** **

**FORM 10-Q**

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

**WASHINGTON,D.C. 20549**

 
| **ý****QUARTERLY REPORT  UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**   |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| **FOR  THE QUARTERLY PERIOD ENDED: June 30, 2003**                                                  |
|                                                                                                |
| **OR**                                                                                              |
|                                                                                                |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES 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 August 4, 2003 therewere 40,826,156 shares of the Registrant’s common stock outstanding.

 

 

----

 

**PINNACOR INC.**

 

**FORM 10-Q**

 

**QUARTER ENDED JUNE 30, 2003**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                              | 3      |
|----------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                               |
| Item 1.  | Condensed Consolidated Financial  Statements                                                                                       | 3      |
|     |                                                                                                                               |
|     | Condensed Consolidated Balance Sheets – June  30, 2003 (unaudited) and December 31, 2002                                      | 3      |
|     |                                                                                                                               |
|     | Condensed  Consolidated Statements of Operations – Three and six months ended June 30,  2003 (unaudited) and 2002 (unaudited) |   | 4 |
|     |                                                                                                                               |
|     | Condensed  Consolidated Statements of Cash Flows – Six months ended June 30, 2003  (unaudited) and 2002 (unaudited)           | 5      |
|     |                                                                                                                               |
|     | Notes  to Condensed Consolidated Financial Statements                                                                              | 6      |
|     |                                                                                                                               |
| Item 2.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                        | 14     |
|     |                                                                                                                               |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                                        | 39     |
|     |                                                                                                                               |
| Item 4.  | Controls and Procedures                                                                                                            | 39     |
|     |                                                                                                                               |
| PART II. | OTHER INFORMATION                                                                                                                  | 39     |
|     |                                                                                                                               |
| Item  1. | Legal  Proceedings                                                                                                                 | 39     |
|     |                                                                                                                               |
| Item  2. | Changes  in Securities and Use of Proceeds                                                                                         | 39     |
|     |                                                                                                                               |
| Item 3.  | Defaults upon  Senior Securities                                                                                                   | 40     |
|     |                                                                                                                               |
| Item  4. | Submission  of Matters to a Vote of Security Holders                                                                               | 40     |
|     |                                                                                                                               |
| Item  5. | Other  Information                                                                                                                 | 41     |
|     |                                                                                                                               |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                                                                  | 41     |
|          |                                                                                                                                    |        |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**PINNACOR INC.**

