and theremaining shares vest in eight equal quarterly installments thereafter, as longas the Company employs the executive. The value of restricted stock issued was $331,000 for the nine monthsended September 30, 2003.  Theamount of stock-based compensation expense recognized was approximately $28,000and $75,000 for the three and nine months ended September 30, 2003.  There was no restricted stock issued, orexpensed during the three months ended September 30, 2003 and the threeand nine months ended September 30, 2002.

 

11. PENDING DISPOSITION

On July 22, 2003 the Companyentered into a definitive agreement whereby MarketWatch.com will acquirePinnacor Inc.  Under the terms of theagreement, a new company will be formed to combine the businesses of MarketWatch.comand Pinnacor.  Each Pinnacor shareholderwill have the right to elect either $2.42 in cash or 0.2659 shares of the stockof the combined company for each share of Pinnacor stock, subject topro-ration.  Each MarketWatch.comshareholder will receive one share of stock in the combined company for eachshare of MarketWatch.com stock.  Theaggregate consideration paid to Pinnacor shareholders will be $44 million ofcash and 6.5 million shares of the stock of the combined company.  Based on the closing price and the number ofoutstanding shares of MarketWatch.com’s common stock on July 22, 2003, theaggregate purchase price for Pinnacor would be $103.2 million and Pinnacorstockholders would own approximately 27 percent of the combined company’sequity.  In addition, upon the closing,Pinnacor will nominate two representatives to the new Company’s board ofdirectors.  The acquisition is subjectto customary closing conditions, including regulatory approval and the approvalof the MarketWatch.com and Pinnacor stockholders.  The transaction is expected to be completed in the fourth quarterof 2003. See Footnote 12 for pending litigation related to this matter.

 

12. LITIGATION

There are no material pendinglegal proceedings to which we are a party, except that on July 24, 2003, ashareholder class action lawsuit, entitled *Leiferv. Clark, et al*., C.A. No. 20448-NC, was filed against PinnacorInc., Pinnacor’s current directors, a Pinnacor officer and MarketWatch.com inthe Delaware Chancery Court.  Theplaintiffs filed an amended complaint on September 17, 2003, which namedHoldco, Pine Merger Sub and Maple Merger Sub as defendants to the action.  The lawsuit purports to be a class actionfiled on behalf of holders of Pinnacor’s common stock who allegedly are or willbe threatened with injury arising from actions by the defendants in connectionwith the merger.   The lawsuit alleges that Pinnacor’s directorsbreached their fiduciary duties in proceeding with the merger by agreeing to aproposed purchase price that fails to adequately compensate Pinnacorshareholders for the loss of control of the company.  The lawsuit allegesthat MarketWatch knowingly aided and abetted these breaches of fiduciary dutyin some unspecified way.  The lawsuitalso alleges that the registration statement on Form S-4, which includes thejoint

 

12

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proxy statement-prospectus,contains material misrepresentations and omissions which render itdefective.  The lawsuit seeks anunspecified amount of damages and also an injunction against consummation ofthe proposed transaction.  The plaintiffhas moved for expedited discovery and has requested the production of documentsfrom Pinnacor and MarketWatch.  Pinnacorand MarketWatch have begun producing documents responsive to the plaintiff’srequest.

 

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

The following discussion andanalysis of our financial condition and results of operations (MD&A) should be read together with ourCondensed Consolidated Financial Statements and related notes contained hereinand the information contained in our Annual Report on Form 10-K for the yearended December 31, 2002, as filed with the SEC on March 31, 2003. This MD&Acontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended and Section 21E of the Securities ExchangeAct of 1934, as amended.

 

Anystatements that express, or involve discussions as to, expectations, beliefs,plans, objectives, assumptions or future events or performance (often, but notalways, through the use of words or phrases such as “intends,” “plans,” “willresult,” “are expected to,” “will continue,” “is anticipated,” “estimated,”“projection” and “outlook”) are not historical facts and may be forward-lookingand, accordingly, such statements involve estimates, assumptions, anduncertainties which could cause actual results to differ materially from thoseexpressed in the forward-looking statements.

 

TheCompany cautions that actual results or outcomes could differ materially fromthose expressed in any forward-looking statements made by or on behalf of theCompany. Any forward-looking statement speaks only as of the date on which suchstatement is made, and the Company undertakes no obligation to update anyforward-looking statement or statements to reflect events or circumstancesafter the date on which such statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for management to predict all of such factors. Further, management

 

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cannotassess the impact of each such factor on the business or the extent to whichany factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

**THE COMPANY**

 

Pinnacor Inc.is an outsourced provider of information and analytical applications tofinancial services companies and global corporations.

 

TheCompany delivers information-based applications and tools as well as customizeddata and news packages that help businesses cost-effectively serve theirexternal or internal clients. Pinnacor’s solutions include market data andinvestment analysis tools for financial services firms; critical businessinformation for the enterprise; and personalized portal applications andmessaging services for wireless carriers and ISPs.

 

RECENT DEVELOPMENTS

 

On July 22, 2003 the Company enteredinto a definitive agreement whereby MarketWatch.com will acquire PinnacorInc.  Under the terms of the agreement,a new company will be formed to combine the businesses of MarketWatch.com andPinnacor.  Each Pinnacor shareholderwill have the right to elect either $2.42 in cash or 0.2659 shares of the stockof the combined company for each share of Pinnacor stock, subject topro-ration.  Each MarketWatch.comshareholder will receive one share of stock in the combined company for eachshare of MarketWatch.com stock.  Theaggregate consideration paid to Pinnacor shareholders will be $44 million ofcash and 6.5 million shares of the stock of the combined company.  Based on the closing price and the number ofoutstanding shares of MarketWatch.com’s common stock on July 22, 2003, theaggregate purchase price for Pinnacor would be $103.2 million and Pinnacorstockholders would own approximately 27 percent of the combined company’sequity.  In addition, upon the closing,Pinnacor will nominate two representatives to the new Company’s board ofdirectors.  The acquisition is subjectto customary closing conditions, including regulatory approval and the approvalof the MarketWatch.com and Pinnacor stockholders.  The transaction is expected to be completed in the fourth quarterof 2003.

 

There are no material pending legalproceedings to which we are a party, except that on July 24, 2003, ashareholder class action lawsuit, entitled*Leifer v. Clark, et al*., C.A. No. 20448-NC, was filed againstPinnacor Inc., Pinnacor’s current directors, a Pinnacor officer andMarketWatch.com in the Delaware Chancery Court.  The plaintiffs filed an amended complaint on September 17, 2003,which named Holdco, Pine Merger Sub and Maple Merger Sub as defendants to theaction.  The lawsuit purports to be aclass action filed on behalf of holders of Pinnacor’s common stock whoallegedly are or will be threatened with injury arising from actions by thedefendants in connection with the merger.   The lawsuit alleges thatPinnacor’s directors breached their fiduciary duties in proceeding with themerger by agreeing to a proposed purchase price that fails to adequatelycompensate Pinnacor shareholders for the loss of control of the company. The lawsuit alleges that MarketWatch knowingly aided and abetted these breachesof fiduciary duty in some unspecified way. The lawsuit also alleges that the registration statement on Form S-4,which includes the joint proxy statement-prospectus, contains material misrepresentationsand omissions which render it defective. The lawsuit seeks an unspecified amount of damages and also aninjunction against consummation of the proposed transaction.  The plaintiff has moved for expediteddiscovery and have requested the production of documents from Pinnacor and MarketWatch.  Pinnacor and MarketWatch have begunproducing documents responsive to the plaintiff’s request.

 

**CRITICAL ACCOUNTINGPOLICIES**

 

The SEC has issued disclosureguidance for “critical accounting policies”. The SEC defines “criticalaccounting policies” as those that require application of management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain andmay change in subsequent periods.

 

The following listing is notintended to be a comprehensive list of all of our accounting policies. TheCompany’s significant accounting policies are more fully described in Note 2 ofthe Notes to the Condensed Consolidated Financial Statements included in our AnnualReport on Form 10-K for the year ended December 31, 2002 as filed with the SECon March 31, 2003. In many cases, the accounting treatment of a particulartransaction is specifically dictated by accounting principles generallyaccepted in the United States of America, with no need for management’sjudgment in their application. There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.

 

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We have identified thefollowing items as critical accounting policies to our Company:

 

*Revenue recognition:*  Ourrevenue recognition policy is significant as our revenue is a key component ofour results of operations. The Company principally recognizes revenue pursuantto Staff Accounting Bulletin (SAB) 101, “Revenue Recognition in FinancialStatements” as it relates to revenue derived from our Application ServiceProvider (ASP) model. In accordance with SAB 101, we recognize revenue when asigned contract exists, the fee is fixed and determinable, delivery hasoccurred and collection of the resulting receivable is probable. Generally,revenue is recognized ratably over the life of the applicable contract.