**CONDENSED****CONSOLIDATED BALANCE SHEETS**

** **
|                                                                                                                                                                                 |   | **June 30,****2003** |       | **December 31,****2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|--------------------------|--------|
|                                                                                                                                                                                 |   | **(Unaudited)**      |       |                     |   |
| ASSETS                                                                                                                                                                               |   |                 |       |                     |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| CURRENT ASSETS:                                                                                                                                                                      |   |                 |       |                     |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Cash and cash equivalents                                                                                                                                                            |   | $                    | 22,151,266 |                     | $      | 15,098,184 |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Marketable securities                                                                                                                                                                |   | 25,784,015           |       | 35,611,212               |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Accounts receivable, net of  allowance for doubtful accounts of $570,000 and $620,000 as of June 30, 2003  and December 31, 2002, respectively                                       |   | 4,135,454            |       | 5,253,667                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Prepaid expenses                                                                                                                                                                     |   | 1,492,914            |       | 1,142,691                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Total current assets                                                                                                                                                                 |   | 53,563,649           |       | 57,105,754               |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| PROPERTY AND EQUIPMENT-Net of  accumulated depreciation and amortization                                                                                                             |   | 4,775,411            |       | 5,791,930                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| GOODWILL                                                                                                                                                                             |   | 34,887,862           |       | 34,874,692               |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| OTHER INTANGIBLE ASSETS-Net of  accumulated amortization                                                                                                                             |   | 2,064,583            |       | 2,302,083                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| OTHER ASSETS                                                                                                                                                                         |   | 656,525              |       | 793,866                  |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| TOTAL ASSETS                                                                                                                                                                         |   | $                    | 95,948,030 |                     | $      | 100,868,325 |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                           |   |                 |       |                     |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| CURRENT LIABILITIES:                                                                                                                                                                 |   |                 |       |                     |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Accounts payable and accrued  expenses                                                                                                                                               |   | $                    | 3,687,408  |                     | $      | 4,610,897 |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Accrued restructuring and other  expenses                                                                                                                                            |   | 616,955              |       | 765,292                  |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Deferred revenue                                                                                                                                                                     |   | 5,655,384            |       | 8,333,593                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Current portion of capital lease  obligations                                                                                                                                        |   | 1,099,576            |       | 1,576,174                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Total current liabilities                                                                                                                                                            |   | 11,059,323           |       | 15,285,956               |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| NONCURRENT LIABILITIES:                                                                                                                                                              |   |                 |       |                     |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Capital lease obligations, less  current portion                                                                                                                                     |   | 654,302              |       | 1,181,496                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Total liabilities                                                                                                                                                                    |   | 11,713,625           |       | 16,467,452               |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                           |   |                 |       |                     |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Common stock, $0.01 par value,  100,000,000 shares authorized and 45,215,265 and 44,848,386 issued and  40,790,486 and 40,539,207 outstanding at June 30, 2003 and December 31, 2002 |   | 452,153              |       | 448,484                  |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Additional paid-in capital                                                                                                                                                           |   | 225,477,121          |       | 225,121,104              |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Warrants                                                                                                                                                                             |   | 1,708,304            |       | 1,708,304                |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Deferred compensation                                                                                                                                                                |   | (350,746             | )          | (118,233                 | )      |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Treasury stock, 4,424,779 and  4,309,179 shares at June 30, 2003 and December 31, 2002, respectively, at  cost                                                                       |   | (4,301,299           | )          | (4,146,680               | )      |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Accumulated deficit                                                                                                                                                                  |   | (138,981,023         | )          | (138,962,620             | )      |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Accumulated other comprehensive  income                                                                                                                                              |   | 229,895              |       | 350,514                  |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| Total stockholders’ equity                                                                                                                                                      |   | 84,234,405           |       | 84,400,873               |   |
|                                                                                                                                                                                 |   |                 |       |                     |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                     |   | $                    | 95,948,030 |                     | $      | 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****June 30,** |      | **Six months ended****June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-----------|----------------------------------|--------|
|                                                                                                                                                                                                                                          |   | **2003**                           |      | **2002**                         |   | **2003** |   | **2002** |   |
| NET REVENUE                                                                                                                                                                                                                                   |   | $                                  | 8,440,328 |                             | $      | 8,901,807 |   | $ | 16,781,539 |   | $ | 18,312,802 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| OPERATING EXPENSES:                                                                                                                                                                                                                           |   |                               |      |                             |   |   |   |   |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Cost of services (excluding  depreciation of $102,780, $228,870, $205,133 and $476,293 for the three  months ended June 30, 2003 and 2002 and the six months ended June 30, 2003  and 2002, respectively, shown below)                        |   | 2,930,115                          |      | 2,851,252                        |   | 5,887,725 |   | 5,839,112 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Research and development (excluding  stock-based compensation of $(2,551), $(99,342), $358 and $(76,582) for the  three months ended June 30, 2003 and 2002 and the six months ended June 30,  2003 and 2002, respectively, shown below)      |   | 1,792,029                          |      | 1,848,514                        |   | 3,574,554 |   | 3,976,817 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Sales and marketing (excluding  stock-based compensation of $(7,670),   $138,763, $10,090 and $(595,717) for the three months ended June 30,  2003 and 2002 and the six months ended June 30, 2003 and 2002, respectively,  shown below) |   | 1,623,005                          |      | 2,412,636                        |   | 3,180,954 |   | 5,528,779 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| General and administrative  (excluding stock-based compensation of $(875), $141,391, $22,748, and  $282,782 for the three months ended June 30, 2003 and 2002 and the six months  ended June 30, 2003 and 2002, respectively, shown below)    |   | 1,391,198                          |      | 1,765,926                        |   | 2,999,413 |   | 3,886,017 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Depreciation and amortization                                                                                                                                                                                                                 |   | 807,886                            |      | 1,091,026                        |   | 1,686,536 |   | 2,327,727 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Stock-based compensation                                                                                                                                                                                                                      |   | (11,096                            | )         | 180,812                          |   | 33,196 |   | (389,517 | ) |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Restructuring and asset abandonment  charge                                                                                                                                                                                                   |   | —                             |      | 4,645,344                        |   | — |   | 4,645,344 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Total operating expenses                                                                                                                                                                                                                      |   | 8,533,137                          |      | 14,795,510                       |   | 17,362,378 |   | 25,814,279 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| OPERATING LOSS                                                                                                                                                                                                                                |   | (92,809                            | )         | (5,893,703                       | )      | (580,839 | ) | (7,501,477 | ) |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                                                                                                                                                                       |   |                               |      |                             |   |   |   |   |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Interest income                                                                                                                                                                                                                               |   | 276,514                            |      | 467,439                          |   | 662,962 |   | 1,171,486 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Interest expense                                                                                                                                                                                                                              |   | (41,457                            | )         | (82,853                          | )      | (100,526 | ) | (182,621 | ) |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Total other income, net                                                                                                                                                                                                                       |   | 235,057                            |      | 384,586                          |   | 562,436 |   | 988,865 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| NET INCOME (LOSS)                                                                                                                                                                                                                             |   | $                                  | 142,248   |                             | $      | (5,509,117 | ) | $ | (18,403 | ) | $ | (6,512,612 | ) |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Basic net income (loss) per common  share                                                                                                                                                                                                     |   | $                                  | 0.00      |                             | $      | (0.13 | ) | $ | 0.00 |   | $ | (0.15 | ) |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Diluted net income (loss) per  common share                                                                                                                                                                                                   |   | $                                  | 0.00      |                             | $      | (0.13 | ) | $ | 0.00 |   | $ | (0.15 | ) |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Basic weighted-average number of  shares of common stock outstanding                                                                                                                                                                          |   | 40,469,620                         |      | 42,454,363                       |   | 40,502,805 |   | 42,415,442 |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Effect of dilutive stock options  and restricted stock                                                                                                                                                                                        |   | 881,409                            |      | —                           |   | — |   | — |   |
|                                                                                                                                                                                                                                          |   |                               |      |                             |   |   |   |   |   |
| Diluted weighted-average number of  shares of common stock outstanding                                                                                                                                                                        |   | 41,351,029                         |      | 42,454,363                       |   | 40,502,805 |   | 42,415,442 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