 

*Goodwill and OtherIntangible Assets:*  The Company’s intangibles consist primarilyof goodwill from the acquisitions of Stockpoint, Inc. andInlumen, Inc. accounted for under the purchase method and other intangibleassets identified in the acquisition of Stockpoint. The other intangible assetsacquired from Stockpoint were its Trade Name valued at $600,000 and CustomerList valued at $1,900,000. Under the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets”, the goodwill and indefinite lived Trade Name related to the Company’sStockpoint acquisition have not been periodically amortized during the threeand nine months ended September 30, 2003, but instead are assessed forimpairment at least annually. The Customer List is carried at cost lessaccumulated amortization and the Customer List is being amortized on astraight-line basis over its expected life, which is estimated to be fouryears.

 

TheCompany is in the process of obtaining an independent valuation of theoperating assets and liabilities it has acquired from Inlumen as well asidentifying the intangible assets it has acquired in order to finalize theallocation of the purchase price of the transaction. The Company will finalizeits valuation as soon as possible or within one year of the acquisition date.The Company’s preliminary allocation of the purchase price is subject torefinement based on the final determination of fair value. Goodwill from theCompany’s Inlumen acquisition has not been periodically amortized.

 

*Costs of ComputerSoftware Developed or Obtained for Internal Use:*  Costs ofcomputer software developed or obtained for internal use are capitalized whilein the application development stage and are expensed while in the preliminarystage and post-implementation stage. The Company amortizes these capitalizedcosts over the life of the systems, which is estimated to be two years. As ofSeptember 30, 2003, the Company had capitalized a total of approximately$2,227,000 of internal development and software purchase costs relating toweb-site development and the Company’s proprietary content engine which wereincurred during the application development stage. These costs were fullydepreciated as of September 30, 2003.

 

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*SoftwareCapitalization for Software Sold Externally:*  Prior to2002, the Company had developed internal use software to provide their productsto customers through our ASP model. During 2002, management decided to marketits internal use software as “Actrellis”, a standalone product. The Companysold an insignificant amount of Actrellis software during 2002 and for the ninemonths ended September 30, 2003.

 

*Use of Estimates:*  TheCompany’s preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amount ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theseestimates.

 

**REVENUE**

 

We deriveour revenue from the sale of hosted applications, customized information,processing and delivery of information as well as set-up, professionalservices, and maintenance.

 

*Hosted Applications:*  We selland host end-user applications that enable our customers to present and analyzeinformation. We sell individual applications such as stock quotes or charts andbundle many of our applications into business solutions that include theFinancial Services, Business Information and Access Solutions Product Suites.Our contracts are fixed price and include a variable component if the customerexceeds the minimum page view, per article, real-time stock quote, shortmessaging services (SMS) or downloadable limit. We recognize the fixedcomponent of revenue on a subscription basis, ratably over the contract term.Any variable component of revenue is recognized in the period the service wasrendered.

* *

*CustomizedInformation:*  We provide clients with information, whichis provided as either customized data feeds or presented in our applications.We charge clients based on the type and volume of information and recognizethis revenue on a subscription basis, ratably over the contract term.

 

*Processing andDelivery:*  For clients that have direct relationshipswith information providers and for media clients with direct relationships totheir customers, we provide a technology platform for the delivery andintegration of information. We charge a processing and delivery fee based onthe amount of data delivered. This revenue is recognized on a subscriptionbasis ratably over the contract term.

 

*Set-Up Fees:*  From timeto time, we may charge our customers an explicit one-time set-up fee, or thisset-up fee may be bundled within the recurring hosted applications fee. Thisset-up fee includes charges for the implementation of the client website andbuilding custom filters that enable the customer to receive customizedinformation. Set-up revenue is recognized ratably over the term of the relatedcontract once the product has been implemented.

 

*ProfessionalServices:*  From time to time, we offer moresophisticated professional services, which include customization of products,systems integration services, the build-out of customized portals and platformsto allow our customers and partners to deliver real time alerts, personalizedinformation including short messaging services (SMS) and other criticalinformation to their subscribers and employees and other special projectsincluding editorial services and consulting. Depending on the nature of thecustomization, this revenue is generally recognized as the service is performedor over the life of the related contract.

 

*M**aintenance:*  Revenue for technical product support isrecognized on a subscription basis, ratably over the contract term.

 

We recordbilled amounts due from clients in excess of revenue recognized as deferredrevenue on our balance sheet. Our contracts typically have lengths of one ortwo years. We report our revenue net of allowances and rebates.

 

**COST OF SERVICES**

 

Cost ofservices consists of royalties to information providers as well as costs forbandwidth, storage of our servers in third-party network data centers, andcertain costs associated with the maintenance of our infrastructure. We alsoinclude certain payroll and related expenses pertaining to staff and outsourceddevelopment associated with client implementation, developing customapplications, performing editorial and quality assurance services, andmaintaining our network operations.

 

We haveseveral different arrangements with information providers. The majority of ourcontracts are based on royalty fees that are calculated monthly, based on thevolume of a provider’s information relayed to our customers or on a per clientbasis. In certain cases, the contractual agreement is based on fixed fees orsubject to a minimum charge. Certain fixed fee arrangements include additionalfees at a variable rate once our clients exceed a specified usage volume.

 

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**RESEARCH ANDDEVELOPMENT EXPENSES**

 

Research and development expenses consist primarily of salaries andrelated personnel costs associated with the research, design and development ofsoftware applications and services supporting our business. These includeengineers that are developing and maintaining our software and infrastructureand our product managers.

 

Research and development costs are expensed as incurred untiltechnological feasibility has been established for software to be sold inaccordance with SFAS No. 86. To date, we believe under our currentsoftware engineering processes that the establishment of technologicalfeasibility and general release have substantially coincided. As a result, nosoftware development costs have been capitalized to date for software developedfor external sales. For software developed for internal use, expenses arecapitalized while in the application development stage and expensed while inthe preliminary and post implementation stages in accordance withSOP 98-1.

 

**SALES AND MARKETINGEXPENSES**

 

Sales and marketing expenses include costs of sales and marketing personnel,as well as business development and customer support personnel, relatedoverhead, commissions, advertising and promotion expenses, travel andentertainment expenses and other selling and marketing costs.

 

**GENERAL ANDADMINISTRATIVE EXPENSES**

 

General and administrative expenses consist primarily of personnel andrelated costs for general corporate functions including accounting, finance,human resources, legal and other administrative functions, as well asprovisions for doubtful accounts and bad debt expense.

 

**STOCK-BASEDCOMPENSATION**

 

In connection with the grant of stock options and restricted stock toemployees, we recognized deferred stock-based compensation (income) expense ofapproximately $7,000, $33,000, $40,000 and ($356,000) for the three and ninemonths ended September 30, 2003 and 2002, respectively. Stock-basedcompensation is a result of the issuance of stock options to employees,directors and affiliated parties with exercise prices per share determined forfinancial reporting purposes to be below the fair market value per share of ourcommon stock at the date of the applicable grant. This difference is recordedas a reduction of stockholders’ equity and amortized as non-cash compensationexpense on an accelerated basis over the vesting period of the related options.The income for the nine months ended September 30, 2002 relates topreviously recognized but unearned stock-based compensation of forfeited,unvested stock options granted to terminated employees.

 

In connection with the granting of restricted stock to employees, werecorded deferred stock-based compensation of $331,000, for the nine monthsended September 30, 2003. There was no deferred stock-based compensationrecorded in connection with the granting of stock options during the threemonths ended September 30, 2003 and the three and nine months endedSeptember 30, 2002.

 

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**RESULTS OF OPERATIONS**

 

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

 
|                                                                                                                                                                              |   | **FOR THE THREE  MONTHS ENDED  September 30,** |   | **FOR THE NINE  MONTHS ENDED  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                                                                              |   | **2003**                                       |   | **2002**                                      |   | **2003** |   | **2002** |   |
| Revenue                                                                                                                                                                           |   | 100                                            | %      | 100                                           | %      | 100 | % | 100 | % |
|                                                                                                                                                                              |   |                                           |   |                                          |   |   |   |   |   |
| Operating expenses:                                                                                                                                                               |   |                                           |   |                                          |   |   |   |   |   |
|                                                                                                                                                                              |   |                                           |   |                                          |   |   |   |   |   |
| Cost of services (excluding depreciation  of 1%, 2%, 1% and 2% for the three and nine months ended September 30, 2003  and 2002 respectively, shown below)                        |   | 34                                             | %      | 34                                            | %      | 35 | % | 32 | % |
| Research and development (excluding  stock-based compensation of 0%, 0%, 0%, and 0% for the three and nine months  ended September 30, 2003 and 2002, respectively, shown below)  |   | 22                                             |   | 22                                            |   | 21 |   | 22 |   |
|                                                                                                                                                                              |   |                                           |   |                                          |   |   |   |   |   |
| Sales and marketing (excluding  stock-based compensation of 0%, (1)%, 0%, and (3)% for the three and nine  months ended September 30, 2003 and 2002, respectively, shown below)   |   | 18                                             |   | 24                                            |   | 18 |   | 28 |   |
| General and administrative (excluding  stock-based compensation of 0%, 1%, 0% and 2% for the three and nine months  ended September 30, 2003 and 2002, respectively, shown below) |   | 30                                             |   | 19                                            |   | 22 |   | 20 |   |
| Depreciation and amortization                                                                                                                                                     |   | 8                                              |   | 11                                            |   | 10 |   | 12 |   |
| Stock-based compensation                                                                                                                                                          |   | —                                         |   | —                                        |   | — |   | (1 | ) |
| Restructuring and asset abandonment  charge                                                                                                                                       |   | —                                         |   | (27                                           | )      | — |   | 10 |   |
| Total operating expenses                                                                                                                                                          |   | 112                                            |   | 83                                            |   | 106 |   | 123 |   |
| Operating loss                                                                                                                                                                    |   | (12                                            | )      | 17                                            |   | (6 | ) | (23 | ) |
| Other income (expense), net                                                                                                                                                       |   | 3                                              |   | 4                                             |   | 3 |   | 5 |   |
| Net income (loss)                                                                                                                                                                 |   | (9                                             | )%     | 21                                            | %      | (3 | )% | (18 | )% |