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**PINNACOR INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(UNAUDITED)

 
|                                                                                              |   | **For the six months ended  June 30,** |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|
|                                                                                              |   | **2003**                               |       | **2002** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                            |   |                                   |       |   |   |
| Net loss                                                                                          |   | $                                      | (18,403    | ) | $ | (6,512,612 | ) |
| Adjustments to reconcile net loss  to net cash and cash equivalents used in operating activities: |   |                                   |       |   |   |
| Depreciation and amortization                                                                     |   | 1,686,536                              |       | 2,327,727 |   |
| Stock-based compensation                                                                          |   | 33,196                                 |       | (389,517 | ) |
| 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                                                                   |   | 1,164,805                              |       | 2,320,128 |   |
| (Increase) decrease in prepaid  expenses and other assets                                         |   | (212,881                               | )          | 817,656 |   |
| Decrease in accounts payable and  accrued expenses                                                |   | (583,814                               | )          | (726,276 | ) |
| Decrease in deferred revenue                                                                      |   | (2,678,209                             | )          | (3,378,856 | ) |
| (Decrease) increase in accrued  restructuring expenses                                            |   | (148,337                               | )          | 7,942 |   |
| Net cash used in operating  activities                                                            |   | (806,869                               | )          | (2,108,248 | ) |
|                                                                                              |   |                                   |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                            |   |                                   |       |   |   |
| Purchase of property and equipment                                                                |   | (432,371                               | )          | (479,212 | ) |
| Sale of investments and marketable  securities                                                    |   | 9,704,645                              |       | 16,718,189 |   |
| Payment of severance, transaction  and other exit costs related to businesses acquired            |   | (349,821                               | )          | (203,854 | ) |
| Net cash provided by investing  activities                                                        |   | 8,922,453                              |       | 16,035,123 |   |
|                                                                                              |   |                                   |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                            |   |                                   |       |   |   |
| Payment of capital lease  obligations                                                             |   | (1,003,792                             | )          | (1,331,447 | ) |
| Proceeds from exercise of stock  options and stock issued under employee stock purchase plan      |   | 93,976                                 |       | 194,557 |   |
| Payment for the repurchase of  treasury stock                                                     |   | (154,619                               | )          | — |   |
| Net cash used in financing  activities                                                            |   | (1,064,435                             | )          | (1,136,890 | ) |
| Effect of exchange rate changes on  cash and cash equivalents                                     |   | 1,933                                  |       | 79,486 |   |
| NET INCREASE IN CASH AND CASH  EQUIVALENTS                                                        |   | 7,053,082                              |       | 12,869,471 |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD                                                   |   | 15,098,184                             |       | 15,189,440 |   |
| CASH AND CASH EQUIVALENTS, END OF  PERIOD                                                         |   | $                                      | 22,151,266 |   | $ | 28,058,911 |   |
|                                                                                              |   |                                   |       |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                               |   |                                   |       |   |   |
| Cash paid for interest and income  taxes are as follows:                                          |   |                                   |       |   |   |
| Interest                                                                                          |   | $                                      | 100,526    |   | $ | 182,621 |   |
| 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 TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS****FOR THE SIX MONTHS ENDED JUNE 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")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 our financialposition and operating 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 aconsensus 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 performmultiple revenue generating activities. The EITF will be effective for fiscalyears beginning after June 15, 2003. The Company is currently evaluatingthe effects of this change on their consolidated financial position andoperating results.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure-an amendment of FASB StatementNo. 123”. SFAS No. 148 amends SFAS No. 123, “Accounting forStock-Based Compensation” to provide alternative methods to account for thetransition from the intrinsic value method of recognition of stock-basedemployee compensation in accordance with APB Opinion No. 25, “Accountingfor Stock Issued to Employees” to the fair value recognition provisions underSFAS No. 123. SFAS No. 148 provides two additional methods oftransition and will no longer permit the SFAS No. 123 prospective methodto be used for fiscal years beginning after December 15, 2003. Inaddition, SFAS No. 148 amends the disclosure requirements of SFASNo. 123 to require prominent disclosure in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the pro-forma effects had the fair value recognitionprovisions of SFAS No. 123 been used for all periods presented. TheCompany 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 is not expected to have a material effect on ourfinancial position 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 theissuance date of this Statement and still existing at the beginning of theinterim period of adoption, transition shall be achieved by reporting thecumulative effect of a change in an accounting principle by initially measuringthe financial instruments at fair value or other measurement attribute requiredby this Statement. The adoption of this Statement is not expected to have amaterial impact on the Company’s consolidated financial position or results ofoperations.