 

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**THREE MONTHS ENDED SEPTEMBER 30, 2003COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002**

 

REVENUE.  Revenue totaled approximately$8.3 million for the three months ended September 30, 2003, an increase ofapproximately $200,000 or 2% from $8.1 million for the three months endedSeptember 30, 2002. This increase was primarily due to an 8% increase in theaverage contract value per customer and the acquisition of Inlumen in November2002 that accounted for approximately $1.0 million of revenue partially offsetby a decrease in the total number of customers for the three months endedSeptember 30, 2003.

 

COSTOF SERVICES.  Cost of services increasedslightly to approximately $2.8 million for the three months ended September 30,2003, an increase of approximately $100,000 or 4% from approximately $2.7million for the three months ended September 30, 2002.  As a percentage of revenue, and includingInlumen from its acquisition date, cost of services remained at approximately34% for the three months ended September 30, 2003 and 2002.  This net increase is due to an increase inpersonnel costs related to client customization allocated from research anddevelopment. This was partially offset by cost savings including renegotiatedcontent fee contracts, monthly fees for housing our servers in third-partynetwork data centers and other telecom costs.

 

RESEARCH ANDDEVELOPMENT.  Research and developmentexpenses increased slightly to $1.9 million for the three months endedSeptember 30, 2003, an increase of approximately $100,000 or 6% from $1.8million for the three months ended September 30, 2002.  This was due to a decrease in certainpersonnel costs related to client customization allocated to cost of services.As a percentage of revenue, and including Inlumen from its acquisition date,research and development expenses remained at approximately 22% during thethree months ended September 30, 2003 and 2002.

 

SALES AND MARKETING. Salesand marketing expenses decreased to approximately $1.5 million for the threemonths ended September 30, 2003, a decrease of approximately $500,000 or 25%,from $2.0 million for the three months ended September 30, 2002.  This was due to a decrease in compensationexpense and travel and entertainment costs associated with the reduction of oursales force and a decrease in marketing programs.   As a percentage of revenue, and including Inlumen from its acquisitiondate, sales and marketing expenses decreased to approximately 18% for the threemonths ended September 30, 2003 from approximately 24% for the three monthsended September 30, 2002. The decrease in sales and marketing expense as apercentage of revenue resulted primarily from the significant reductions insales and marketing expenditures outpacing the increase in revenue.

 

GENERAL ANDADMINISTRATIVE.  General andadministrative expenses increased to $2.5 million for the three months endedSeptember 30, 2003, an increase of approximately $1.0 million or 67%, fromapproximately $1.5 million for the three months ended September 30, 2002. Thisincrease was due to professional fees of approximately $1.1 million in relationto the MarketWatch.com acquisition, announced on July 22, 2003. As a percentageof revenue, and including Inlumen from its acquisition date, general andadministrative expenses increased to approximately 30% for the three monthsended September 30, 2003 from 19% for the three months ended September 30,2002. The increase in general and administrative expense as a percentage ofrevenue resulted primarily from general and administrative expenditures relatedto deal costs outpacing the increase in revenue.

 

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased to approximately$703,000 for the three months ended September 30, 2003, a decrease ofapproximately $200,000 or 22%, from approximately $906,000 for the three monthsended September 30, 2002.  As apercentage of revenue, and including Inlumen from its acquisition date,depreciation and amortization expense decreased to approximately 8% for thethree months ended September 30, 2003 from approximately 11% for the threemonths ended September 30, 2002.  Thedecrease in depreciation and amortization expense as a percentage of revenuewas due the depreciation savings from the abandonment of $3.4 million of assetsin our restructuring plan completed in June 2002, an overall decrease in thecapital assets purchased and certain assets becoming fully depreciated.  This was partially offset by the increase inthe amortization of our customer list intangible from our Stockpointacquisition of approximately $40,000 and approximately $69,000 of depreciationexpense from capital assets acquired from Inlumen in the statement ofoperations for the three months ended September 30, 2003.

 

In connection with theacquisition of Inlumen, we are in the process of obtaining an independentvaluation of the assets and liabilities acquired, as well as identifying theintangible assets acquired in order to finalize the allocation of the purchaseprice of the transaction.  The valuationwill be finalized as soon as possible or within one year of the acquisitiondate.

 

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STOCK-BASED COMPENSATION.  Inconnection with the granting of stock options to employees, the Company hasrecognized deferred stock-based compensation expense of approximately $7,000and $33,000 for the three months ended September 30, 2003 and 2002,respectively.  Included in stock-basedcompensation expense for the three months ended September 30, 2003 and 2002,the Company has reversed previously recognized deferred stock-based compensationexpense of approximately $20,000 and $60,000, respectively.  This reversal relates to previouslyrecognized but unearned stock-based compensation of forfeited, unvested stockoptions granted to terminated employees. In addition, due to the forfeiture ofthese options during the period, the Company reversed future amortizationexpense of approximately $28,000 and $339,000, included in the balance sheet asdeferred compensation, against paid-in capital for the three months endedSeptember 30, 2003 and 2002, respectively. As a percentage of revenue, stock based compensation was 0% for thethree months ended September 30, 2003 and 2002.

 

RESTRUCTURING AND ASSET ABANDONMENT CHARGE.  In September 2002, management negotiated an early termination ofa lease related to a facility previously restructured in 2001. This resulted ina reversal of previously recognized restructuring expense of approximately $2.4million. This was offset by approximately $200,000 of certain othernon-recurring expenses related to our name change.

 

We incurred nosuch restructuring or asset abandonment charges for the three months endedSeptember 30, 2003.

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and cash equivalents andmarketable securities offset by interest expense on capital leases. Otherincome, net, decreased to approximately $217,000 for the three months endedSeptember 30, 2003, from approximately $340,000 for the three months endedSeptember 30, 2002. This decrease was due to a reduction in overall interestrates and the interest income earned on lower cash balances, cash equivalentsand investments in marketable securities.

 

**NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPAREDTO NINE MONTHS ENDED SEPTEMBER 30, 2002**

 

REVENUE.  Total revenuedecreased to $25.1 million for the nine months ended September 30, 2003, adecrease of $1.3 million or 5% from $26.4 million for the nine months endedSeptember 30, 2002.  This decrease wasprimarily due to a decrease in the total number of customers partially offsetby a 15% increase in the average contract value per customer and theacquisition of Inlumen in November 2002 that accounted for approximately $3.1million of revenue for the nine months ended September 30, 2003.

 

COST OF SERVICES.  Cost ofservices increased to approximately $8.7 million for the nine months endedSeptember 30, 2003, an increase of approximately $100,000 or 1%, from $8.6million for the nine months ended September 30, 2002.  As a percentage of revenue, and including Inlumen from its acquisitiondate, cost of services increased to 35% for the nine months ended September 30,2003 from 32% for the nine months ended September 30, 2002.  This increase as a percentage ofrevenue is due to higher cost of services as a percentage of revenues due to anincrease in personnel costs related to client customization.  This was partially offset by cost savingsincluding renegotiated content fee contracts, monthly fees for housing ourservers in third-party network data centers and other telecom costs.

 

RESEARCH AND DEVELOPMENT.  Research and development costs decreased toapproximately $5.4 million for the nine months ended September 30, 2003, adecrease of approximately $300,000 or 5%, from $5.7 million for the nine monthsended September 30, 2002.  This wasprimarily due to a net decrease in personnel costs as a result of fullyrealizing the savings from our restructuring plans and a greater allocation ofsalaries into cost of services related to client customization.  As a percentage of revenue, and includingInlumen from its acquisition date, research and development expenses decreasedto approximately 21% during the nine months ended September 30, 2003 fromapproximately 22% for the nine months ended September 30, 2002.   This decrease in research and developmentexpense as a percentage of revenue resulted from the reduction in research anddevelopment outpacing the decrease in revenue.

 

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SALES AND MARKETING.  Sales and marketing expenses decreased to$4.7 million for the nine months ended September 30, 2003, a decrease ofapproximately $2.8 million or 37%, from $7.5 million for the nine months endedSeptember 30, 2002.  This was due to adecrease in marketing programs and a decrease in compensation, travel andentertainment costs associated with the reduction of our sales force.   As a percentage of revenue, and includingInlumen from the acquisition date, sales and marketing expenses decreased toapproximately 18% for the nine months ended September 30, 2003 fromapproximately 28% for the nine months ended September 30, 2002.  The decrease in sales and marketing expenseas a percentage of revenue resulted primarily from the significant reductionsin sales and marketing expenditures outpacing the decrease in revenue.

 

GENERAL AND ADMINISTRATIVE.  General and administrative expenses increasedto $5.5 million for the nine months ended September 30, 2003, an increase ofapproximately $100,000 or 2%, from $5.4 million for the nine months endedSeptember 30, 2002.  This was due to asignificant decrease in bad debt expense, a decrease in facilities, personnelcosts and professional fees, offset by an increase in certain professional feesincurred in relation to the MarketWatch.com acquisition.  As a percentage of revenue, and includingInlumen from the acquisition date, general and administrative expensesincreased to approximately 22% for the nine months ended September 30, 2003from approximately 20% for the nine months ended September 30, 2002. The netincrease in general and administrative expense as a percentage of revenueresulted primarily from the significant reductions in general andadministrative expenditures offset by deal costs in relation to theMarketWatch.com acquisition outpacing the decrease in revenue.

 

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased to approximately $2.4million for the nine months ended September 30, 2003, a decrease ofapproximately $800,000 or 25%, from $3.2 million for the nine months endedSeptember 30, 2002.  As a percentage ofrevenue, and including Inlumen from its acquisition date, depreciation andamortization expense decreased to approximately 10% for the nine months endedSeptember 30, 2003 from approximately 12% for the nine months ended September30, 2002.  The decrease in depreciationand amortization expense as a percentage of revenue was due to the depreciationsavings from the abandonment of $3.4 million of assets in our restructuringplan completed in June 2002, an overall decrease in the capital assetspurchased and certain assets becoming fully depreciated.  This was partially offset by the increase inthe amortization of our customer list intangible from our Stockpointacquisition of approximately $277,000 and approximately $207,000 ofdepreciation expense from capital assets acquired from Inlumen included in thestatement of operations for the nine months ended September 30, 2003.

 

STOCK-BASED COMPENSATION.  Inconnection with the granting of stock options to employees, the Company hasrecognized deferred stock-based compensation (income) expense of approximately$40,000 and ($356,000) for the nine months ended September 30, 2003 and 2002,respectively.  Included in stock-basedcompensation expense for the nine months ended September 30, 2003 and 2002, theCompany has reversed previously recognized deferred stock-based compensationexpense of approximately $56,000 and $812,000, respectively.  This reversal relates to previouslyrecognized but unearned stock-based compensation of forfeited, unvested stockoptions granted to terminated employees. In addition, due to the forfeiture ofthese options during the period, the Company reversed future amortizationexpense of approximately $93,000 and $1.8 million, included in the balancesheet as deferred compensation, against paid-in capital for the nine monthsended September 30, 2003 and 2002, respectively.  As a percentage of revenue, stock based compensation increased to0% for the nine months ended September 30, 2003 from approximately (1)% for thenine months ended September 30, 2002.

 

RESTRUCTURING AND ASSET ABANDONMENT CHARGE.  The Company recognized approximately $0 and $2.5 million inrestructuring charges for the nine months ended September 30, 2003 and 2002,respectively. In June 2002 our management took certain actions to furtherincrease operational efficiencies and bring costs in line with revenues. Thesemeasures included asset impairment and abandonment charges, the involuntaryterminations of 34 employees, from sales and marketing, research anddevelopment and general and administrative areas, and the closure of our UKsatellite office.  As a consequence, werecorded a $4.6 million charge to operations during the second quarter of 2002for severance-related payments to terminated employees, the accrual of futurelease costs (net of estimated sublease income) and the write-off of fixedassets for office locations that were closed or consolidated and assets thatwere abandoned or impaired.  InSeptember 2002, the Company’s management negotiated an early termination of a leaserelated to a facility previously restructured. This resulted in a reversal ofpreviously recognized restructuring expense of approximately $2.4 million. Thiswas offset by approximately $200,000 of certain other non-recurring expensesrelated to our name change.

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and cash equivalents andmarketable securities offset by interest expense on capital leases. Otherincome, net, decreased to approximately $780,000 for the nine months endedSeptember 30, 2003, from approximately $1.3 million for the nine months endedSeptember 30, 2002. This decrease was due to a reduction in overall interestrates and the interest income earned on lower cash balances, cash equivalentsand investments in marketable securities.

 

**QUARTERLYOPERATING RESULTS**

The following table setsforth our unaudited quarterly operating results (in thousands) for each of ourlast eight quarters. This

 

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information has been derivedfrom our unaudited interim financial statements. In our opinion, this unauditedinformation has been prepared on a basis consistent with our auditedconsolidated financial statements elsewhere contained herein and includes alladjustments, consisting only of normal recurring adjustments, necessary for afair presentation of the information for the quarters presented. Historicalresults for any quarter are not necessarily indicative of the results to beexpected for any future period.

 

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**QUARTERLYOPERATING RESULTS**

**(In thousands exceptper share data)**

 
|                                                                                                                                                                                                                 |   | **December 31,****2001** |   | **March 31,****2002** |   | **June 30,****2002** |   | **September 30,****2002** |   | **December 31,****2002** |   | **March 31,****2003** |   | **June 30,****2003** |   | **September 30,****2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|----------------------------|--------|---------------------------|--------|--------------------------------|--------|-------------------------------|--------|----------------------------|--------|---------------------------|--------|--------------------------------|--------|
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Total revenue                                                                                                                                                                                                        |   | $                             | 9,405  |                       | $      | 9,411                     |   | $                              | 8,902  |                          | $      | 8,051                      |   | $                         | 8,203  |                           | $      | 8,341 |   | $ | 8,440 |   | $ | 8,347 |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Operating expenses:                                                                                                                                                                                                  |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Cost of services (excluding depreciation of $227,  $247, $229, $164, $132,  $102, $103  and $102 in the fourth quarter of 2001 through the third quarter of 2003,  respectively, as shown below)                |   | 2,866                         |   | 2,988                      |   | 2,851                     |   | 2,719                          |   | 2,922                         |   | 2,958                      |   | 2,930                     |   | 2,802                          |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Research and development (excluding stock-based  compensation of $236, $23, $(99), $(39), $187, $3, $(3) and $5 in the fourth  quarter of 2001 through the third quarter of 2003, respectively, as shown  below)     |   | 1,893                         |   | 2,128                      |   | 1,849                     |   | 1,760                          |   | 1,676                         |   | 1,783                      |   | 1,792                     |   | 1,851                          |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Sales and marketing (excludes stock-based  compensation of $(196), $(734), $139, $(67), $(266), $17, $(7) and $(16) in  the fourth quarter of 2001 through the third quarter of 2003, respectively,  as shown below) |   | 3,377                         |   | 3,116                      |   | 2,413                     |   | 1,973                          |   | 1,551                         |   | 1,558                      |   | 1,623                     |   | 1,477                          |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| General and administrative (excludes stock-based  compensation of $(296), $141, $141, $139, $246, $24, $(1) and $18 in the  fourth quarter of 2001 through the third quarter of 2003, respectively, as  shown below) |   | 2,671                         |   | 2,120                      |   | 1,766                     |   | 1,513                          |   | 1,804                         |   | 1,608                      |   | 1,391                     |   | 2,542                          |   |
| Depreciation and amortization                                                                                                                                                                                        |   | 1,353                         |   | 1,236                      |   | 1,091                     |   | 906                            |   | 901                           |   | 878                        |   | 808                       |   | 703                            |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Stock-based compensation                                                                                                                                                                                             |   | (256                          | )      | (570                       | )      | 181                       |   | 33                             |   | 167                           |   | 44                         |   | (11                       | )      | 7                              |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Restructuring and asset abandonment                                                                                                                                                                                  |   | —                        |   | —                     |   | 4,645                     |   | (2,183                         | )      | —                        |   | —                     |   | —                    |   | —                         |   |
| Total operating expenses                                                                                                                                                                                             |   | 11,904                        |   | 11,018                     |   | 14,796                    |   | 6,721                          |   | 9,021                         |   | 8,829                      |   | 8,533                     |   | 9,382                          |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Operating income (loss)                                                                                                                                                                                              |   | (2,499                        | )      | (1,607                     | )      | (5,894                    | )      | 1,330                          |   | (818                          | )      | (488                       | )      | (93                       | )      | (1,035                         | )      |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Other income                                                                                                                                                                                                         |   | 607                           |   | 604                        |   | 385                       |   | 340                            |   | 328                           |   | 327                        |   | 235                       |   | 217                            |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Income (loss) attributable to common stockholders                                                                                                                                                                    |   | $                             | (1,892 | )                          | $      | (1,003                    | )      | $                              | (5,509 | )                             | $      | 1,670                      |   | $                         | (490   | )                              | $      | (161 | ) | $ | 142 |   | $ | (818 | ) |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |   |   |   |   |   |   |   |   |
| Basic net income (loss) per common share                                                                                                                                                                             |   | $                             | (0.04  | )                          | $      | (0.02                     | )      | $                              | (0.13  | )                             | $      | 0.04                       |   | $                         | (0.01  | )                              | $      | 0.00 |   | $ | 0.00 |   | $ | (0.02 | ) |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |   |   |   |   |   |   |   |   |
| Diluted net income (loss) per common share                                                                                                                                                                           |   | $                             | (0.04  | )                          | $      | (0.02                     | )      | $                              | (0.13  | )                             | $      | 0.04                       |   | $                         | (0.01  | )                              | $      | 0.00 |   | $ | 0.00 |   | $ | (0.02 | ) |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |   |   |   |   |   |   |   |   |
| Weighted-average number of shares used in  computation of basic net loss per share                                                                                                                                   |   | 42,256                        |   | 42,377                     |   | 42,454                    |   | 42,755                         |   | 40,483                        |   | 40,762                     |   | 40,470                    |   | 40,584                         |   |
|                                                                                                                                                                                                                 |   |                          |   |                       |   |                      |   |                           |   |                          |   |                       |   |                      |   |                           |   |
| Weighted-average number of shares used in  computation of diluted net loss per share                                                                                                                                 |   | 42,256                        |   | 42,377                     |   | 42,454                    |   | 42,826                         |   | 40,483                        |   | 40,762                     |   | 41,351                    |   | 40,584                         |   |