 

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 ($11,000), $181,000,$33,000 and ($390,000) for the three and six months ended June 30, 2003 and2002, 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 the vestingperiod of the related options. Stock-based compensation for restricted shares is recognized on astraight-line basis. The reversal for thethree months ended June 30, 2003 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 June 30, 2003, the Company has twostock-based employee compensation plans. The Company accounts for those plansunder the recognition and measurement principles of Accounting Principles Board(“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.

 

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 June 30,** |    | **For the six months ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|---------------------------------------|--------|
|                                                                                                                                          |   | **2003**                                |    | **2002**                              |   | **2003** |   | **2002** |   |
| Net income (loss) applicable  to common stockholders as reported                                                                              |   | $                                       | 142,248 |                                  | $      | (5,509,117 | ) | $ | (18,403 | ) | $ | (6,512,612 | ) |
|                                                                                                                                          |   |                                    |    |                                  |   |   |   |   |   |
| Add (deduct): Stock-based  employee compensation expenses included in reported net income (loss)                                              |   | (11,096                                 | )       | 180,812                               |   | 33,196 |   | (389,517 | ) |
|                                                                                                                                          |   |                                    |    |                                  |   |   |   |   |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   | 152,135                                 |    | (471,553                              | )      | (402,007 | ) | (947,286 | ) |
|                                                                                                                                          |   |                                    |    |                                  |   |   |   |   |   |
| Net income (loss) applicable  to common stockholders, pro forma                                                                               |   | $                                       | 283,287 |                                  | $      | (5,799,858 | ) | $ | (387,214 | ) | $ | (7,849,415 | ) |
|                                                                                                                                          |   |                                    |    |                                  |   |   |   |   |   |
| Earnings per share:                                                                                                                           |   |                                    |    |                                  |   |   |   |   |   |
|                                                                                                                                          |   |                                    |    |                                  |   |   |   |   |   |
| Net income (loss) per common  share as reported                                                                                               |   | $                                       | 0.00    |                                  | $      | (0.13 | ) | $ | 0.00 |   | $ | (0.15 | ) |
|                                                                                                                                          |   |                                    |    |                                  |   |   |   |   |   |
| Net income (loss) per common  share, pro-forma                                                                                                |   | $                                       | 0.01    |                                  | $      | (0.14 | ) | $ | (0.01 | ) | $ | (0.19 | ) |

 

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 June 30,** |   | **Six months ended June 30,** |   |
|-------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                    |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
|                    |   |                            |   |                          |   |   |   |   |   |
| Risk-free interest rate |   | 1.66                            | %      | 3.82                          | %      | 2.88 | % | 3.82 | % |
| Expected lives          |   | 3                               |   | 5                             |   | 3 |   | 5 |   |
| Expected Volatility     |   | 48                              | %      | 100                           | %      | 47 | % | 100 | % |
| Expected Dividend Yield |   | 0                               | %      | 0                             | %      | 0 | % | 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 in addition tonet income (loss), a Company should report other comprehensive income (loss)consisting of gains and losses that bypass the traditional income statement andare recorded directly into stockholders’ equity on the balance sheet.  The components of other comprehensive income(loss) for the Company consist of unrealized gains and losses relating to thetranslation of foreign currency and unrealized gains and losses relating to theCompany’s investments in available-for-sale marketable securities.  Comprehensive income (loss) wasapproximately $23,000, ($5.4) million, ($139,000) and ($6.6) million for thethree and six months ended June 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.

 

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 |   |

 

7

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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 June 30,  2002**   |   | **Six Months****Ended June 30,  2002**     |   |
|----------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                           |   | **(in thousands  except per share  data)** |   | **(in thousands  except per share  data)** |   |
|                                                           |   |                                       |   |                                       |   |
| Net revenue                                                    |   | $                                          | 10,238 |                                       | $      | 21,022 |   |
|                                                           |   |                                       |   |                                       |   |
| Net loss applicable to common stockholders                     |   | $                                          | (7,145 | )                                          | $      | (9,926 | ) |
|                                                           |   |                                       |   |                                       |   |
| Pro forma basic and diluted net loss per  common share         |   | $                                          | (0.17  | )                                          | $      | (0.23 | ) |
|                                                           |   |                                       |   |                                       |   |
| Weighted-average number of shares of common  stock outstanding |   | 42,454                                     |   | 42,415                                     |   |