 

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* Certain reclassificationshave been made to the 2001 financial statements to conform with the 2002 and2003 presentation

 

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**BASIC AND DILUTED NETINCOME (LOSS) PER COMMON SHARE**

 

Basic net income (loss) per share was computed by dividing net income(loss) attributable to common stockholders by the weighted average number ofcommon shares outstanding during the period. Diluted net income per share isbased on the assumption that options and warrants are included in thecalculation of diluted net income per share, except when their effect would beanti-dilutive. Dilution is computed by applying the “treasury stock” method.Under this method, options and warrants are assumed to be exercised at thebeginning of the period (or at the time of issuance, if later) and as if fundsobtained thereby were used to purchase common stock at the average market priceduring the period.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

We have financed our operations through private sales of equity anddebt securities and through our initial public offering. Sales of equitysecurities included $57.9 million of net proceeds from ourAugust 2000 initial public offering of common stock and $46.2 millionof net proceeds received from the July 2000 private placement ofconvertible preferred stock, which converted into common stock upon thecompletion of our initial public offering. As of September 30, 2003, wehad cash and cash equivalents and marketable securities of approximately$47.7 million.

 

We have commitments to make future payments under various leaseagreements for computer and networking equipment and our facilities leases.Future commitments under these leases are as follows:

 
| **Contractual  Cash Obligations** |   | **Total** |      | **Less than  1 year** |   | **1-3  years** |   | **4-5  years** |      | **After  5 years** |   |
|-----------------------------------|--------|-----------|-----------|-----------------------|--------|----------------|--------|----------------|-----------|--------------------|--------|
|                              |   |      |      |                  |   |           |   |           |      |               |   |
| Capital lease obligations         |   | $         | 1,476,813 |                  | $      | 1,058,875      |   | $              | 417,938   |               | $      | — |   | $ | — |   |
| Operating leases                  |   | $         | 4,326,117 |                  | $      | 1,248,362      |   | $              | 1,505,935 |               | $      | 1,257,456 |   | $ | 314,364 |   |

 

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We operate from leased premises in New York and satellite offices inSan Francisco, Iowa, and Israel. Our current aggregate annual rentalobligations under these leases, including our abandoned UK office, areapproximately $1.4 million for the year ended December 31, 2003. For theyear ended December 31, 2002, we negotiated a favorable buyout of one ofour real estate leases for approximately $2.2 million. As a result of thisbuyout, we reduced our expected future minimum lease payment obligation byapproximately $3.3 million. For the nine months ended September 30, 2003and 2002, our capital expenditures were approximately $771,000 and$494,000, respectively. Capital expenditures were primarily for computers,hardware, software and networking equipment.

 

As of September 30, 2003, our principal commitments consisted ofobligations outstanding under a series of capital leases for computer andnetworking equipment and our facilities leases. In prior years, we entered intoother capital leases for the design and implementation of our financialsystems. A leasing company is the beneficiary of a $1.6 million standbyletter of credit with a bank securing our lease arrangement with them. At theend of each capital lease term, we have the option to purchase the equipment,typically at the lesser of fair market value or approximately 10% of grossasset value. We presently intend to exercise the purchase option for themajority of the leases.  Our landlord isthe beneficiary of a $175,000 irrevocable standby letter of credit with afinancial institution securing our New York office lease arrangement with them.

 

For the nine months ended September 30, 2003 and 2002, the netcash used in operating activities was approximately $465,000 and $4.1 million,respectively.  The net cash used inoperating activities for the nine months ended September 30, 2003 resultedprimarily from a net loss of approximately $836,000 an increase in prepaidexpenses and other assets of approximately $541,000, a decrease in non-cashdeferred revenue of approximately $3.5 million and a decrease in accruedrestructuring expenses of approximately $215,000.  This was offset by non-cash charges of approximately $2.4million, a decrease in accounts receivable of approximately $1.0 million and anincrease in accounts payable and accrued expenses of $1.2 million.  The net cash used in operating activitiesfor the nine months ended September 30, 2002 resulted primarily from netlosses of $4.8 million, a decrease in accounts payable and accrued expenses ofapproximately $1.1 million, a non-cash decrease in deferred revenue of $3.7million and a decrease in accrued restructuring expenses of approximately$3.5.  This was offset by non-cashcharges of approximately $6.3 million, a decrease in accounts receivable ofapproximately $2.2 million and a decrease in prepaid expenses and other currentassets of approximately $658,000.

 

For the nine months ended September 30, 2003 and 2002, the netcash provided by investing activities was approximately $15.6 million and$8.9 million, respectively.  The netcash provided by investing activities for the nine months endedSeptember 30, 2003 resulted principally from the proceeds of maturedlong-term marketable securities reinvested into cash equivalents ofapproximately $16.7 million, offset by approximately $350,000 for thepayments of exit costs associated with the acquisitions of Stockpoint andInlumen, and approximately $771,000 for the purchase of property and equipment.The net cash provided by investing activities for the nine months endedSeptember 30, 2002 was principally from the sale of marketable securities reclassifiedinto cash and cash equivalents of $9.8 million, offset by approximately$494,000 for the purchase of property and equipment and approximately $339,000for the payment of severance and exit costs related to the Stockpointacquisition and $106,000 for the payment of the withheld portion of theStockpoint purchase price .

 

For the nine months ended September 30, 2003 and 2002, the netcash used in financing activities was approximately $1.2 million and 4.4million, respectively.  The net cashused in financing activities for the nine months ended September 30, 2003was primarily from repayments of our capital lease obligations of approximately$1.3 million and approximately $155,000 used for the repurchase of treasurystock offset by proceeds of approximately $237,000 from the exercise of stockoptions and stock purchases by employees. Net cash used in financing activitiesfor the nine months ended September 30, 2002 was primarily from repayments ofour capital lease obligations of $1.9 million and $3.1 million used for therepurchase of treasury stock offset by proceeds of $548,000 from the exerciseof stock options.

 

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**RISK FACTORS**

 

An investment in our commonstock involves a high degree of risk. The risks and uncertainties describedbelow are not the only ones we face. Additional risks and uncertainties notpresently known to us may also impair our operations and business. If we do notsuccessfully address any of the risks described below, there could be amaterial adverse effect on our financial condition, operating results andbusiness. We cannot assure you that we will successfully address these risks.

 

You should carefullyconsider the risks described below before deciding to invest in shares of ourcommon stock. The trading price of our common stock could decline due to any ofthese risks, in which case you could lose all or part of your investment. Inassessing these risks, you should also refer to the other information in thisand our other public filings, including our financial statements and therelated notes.

 

**RISKSRELATED TO OUR BUSINESS**

 

**THE RECENT ANNOUNCEMENT THAT MARKETWATCH.COM,INC. WILL ACQUIRE PINNACOR COULD ADVERSELY AFFECT OUR BUSINESS.**

 

Our business and results of operations could be affected by theannounced acquisition of Pinnacor by MarketWatch. On July 23, 2003, weentered into an agreement whereby MarketWatch will acquire Pinnacor. Theannouncement of the acquisition could have an adverse effect on our revenue ifcustomers delay, defer, or cancel purchases pending consummation of the plannedacquisition. While we are attempting to mitigate this risk throughcommunications with our customers, current and prospective customers could bereluctant to purchase our services due to potential uncertainty about thedirection of the combined company’s product offerings and its support andservice of existing products. To the extent that our announcement of theacquisition creates uncertainty among customers such that one large customer,or a significant group of small customers, delays purchase decisions pendingconsummation of the planned acquisition, our results of operations and abilityto operate profitably could be negatively affected. Decreased revenue and afailure to be profitable could have a variety of adverse effects, includingnegative consequences to our relationships, and ongoing obligations to,customers, suppliers, business partners, and others with whom we have businessrelationships.