 

8

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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 abandonmentcharge:

 
|                      |   | **Cost**  |      | **Cash  Payments  Made** |   | **Non-cash  Charges  Utilized** |   | **Balance  Remaining at  June 30, 2003** |      |
|---------------------------|--------|-----------|-----------|--------------------------|--------|---------------------------------|--------|------------------------------------------|-----------|
|                      |   |      |      |                     |   |                            |   |                                     |      |
| Facility shutdowns        |   | $         | 520,430   |                     | $      | 218,316                         |   | $                                        | 7,796     |   | $ | 294,318 |   |
| Workforce reductions      |   | 699,354   |      | 699,354                  |   | —                          |   | —                                   |      |
| Asset abandonment charges |   | 3,425,560 |      | —                   |   | 3,425,560                       |   | —                                   |      |
|                      |   | $         | 4,645,344 |                     | $      | 917,670                         |   | $                                        | 3,433,356 |   | $ | 294,318 |   |

 

9

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The Company recorded charges ofapproximately $0, $4.6 million, $0 and $4.6 million for the three and sixmonths ended June 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 and developmentand general and administrative areas. The affected employees received severancebenefits pursuant to established severance policies or by governmentallymandated 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 million for the abandonment of leasehold improvements, furniture andfixtures, and computer and network equipment in conjunction with our facilityand data center closures.

 

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

 
|                       |   | **Cost**  |       | **Cash  Payments  Made** |   | **Non-cash  Charges  Utilized** |   | **Balance  Remaining at  June 30, 2003** |      |
|----------------------------|--------|-----------|------------|--------------------------|--------|---------------------------------|--------|------------------------------------------|-----------|
|                       |   |      |       |                     |   |                            |   |                                     |      |
| Facility  shutdowns        |   | $         | 6,028,201  |                     | $      | 3,275,769                       |   | $                                        | 2,429,795 |   | $ | 322,637 |   |
| Workforce  reductions      |   | 1,297,019 |       | 1,297,019                |   | —                          |   | —                                   |      |
| Asset  abandonment charges |   | 4,913,982 |       | —                   |   | 4,913,982                       |   | —                                   |      |
|                       |   | $         | 12,239,202 |                     | $      | 4,572,788                       |   | $                                        | 7,343,777 |   | $ | 322,637 |   |

 

10

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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 forexpense recognition 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 abandonment of leasehold improvements, furniture and fixtures and computerequipment in conjunction with our facility shutdowns.

 

6. MARKETABLE SECURITIES

 

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

 
|                      |   | **COST** |       | **UNREALIZED****HOLDING  GAINS** |   | **FAIR****VALUE** |   |
|---------------------------|--------|----------|------------|----------------------------------|--------|-------------------|--------|
| Corporate Notes and Bonds |   | $        | 25,656,482 |                             | $      | 127,533           |   | $ | 25,784,015 |   |
|                           |        |          |            |                                  |        |                   |        |  |  |  |

 
|                                  |   | **COST**   |       | **FAIR****VALUE** |   |
|---------------------------------------|--------|------------|------------|-------------------|--------|
| Due within one year                   |   | $          | 8,822,110  |              | $      | 8,898,475 |   |
| Due after one year through five years |   | 16,834,372 |       | 16,885,540        |   |
| Total marketable securities           |   | $          | 25,656,482 |              | $      | 25,784,015 |   |

 

11

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Available-for-sale securitiesare carried at fair value, with unrealized gains and losses reported as aseparate component of stockholders’ equity as of June 30, 2003. The Companydoes 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.

 

Thechanges in the carrying amount of goodwill for the six months ended June 30,2003 is as follows:

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

 

Goodwillat June 30, 2003 consisted of the following:

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

 

12

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At June 30, 2003 otherintangible assets identified from the acquisition of Stockpoint consisted ofthe Customer List, which is being amortized over four years with amortizationexpense being recorded in depreciation and amortization. In addition, the TradeName which has an indefinite life is not being amortized, but instead will beassessed for impairment at least annually. The Company had no other intangibleassets as of June 30, 2003. The Company is in the process of obtaining anindependent valuation and identifying the intangible assets it has acquiredfrom the acquisition of the operating assets of Inlumen. The Company willfinalize its valuation as soon as possible or within one year of theacquisition date.

 

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

 
|                          |   | **As of June  30, 2003**     |      | **As of June 30, 2002**       |   |
|-------------------------------|--------|------------------------------|-----------|-------------------------------|--------|
|                          |   | **Gross****Carrying  Value** |      | **Accumulated  Amortization** |   | **Gross****Carrying  Value** |   | **Accumulated  Amortization** |   |
|                          |   |                         |      |                          |   |   |   |   |   |
| Amortized Intangible Assets   |   |                         |      |                          |   |   |   |   |   |
|                          |   |                         |      |                          |   |   |   |   |   |
| Customer List                 |   | $                            | 1,900,000 |                          | $      | 435,417 |   | $ | — |   | $ | — |   |
|                          |   |                         |      |                          |   |   |   |   |   |
| Unamortized Intangible Assets |   |                         |      |                          |   |   |   |   |   |
|                          |   |                         |      |                          |   |   |   |   |   |
| Trade Name                    |   | $                            | 600,000   |                          | $      | — |   | $ | — |   | $ | — |   |

 

Amortizationcharged to expense was approximately $119,000 and $238,000 for the three andsix months ended June 30, 2003.  Therewas no amortization expense during the three and six months ended June 30,2002.