 

We may suffer additional consequences if the acquisition by Marketwatchwere not to be completed. If such transaction was not completed, we couldsuffer a number of consequences that may adversely affect our business, resultsof operations and stock price, including the following:

 

•      We would not realize the benefits weexpect from becoming a part of a combined company with MarketWatch, includingthe potentially enhanced financial and competitive position;

 

•     Activities relating to the merger and relateduncertainties may divert our management’s attention from our day-to-daybusiness and cause disruptions among our employees and to our relationshipswith customers and business partners, thus detracting from our ability to growrevenue and minimize costs and possibly leading to a loss of revenue and marketposition that we may not be able to regain if the transaction does not occur;

 

•      The market price of our common stock coulddecline following an announcement that the transaction has been abandoned, tothe extent that the current market price reflects a market assumption that thetransaction will be completed;

 

•      We could be required to pay MarketWatch atermination fee and provide reimbursement to MarketWatch for certain costsincurred;

 

•      We would remain liable for our costsrelated to the transaction, such as legal and accounting fees and the financialadvisory fees;

 

•      We may not be able to take advantage ofalternative business opportunities or effectively respond to competitivepressures.

 

In connection with the proposed transaction, we and MarketWatch expectto file a joint proxy statement/prospectus with the SEC. The joint proxystatement/prospectus will be mailed to all holders of our stock and willcontain important information about us, MarketWatch and the proposed merger,risks relating to the transaction and the combined company, and relatedmatters. We urge all of our stockholders to read the preliminary joint proxystatement/prospectus available www.pinnacor.com under “Investor Relations – SECFilings”.

 

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**BECAUSE WE HAVE ALIMITED OPERATING HISTORY, IT WILL BE DIFFICULT FOR YOU TO EVALUATE OURBUSINESS.**

 

It is difficult to value our business and evaluate our prospectsbecause of our limited operating history. We began our current line of businessat the end of 1998 and expanded our line of business with the acquisition ofStockpoint, Inc. in August of 2001 and again with the acquisition of theoperating assets of Inlumen, Inc. in November of 2002. Accordingly, wehave limited financial and operating data for evaluating our business. Inaddition, our business model is unproven, which creates a risk that ourperformance will not meet the expectations of investors.

 

**WE HAVE A HISTORY OFSIGNIFICANT OPERATING LOSSES.**

 

We have incurred operating losses (excluding non-recurring reversals ofprior restructuring charges in the third quarter of 2002) in every quartersince we began our current line of business in 1998. While our operating losseshave narrowed significantly in recent quarters, our ability to achieveprofitability will depend on our ability to generate and sustain higher netsales while maintaining reasonable expense levels. We cannot be certain that ifwe were to achieve profitability, we would be able to sustain or increase thatprofitability.

 

**OUR QUARTERLYFINANCIAL RESULTS MAY BE VOLATILE AND COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.**

 

Our revenues and operating results may vary significantly from quarterto quarter. Because of these fluctuations, our results in any quarter may notbe indicative of future performance and it may be difficult for investors toproperly evaluate our results. It is possible that in some future periods ourrevenues or earnings may fall below the expectations of investors and result inthe market price of our common stock to decline. The factors that may cause ourfinancial results to vary from quarter to quarter include:

 

27

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•      the demand for our services;

 

•      the value, timing and renewal of contractswith customers;

 

•      the amount and timing of operating costsand capital expenditures;

 

•      the performance of our technology;

 

•      actions taken by our competitors,including new product introductions and enhancements; and

 

•      adverse changes in the financial markets.

 

These factors, some of which are beyond our control, make it difficultto forecast our future revenues or results of operations accurately. A portionof our operating expenses are related to costs that cannot be adjusted quickly.Our operating expense levels reflect, in part, our expectations of futurerevenues. If actual revenues on a quarterly basis are below management’sexpectations, or if our expenses exceed increased revenues, results ofoperations would be materially adversely affected.

 

**WE DEPEND UPONFINANCIAL MARKETS.**

 

The target clients for our products include a range of financialservices organizations, including investment advisors, brokerage firms andbanks. The success of many of our clients is intrinsically linked to thefinancial markets. We believe that demand for our products could bedisproportionately affected by fluctuations, disruptions, instability ordownturns in the financial markets which may cause clients and potentialclients to exit the industry or delay, cancel or reduce any plannedexpenditures for our products. In addition, a slowdown in formation of newfinancial services organizations could cause a decline in demand for ourproducts. We believe that a continuing economic downturn in the financialmarkets would negatively impact the demand for our products, which could have amaterially adverse effect on our business and results of operations.

 

**WE FACE INTENSECOMPETITION THAT COULD IMPAIR OUR ABILITY TO RETAIN EXISTING CUSTOMERS, ATTRACTNEW CUSTOMERS AND ACHIEVE PROFITABILITY.**

 

We face significant competition in our markets. We may experiencegreater competition in the future as we address a wider range of marketsegments, additional entrants join the market and existing competitors offernew or upgraded products. If we fail to compete successfully, we could losemarket share, or be forced to lower our prices or spend more on marketing,which would reduce our margins.

 

We compete with:

 

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•      financial information providers and mediacompanies, who often sell their own information directly to customers;

 

•      application service providers andinformation aggregators, who aggregate information and either hostprivate-label applications that use that data or deliver that data in the formof feeds to customers;

 

•      financial software vendors, who havealready, or may in the future, develop extensions to their softwarecapabilities to be able to manage external information as efficiently asinternal information;

 

•      the in-house development staffs of many ofour clients, who develop technology solutions often in conjunction withconsulting and systems integration firms.

 

We expect all of these forms of competition to continue to intensify.Some of our existing competitors, as well as a number of potential newcompetitors, have longer operating histories, greater name recognition, largerclient bases and significantly greater financial, technical and marketingresources than we do. These factors may provide them with significant advantagesover us. In addition, larger, well-established and well-financed entities mayacquire, invest in or form joint ventures with our competitors. Increasedcompetition from these or other competitors could adversely affect ourbusiness.

 

**WE DO NOT HAVE APROVEN TRACK RECORD OF SELLING OUR NEW TECHNOLOGY OFFERINGS.**

 

We have developed and introduced new products and services that have avery limited track record. We cannot assure you whether there will be asignificant demand for our new products and services by either our currentclients or prospective clients. If the investment we have made in producing andselling these new products and services does not result in significant sales,our business may be materially adversely affected.

 

**SOME OF OUR CUSTOMERSARE STARTUP COMPANIES WHO POSE CREDIT RISKS. THE FAILURE OF THESE CUSTOMERS TOPAY THEIR BILLS HAS LED TO A LOSS OF REVENUE, A TREND WHICH MAY CONTINUE.**

 

While the majority of our customers are large and mid-sized enterprisecustomers, a number of our customers are smaller startup companies. Many ofthese companies have limited operating histories, operate at a loss and havelimited cash reserves and limited access to additional capital. With some ofthese customers, we have experienced difficulties collecting accountsreceivable. As a result, our allowance for doubtful accounts as ofSeptember 30, 2003 was approximately $570,000. While our bad debt expensehas narrowed significantly in recent quarters and, we believe, will continue tonarrow, we may continue to encounter these difficulties in the future. If anysignificant part of our customer base is unable or unwilling to pay our feesfor any reason, our business will suffer.

 

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**IF WE DO NOT CONTINUETO DEVELOP OUR TECHNOLOGY, OUR SERVICES MAY QUICKLY BECOME OBSOLETE.**

 

The market we compete in is characterized by rapidly changingtechnology, evolving industry standards and customer demands and frequent newproduct introductions and enhancements. To be successful, we will have tocontinually improve the performance, features and reliability of our productsand services. We cannot assure you that our technological development willadvance at the pace necessary to sustain our growth.

 

Additionally, new technologies may require us to alter our technologyand products to avoid becoming obsolete. Improving our current products anddeveloping and introducing new products will require additional research anddevelopment.

 

**INTERNAL ORTHIRD-PARTY SYSTEM OR EQUIPMENT FAILURES COULD ADVERSELY AFFECT OUR BUSINESS.**

 

Our systems and operations are vulnerable to damage or interruptionfrom a variety of factors, including human error, natural disasters, powerloss, telecommunication failures, break-ins, sabotage (physical or electronic),computer viruses, vandalism and similar unexpected adverse events. Moreover,while we presently have multiple data centers and have implemented internalredundancy measures, we presently do not have all functionality of all datacenters available in multiple sites. We presently have a data center at ourIowa facility, and in addition, we have a data center operation located infacilities owned by third-parties in Carteret, NJ. Any failure of the computerequipment we use or the third-party telecommunications networks and datacenters on which we rely for distribution could interrupt or delay our service.This could lead to customers canceling contracts and could damage ourreputation, which could limit our ability to attract additional customers,decrease our revenue and lead to a drop in the value of our common stock.

 

**UNDETECTED SOFTWAREERRORS OR FAILURES FOUND IN NEW PRODUCTS MAY RESULT IN LOSS OF OR DELAY INMARKET ACCEPTANCE OF OUR PRODUCTS THAT COULD SERIOUSLY HARM OUR BUSINESS.**

 

Our products may contain undetected software errors or failures whenfirst introduced or as new versions are released. Despite testing by us and bycurrent and potential customers, errors may not be found in new products untilafter delivery to our customers, resulting in loss of, or a delay in marketacceptance, which could seriously harm our business.