 

At June 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.  The result of this impairment testdetermined that these assets were not impaired.

 

13

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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 8,857,585 and5,430,278 outstanding options and warrants outstanding as of June 30, 2003 and2002 were not considered in the calculation of diluted net loss per shareduring the six months ended June 30, 2003 and the three and six months endedJune 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 three and sixmonths ended June 30, 2003 the Company repurchased 15,500 and 115,600 shares ofcommon stock at a cost of approximately $20,000 and $150,000. No shares wererepurchased for the three and six months ended June 30, 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 $56,400 and $330,900 for thethree and six months ended June 30, 2003. The amount of stock-based compensation expense recognized wasapproximately $23,000 and $47,000 for the three and six months ended June 30,2003.  There was no restricted stockissued, or expensed during the three and six months ended June 30, 2002.

 

11.  SUBSEQUENT EVENT

 

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 ofMarketWatch.com and Pinnacor.  EachPinnacor shareholder will have the right to elect either $2.42 in cash or0.2659 shares of the stock of the combined company for each share of Pinnacorstock, subject to pro-ration.  EachMarketWatch.com shareholder will receive one share of stock in the combinedcompany for each share of MarketWatch.com stock.  The aggregate consideration paid to Pinnacor shareholders will be$44 million of cash 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., certain of Pinnacor’s current officers and directors, andMarketWatch.com in the Delaware Chancery Court. The lawsuit purports to be aclass action filed on behalf of holders of Pinnacor’s common stock as of thedate of the announcement of the proposed acquisition of Pinnacor byMarketWatch.com.   The lawsuit alleges that the Pinnacor directorsbreached their fiduciary duties in proceeding with the sale of Pinnacor toMarketWatch.com by agreeing to an inadequate proposed purchase price whichfails adequately to compensate Pinnacor shareholders for the loss of control ofthe company.  The lawsuit seeks an unspecified amount of damages and alsoprays for an injunction against consummation of the proposed transaction.

 

**ITEM 2.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

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

 

14

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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., certain of Pinnacor’s current officers and directors, andMarketWatch.com in the Delaware Chancery Court. The lawsuit purports to be aclass action filed on behalf of holders of Pinnacor’s common stock as of thedate of the announcement of the proposed acquisition of Pinnacor byMarketWatch.com.   The lawsuit alleges that the Pinnacor directorsbreached their fiduciary duties in proceeding with the sale of Pinnacor toMarketWatch.com by agreeing to an inadequate proposed purchase pricewhich fails adequately to compensate Pinnacor shareholders for the loss ofcontrol of the company.  The lawsuit seeks an unspecified amount ofdamages and also prays for an injunction against consummation of the proposedtransaction.

 

**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 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 Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets”, the goodwill andindefinite lived Trade Name related to the Company’s Stockpoint acquisitionhave not been periodically amortized during the six months ended June 30,2003, but instead are assessed for impairment at least annually. The CustomerList is carried at cost less accumulated amortization and the Customer List isbeing amortized on a straight-line basis over its expected life, which isestimated to be four years.

 

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 ofJune 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 June 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 sixmonths ended June 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.

 

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*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 also includecertain 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

 

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of aprovider’s information relayed to our customers or on a per client basis. Incertain cases, the contractual agreement is based on fixed fees or subject to aminimum charge. Certain fixed fee arrangements include additional fees at avariable rate once our clients exceed a specified usage volume.

 

**RESEARCH ANDDEVELOPMENT EXPENSES**

 

Researchand development expenses consist primarily of salaries and related personnelcosts associated with the research, design and development of softwareapplications and services supporting our business. These include engineers thatare developing and maintaining our software and infrastructure and our productmanagers.

 

Researchand development costs are expensed as incurred until technological feasibilityhas been established for software to be sold in accordance with SFASNo. 86. To date, we believe under our current software engineeringprocesses that the establishment of technological feasibility and generalrelease have substantially coincided. As a result, no software developmentcosts have been capitalized to date for software developed for external sales.For software developed for internal use, expenses are capitalized while in theapplication development stage and expensed while in the preliminary and postimplementation stages in accordance with SOP 98-1.

 

**SALES AND MARKETINGEXPENSES**

 

Sales andmarketing expenses include costs of sales and marketing personnel, as well asbusiness development and customer support personnel, related overhead,commissions, advertising and promotion expenses, travel and entertainmentexpenses and other selling and marketing costs.