 

**LOSING MAJORINFORMATION PROVIDERS MAY LEAVE US WITH INSUFFICIENT INFORMATION TO RETAIN ANDATTRACT CUSTOMERS.**

 

We do not generate original content or data and are therefore highlydependent upon third-party information providers. If we were to lose several ofour major information providers and were not able to obtain similar content ordata from other sources our

 

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services would be less attractive to customers. In addition, we cannotbe certain that we will be able to license content or data from our current ornew providers on favorable terms in the future, if at all.

 

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

 

We regard our trademarks, service marks, copyrights, trade secrets andsimilar intellectual property as critical to our success. The unauthorized reproductionor other misappropriation of our trademarks or other intellectual propertycould diminish the value of our proprietary rights or reputation. In addition,the laws of some foreign countries do not protect proprietary rights to thesame extent as do U.S. laws. Moreover, potential competitors might be able todevelop technologies or services similar to ours without infringing ourpatents. In addition, if our agreements with employees, consultants and otherswho participate in product and service development activities are breached, wemay not have adequate remedies, and our trade secrets may become known orindependently developed by competitors. If this were to occur, our businesscould 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 ouremployees, customers and others to protect our proprietary rights. We havereceived and have filed a number of trademarks and service marks, and havefiled several patent applications with the United States Patent and TrademarkOffice. However, registrations and patents may only be granted in selectedcases, and there can be no assurance that we will be able to secure these oradditional registrations or patents. Furthermore, policing and enforcementagainst the unauthorized use of our intellectual property rights could entailsignificant expenses and could prove difficult or impossible.

 

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**THIRD-PARTIES MAYCLAIM THAT WE HAVE BREACHED THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULDDIVERT 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 uswith respect to information that we distribute or our technology or marketingtechniques and terminology. These claims, with or without merit, could be timeconsuming to defend, result in costly litigation, divert management attention,require us to enter into costly royalty or licensing arrangements or limit ourability to distribute information or prevent us from utilizing importanttechnologies, ideas or formats.

 

**IF THE INFORMATION WEDISTRIBUTE IS UNLAWFUL OR CAUSES INJURY, WE MAY HAVE TO PAY FINES OR DAMAGES.**

 

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The publication or dissemination of information that we havedistributed may give rise to liability for defamation, negligence, breach ofcopyright, patent, trade secret or trademark infringement or other claims orcharges based on the nature of the information. As a licensor of thisinformation, we may be directly or indirectly liable to claims or charges ofthis nature. In addition, we could be exposed to liability arising from theactivities of our customers or their users with respect to the unauthorizedduplication of, or insertion of inappropriate material into, the information wesupply. Although we carry general liability insurance, our insurance may notcover claims of these types or may be inadequate to indemnify us for allliability that may be imposed on us.

 

**IF WE DISTRIBUTEINFORMATION TO UNAUTHORIZED RECIPIENTS, WE MAY HAVE TO PAY DAMAGES TO OURINFORMATION PROVIDERS.**

 

Our proprietary software technologies enable us to deliver informationwe receive from participating information providers only to customers who havebeen authorized to access that information. We might inadvertently distributeinformation to a customer who is not authorized to receive it, which couldsubject us to a claim for damages from the information provider or harm ourreputation in the marketplace.

 

**LEGAL UNCERTAINTIESAND GOVERNMENT REGULATION OF THE INTERNET COULD INHIBIT GROWTH OF THE INTERNET.**

 

Many legal questions relating to the Internet remain unclear and theseareas of uncertainty may be resolved in ways that damage our business. It maytake years to determine whether and how existing laws governing matters such asintellectual property, privacy, libel and taxation apply to the Internet. Inaddition, new laws and regulations that apply directly to Internetcommunications, commerce and advertising are becoming more prevalent. Forexample, the U.S. Congress has passed Internet-related legislation concerningcopyrights, taxation, and the online privacy of children. As the use of theInternet grows, there may be calls for further regulation, such as morestringent consumer protection laws. Finally, our distribution arrangements andcustomer contracts could subject us to the laws of foreign jurisdictions inunpredictable ways.

 

These possibilities could affect us adversely in a number of ways. Newregulations could make the Internet less attractive to users, resulting inslower growth in its use and acceptance than we expect. Complying with newregulations could result in additional cost to us, which could reduce ourmargins, or it could leave us at risk of potentially costly legal action. Wemay be affected indirectly by legislation that fundamentally alters thepracticality or cost-effectiveness of utilizing the Internet, including thecost of transmitting over various forms of network architecture, such astelephone networks or cable systems, or the imposition of various forms oftaxation on Internet-related activities. Regulators continue to evaluate thebest telecommunications policy regarding the transmission of Internet traffic.

 

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**NEW LAWS ANDREGULATIONS AFFECTING CORPORATE GOVERNANCE MAY IMPEDE OUR ABILITY TO RETAIN ANDATTRACT COMPETENT BOARD MEMBERS, A CHIEF EXECUTIVE OFFICER, AND A CHIEFFINANCIAL OFFICER.**

 

On July 30, 2002, President George W. Bush signed into law theSarbanes-Oxley Act of 2002. The Act is designed to enhance corporateresponsibility through new corporate governance and disclosure obligations,increase auditor independence, and tougher penalties for securities fraud. Inaddition, the SEC and NASDAQ have adopted rules in furtherance of the Act andare considering adopting others. This Act and the related new rules andregulations will likely have the effect of increasing the complexity and costof our company’s corporate governance and the time our executive officers spendon such issues, and this may increase the risk of personal liability for ourBoard members, chief executive officer, chief financial officer and otherexecutives involved in the governance process. As a result, it may become moredifficult to attract and retain Board members, a chief executive officer, achief financial officer and/or other executives involved in corporategovernance.

 

**RISKS RELATED TO OURSECURITIES**

 

**VOLATILITY OF OURSTOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.**

 

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

 

•      variations in our actual or anticipatedquarterly operating results or those of our competitors;

 

•      announcements of technological innovationsby us or our competitors;

 

•      introduction of new products or servicesby us or our competitors;

 

•      conditions or trends in the technology orInternet industry;

 

•      changes in the market valuations of othertechnology or Internet companies;

 

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•      announcements by us or our competitors ofsignificant acquisitions; and

 

•      our entry into strategic partnerships orjoint ventures.

 

**WE DO NOT INTEND TOPAY 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 cash dividends in the foreseeable future.

 

**WE ARE EFFECTIVELYCONTROLLED BY OUR EXECUTIVE OFFICERS AND DIRECTORS AND THE INTERESTS OF THESESTOCKHOLDERS COULD CONFLICT WITH YOUR INTERESTS.**

 

Our executive officers and directors, in the aggregate, beneficiallyown approximately 32.8% of our outstanding common stock on a fully dilutedbasis. As a result, these stockholders, if acting together, would be able toexert considerable influence on any matters requiring approval by ourstockholders, including the election of directors, amendments to our charterand by-laws and the approval of mergers or other business combinationtransactions. The ownership position of these stockholders could delay, deteror prevent a change in control of Pinnacor and could adversely affect the pricethat investors might be willing to pay in the future for shares of our commonstock.

 

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**RECENTACCOUNTING PRONOUNCEMENTS**

 

In November 2002, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers” which elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued. It also clarifies that a guarantor is requiredto recognize, at the inception of a guarantee, a liability for the fair valueof the obligation undertaken in issuing the guarantee. The initial recognitionand measurement provisions of FIN 45 are applicable on a prospective basisto guarantees issued or modified after December 31, 2002. The disclosurerequirements in this Interpretation are effective for financial statements ofinterim or annual periods ending after December 15, 2002. The adoption ofFIN 45 as of January 1, 2003 has not had a material effect on ourfinancial position and operating results.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities”, (“FIN 46”). FIN 46 requires that companies thatcontrol another entity through interests other than voting interests shouldconsolidate the controlled entity. FIN 46 applies to variable interest entitiescreated after January 31, 2003, and to variable interest entities in whichan enterprise obtains an interest in after that date. The related disclosurerequirements are effective immediately. The adoption of this interpretation hasnot had a significant impact on our consolidated financial position and resultsof operations.

 

In November 2002, the Emerging Issues Task Force (“EITF”) reacheda consensus on Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables.” EITF Issue 00-21 addresses certain aspects of theaccounting by a vendor for arrangements under which the vendor will perform multiplerevenue generating activities. The EITF will be effective for fiscal yearsbeginning after June 15, 2003. The Company is currently evaluating theeffects of this change on their consolidated financial position and operatingresults.