 

**GENERAL ANDADMINISTRATIVE EXPENSES**

 

Generaland administrative expenses consist primarily of personnel and related costsfor general corporate functions including accounting, finance, human resources,legal and other administrative functions, as well as provisions for doubtfulaccounts and bad debt expense.

 

**STOCK-BASEDCOMPENSATION**

 

Inconnection with the grant of stock options and restricted stock to employees,we recognized deferred stock-based compensation (income) expense ofapproximately ($11,000), $33,000, $181,000 and ($390,000) for the three and sixmonths ended June 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 three months ended June 30, 2003 and the six monthsended June 30, 2002 relates to previously

 

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recognizedbut unearned stock-based compensation of forfeited, unvested stock optionsgranted to terminated employees.

 

Inconnection with the granting of restricted stock to employees, we recordeddeferred stock-based compensation of $56,400, $330,900, $0 and $0 for the threeand six months ended June 30, 2003 and 2002, respectively.  There was no deferred stock-basedcompensation recorded in connection with the granting of stock options duringthe three and six months ended June 30, 2003 and 2002, respectively.

 

**RESULTSOF OPERATIONS**

 

The following table sets forthour unaudited results of operations as a percentage of revenue for the periodsindicated.

 
|                                                                                                                                                                         |   | **FOR THE THREE  MONTHS ENDED  June 30,** |   | **FOR THE SIX  MONTHS ENDED  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                                                                                         |   | **2003**                                  |   | **2002**                                |   | **2003** |   | **2002** |   |
| Revenue                                                                                                                                                                      |   | 100                                       | %      | 100                                     | %      | 100 | % | 100 | % |
|                                                                                                                                                                         |   |                                      |   |                                    |   |   |   |   |   |
| Operating expenses:                                                                                                                                                          |   |                                      |   |                                    |   |   |   |   |   |
|                                                                                                                                                                         |   |                                      |   |                                    |   |   |   |   |   |
| Cost of services (excluding depreciation  of 1%, 3%, 1% and 3% for the three and six months ended June 30, 2003 and  2002 respectively, shown below)                         |   | 35                                        | %      | 32                                      | %      | 35 | % | 32 | % |
| Research and development (excluding  stock-based compensation of 0%, (2)%, 0%, and 0% for the three and six months  ended June 30, 2003 and 2002, respectively, shown below) |   | 21                                        |   | 21                                      |   | 21 |   | 22 |   |
|                                                                                                                                                                         |   |                                      |   |                                    |   |   |   |   |   |
| Sales and marketing (excluding  stock-based compensation of 0%, 2%, 0%, and (4)% for the three and six months  ended June 30, 2003 and 2002, respectively, shown below)      |   | 19                                        |   | 27                                      |   | 19 |   | 30 |   |
| General and administrative (excluding  stock-based compensation of 0%, 2%, 0% and 2% for the three and six months  ended June 30, 2003 and 2002, respectively, shown below)  |   | 16                                        |   | 20                                      |   | 18 |   | 21 |   |
| Depreciation and amortization                                                                                                                                                |   | 10                                        |   | 12                                      |   | 10 |   | 13 |   |
| Stock-based compensation                                                                                                                                                     |   | —                                    |   | 2                                       |   | — |   | (2 | ) |
| Restructuring and asset abandonment  charge                                                                                                                                  |   | —                                    |   | 52                                      |   | — |   | 25 |   |
| Total operating expenses                                                                                                                                                     |   | 101                                       |   | 166                                     |   | 103 |   | 141 |   |
| Operating loss                                                                                                                                                               |   | (1                                        | )      | (66                                     | )      | (3 | ) | (41 | ) |
| Other income (expense), net                                                                                                                                                  |   | 3                                         |   | 4                                       |   | 3 |   | 5 |   |
| Net income (loss)                                                                                                                                                            |   | 2                                         | %      | (62                                     | )%     | — | % | (36 | )% |

 

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**THREEMONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002**

 

REVENUE.  Revenue totaledapproximately $8.4 million for the three months ended June 30, 2003, a decreaseof approximately $500,000 or 6% from $8.9 million for the three months endedJune 30, 2002. This decrease was primarily due to a decrease in the totalnumber of customers partially offset by a 15% increase in the average contractvalue per customer and the acquisition of Inlumen in November 2002 thataccounted for approximately $1.0 million of revenue for the three months endedJune 30, 2003.

 

COST OF SERVICES.  Cost of services remained at approximately $2.9 million for thethree months ended June 30, 2003 and 2002. As a percentage of revenue, and including Inlumen from its acquisitiondate, cost of services increased to approximately 35% for the three monthsended June 30, 2003 from approximately 32% for the three months ended June 30,2002.  This increase as a percentage ofrevenue is due an increase in personnel costs related to client customizationallocated from research and development. This was partially offset by cost savings including renegotiated contentfee contracts, monthly fees for housing our servers in third-party network datacenters and other telecom costs.