 

In December 2002, the FASB issued SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure-an amendment of FASBStatement No. 123”. SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation” to provide alternative methods toaccount for the transition from the intrinsic value method of recognition ofstock-based employee compensation in accordance with APB Opinion No. 25,“Accounting for Stock Issued to Employees” to the fair value recognitionprovisions under SFAS No. 123. SFAS No. 148 provides two additionalmethods of transition and will no longer permit the SFAS No. 123prospective method to be used for fiscal years beginning afterDecember 15, 2003. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the pro-forma effects had the fair valuerecognition provisions of SFAS No. 123 been used for all periodspresented. The Company has adopted the disclosure provisions of SFAS

 

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No. 148 as of December 31, 2002 (see below). The adoption ofSFAS No. 148 did not have a significant impact on the Company’s financialposition and results of operations.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.” This Statement amendsand clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities” and is effective for contracts entered into or modified after June30, 2003. The adoption of this Statement did not have a material effect on ourfinancial position and operating results.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”.SFAS No. 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). Many ofthose instruments were previously classified as equity. This Statement willbecome effective for financial instruments entered into or modified after May31, 2003, and otherwise shall be effective at the beginning of the firstinterim period beginning after June 15, 2003. For financial instruments createdbefore the issuance date of this Statement and still existing at the beginningof the interim period of adoption, transition shall be achieved by reportingthe cumulative effect of a change in an accounting principle by initiallymeasuring the financial instruments at fair value or other measurementattribute required by this Statement. The adoption of this Statement did nothave a material impact on the Company’s consolidated financial position orresults of operations.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Interest Rate Sensitivity -We do not enter into financial instrument transactions for trading purposes.Some of our investments may be subject to market risk which means that a changein prevailing interest rates may cause the principal amount of the investmentto fluctuate.

 

Exchange Rate Sensitivity -We consider our exposure to foreign currency exchange rate fluctuations to beminimal as we currently do not have significant amount of revenue and assetsdenominated in a foreign currency and have minimal expenses paid in a foreigncurrency. Currently, the exposure is primarily related to revenue and operatingexpenses in the U.K. Accordingly, we may be subject to exposure from adversemovements in foreign currency exchange rates in relation to these revenues andexpenses. We do not currently use derivative financial instruments. As ofSeptember 30, 2003 the effect of foreign exchange rate fluctuations was notmaterial.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

As of the end of the periodcovered by this report, management, including the Chief Executive Officer andthe Chief Financial Officer, evaluated the effectiveness of the design andoperation of the Company’s disclosure controls and procedures with respect tothe information generated for use in this Quarterly Report.  Based upon, and as of the date of thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the disclosure controls and procedures were effective to providereasonable assurance that information required to be disclosed in the reportsthat the Company files or submits under the Securities Exchange act of 1934 arerecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

There was nochange in the Company’s internal control over financial reporting during thequarter ended September 30, 2003, that has materially affected, or isreasonably likely to materially affect our internal control over financialreporting.

 

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Thereare no material pending legal proceedings to which we are a party, except thaton July 24, 2003, a shareholder class action lawsuit, entitled Leifer v. Clark, et al., C.A. No.20448-NC, was filed against Pinnacor Inc., Pinnacor’s current directors, aPinnacor officer and MarketWatch.com in the Delaware Chancery Court.  The plaintiffs filed an amended complaint onSeptember 17, 2003, which named Holdco, Pine Merger Sub and Maple Merger Sub asdefendants to the action.  The lawsuitpurports to be a class action filed on behalf of holders of Pinnacor’s commonstock who allegedly are or will be threatened with injury arising from actionsby the defendants in connection with the merger.   The lawsuitalleges that Pinnacor’s directors breached their fiduciary duties in proceedingwith the merger by agreeing to a proposed purchase price that fails toadequately compensate Pinnacor shareholders for the loss of control of thecompany.  The lawsuit alleges that MarketWatch knowingly aided and abettedthese breaches of fiduciary duty in some unspecified way.  The lawsuit also alleges that theregistration statement on Form S-4, which includes the joint proxystatement-prospectus, contains material

 

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misrepresentationsand omissions which render it defective. The lawsuit seeks an unspecified amount of damages and also aninjunction against consummation of the proposed transaction.  The plaintiff has moved for expediteddiscovery and has requested the production of documents from Pinnacor andMarketWatch.  Pinnacor and MarketWatchhave begun producing documents responsive to the plaintiff’s request.

 

**ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

From the date of receipt offunds from our initial public offering through September 30, 2003, the netproceeds of the offering have been used to support our domestic sales andmarketing activities, our international operations, product development and forgeneral corporate purposes. We also may use a portion of the net proceeds toinvest in complementary businesses or technologies. None of the net proceedsfrom the offering was paid directly or indirectly to any director, officer,general partner or their associates, or to any persons owning 10% or more ofany class of equity securities. Pending application of the net proceeds towardsone of the above uses, the net proceeds have been invested in interest-bearing,investment-grade securities.

 

We have never declared orpaid any cash dividends on our common or preferred stock. We do not anticipatepaying any cash dividends in the foreseeable future. We currently intend toretain future earnings, if any, to finance operations and the expansion of ourbusiness. Any future determination to pay cash dividends will be at thediscretion of the board of directors and will be dependent upon our financialcondition, operating results, capital requirements, general businessconditions, restrictions imposed by financing arrangements, if any, legal andregulatory restrictions on the payment of dividends and other factors that ourboard of directors deems relevant.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

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**ITEM 5. OTHER INFORMATION**

 

On July 22, 2003 the Company and MarketWatch.com, Inc. announced that theysigned a definitive agreement whereby MarketWatch.com will acquirePinnacor.  Under the terms of the agreement, a newcompany will be formed to combine the businesses of MarketWatch.com andPinnacor.  Each Pinnacor stockholder will have the right to electeither $2.42 in cash or 0.2659 shares of the stock of thecombined company for each share of Pinnacor stock, subject toproration.  Each MarketWatch.com stockholder will receive one shareof stock in the combined company for each share of MarketWatch.com stock. Theaggregate consideration paid to Pinnacor stockholders will be $44million in cash and 6.5 million shares of the stock of the combinedcompany. Based on the closing price and the number of outstandingshares of MarketWatch.com’s common stock on July 22, 2003, the aggregatepurchase price for Pinnacor would be $103.2 millionand Pinnacor stockholders will own approximately 27 percentof the combined company’s equity. In addition, upon the closing,Pinnacor will nominate two representatives to the new company’s board ofdirectors.  The acquisition issubject to customary closing conditions, including regulatory approval and theapproval of MarketWatch.com and Pinnacor stockholders. The transaction isexpected to be completed during the fourth quarter of 2003.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)       Exhibits

 

2.1      Agreement and Plan of Merger, dated July 22, 2003, by andamong NMP, Inc., MarketWatch.com, Inc., Pinnacor Inc., Maple Merger Sub, Inc.and Pine Merger Sub, Inc. (incorporated by reference to Form 8-K filedwith the SEC on July 24, 2003).

 

10.1    Votingand Waiver Agreement, dated July 22, 2003, by and among NMP, Inc.,MarketWatch.com, Inc., Pinnacor Inc., CBS Broadcasting Inc. and PearsonInternational Finance Ltd. (incorporated by reference to Form 8-K filedwith the SEC on July 24, 2003)

 

10.2    Formof Voting Agreement, dated as of July 22, 2003, by and among NMP, Inc.,MarketWatch.com, Inc. and each of certain individual stockholders of PinnacorInc. (incorporated by reference to Form 8-K filed with the SEC onJuly 24, 2003)

 

10.3    Formof Affiliate Agreement, dated as of July 22, 2003, by and among NMP, Inc.,MarketWatch.com, Inc. and each of certain individual stockholders of PinnacorInc. (incorporated by reference to Form 8-K filed with the SEC onJuly 24, 2003)

 

31.1 CEO Section 302 certification

31.2 CFO Section 302 certification

32.1 CEO Section 906 certification

32.2 CFO Section 906 certification

 

(b)           Reports on Form 8-K

On July 24, 2003 the registrant submitted a report on Form 8-K underItem 5 to file a merger agreement, voting agreements, affiliate agreements anda press release in connection with the signing of a definitive merger agreementdated July 22, 2003 whereby MarketWatch.com will acquire the registrant

 

On July 29, 2003 the registrant submitted a report on Form 8-K underItem 12 to file a press release dated July 29, 2003 reporting its financialresults for the second quarter of 2003.

 

On October 23, 2003 the registrant submitted a report on Form 8-K underItem 12 to file a press release dated October 23, 2003 reporting its financialresults for the third quarter of 2003.

 

**SIGNATURES**

 

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

 

**PINNACOR, INC.**

(Registrant)

 
| **SIGNATURE**        |   | **TITLE**                                                                                                  |   | **DATE**          |
|----------------------|--------|------------------------------------------------------------------------------------------------------------|--------|-------------------|
|                 |   |                                                                                                       |   |              |
| /s/ KIRK LOEVNER     |   | President, Chief Executive Officer  and Chairman                                                           |   | November 14, 2003 |
| Kirk Loevner         |   |                                                                                                       |   |              |
|                 |   |                                                                                                       |   |              |
| /s/ DAVID M. OBSTLER |   | Chief Financial Officer, Executive  Vice President of Corporate  Development & Strategy and  Treasurer |   | November 14, 2003 |
| David M. Obstler     |   |                                                                                                       |   |              |

 

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