 

RESEARCH ANDDEVELOPMENT.  Research and developmentexpenses remained at approximately $1.8 million for the three months ended June30, 2003 and 2002.  As a percentage ofrevenue, and including Inlumen from its acquisition date, research anddevelopment expenses remained at approximately 21% during the three monthsended June 30, 2003 and 2002.

 

SALES AND MARKETING. Salesand marketing expenses decreased to $1.6 million for the three months endedJune 30, 2003, a decrease of approximately $800,000 or 33%, from $2.4 millionfor the three months ended June 30, 2002. This was due to a decrease in compensation expense and travel andentertainment costs associated with the reduction of our sales force and adecrease in marketing programs.   As apercentage of revenue, and including Inlumen from its acquisition date, salesand marketing expenses decreased to approximately 19%

 

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for the three months ended June 30, 2003 from approximately 27% for thethree months ended June 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 ANDADMINISTRATIVE.  General andadministrative expenses decreased to $1.4 million for the three months endedJune 30, 2003, a decrease of approximately $400,000 or 22%, from $1.8 millionfor the three months ended June 30, 2002. This was due to a significant decrease in bad debt expense and adecrease in personnel costs.  As apercentage of revenue, and including Inlumen from its acquisition date, generaland administrative expenses decreased to approximately 16% for the three monthsended June 30, 2003 from 20% for the three months ended June 30, 2002. Thedecrease in general and administrative expense as a percentage of revenueresulted primarily from the significant reductions in general andadministrative expenditures outpacing the decrease in revenue.

 

DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expensedecreased to approximately $800,000 for the three months ended June 30, 2003, adecrease of approximately $300,000 or 27%, from $1.1 million for the threemonths ended June 30, 2002.  As apercentage of revenue, and including Inlumen from its acquisition date,depreciation and amortization expense decreased to approximately 10% for thethree months ended June 30, 2003 from approximately 12% for the three monthsended June 30, 2002.  The decrease indepreciation and amortization expense as a percentage of revenue was due thedepreciation savings from the abandonment of $3.4 million of assets in our  restructuring plan completed in June 2002,an overall decrease in the capital assets purchased and certain assets becomingfully depreciated.  This was partiallyoffset by the increase in the amortization of our customer list intangible fromour Stockpoint acquisition of approximately $119,000 and approximately $69,000of depreciation expense from capital assets acquired from Inlumen in thestatement of operations for the three months ended June 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 (income) expense of approximately($11,000) and $181,000 for the three months ended June 30, 2003 and 2002,respectively.  Included in stock-basedcompensation expense for the three months ended June 30, 2003 and 2002, theCompany has reversed previously recognized deferred stock-based compensationexpense of approximately $36,000 and $113,000, 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 $50,000 and $205,000, included in the balance sheet asdeferred compensation, against paid-in capital for the three months ended June30, 2003 and 2002, respectively.  As apercentage of revenue, stock based compensation decreased to 0% for the threemonths ended June 30, 2003 from approximately 2% for the three months endedJune 30, 2002.

 

RESTRUCTURINGAND ASSET ABANDONMENT CHARGE.  In June2002 our management took certain actions to further increase operational efficienciesand bring costs in line with revenues. These measures included asset abandonment charges, the involuntarytermination of 34 employees, from sales and marketing, research and developmentand general and administrative areas, and the closure of our UK satelliteoffice and data center.  As a result ofthese actions, we recorded a $4.6 million charge to operations during thesecond quarter of 2002 for severance-related payments to terminated employees,the accrual of future lease costs (net of estimated sublease income) and thewrite-off of fixed assets for office locations that were closed or consolidatedand assets that were abandoned.  As aresult of these restructuring initiatives, we expect to achieve annualizedsavings of approximately $5.0 million in operating expenses, includingdepreciation expense.  However, therecan be no assurance that such cost reductions can be sustained or that theestimated costs of such actions will not change.

 

We incurred nosuch restructuring or asset abandonment charges for the three months ended June30, 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 $235,000 for the three months endedJune 30, 2003, from approximately $385,000 for the three months ended June 30,2002. This decrease was due to a reduction in overall interest rates and theinterest income earned on lower cash balances, cash equivalents and investmentsin marketable securities.

 

**SIXMONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002**

 

REVENUE.  Total revenue decreased to $16.8 million forthe six months ended June 30, 2003, a decrease of $1.5 million or 8% from $18.3million for the six months ended June 30, 2002.  This decrease was primarily due to a decrease in the total numberof customers partially offset by a 14% increase in the average contract valueper customer and the acquisition of Inlumen in November 2002 that accounted forapproximately $2.1 million of revenue for the six months ended June 30, 2003.

 

COST OF SERVICES.  Cost of services increased to approximately$5.9 million for the six months ended June 30, 2003, an increase ofapproximately $100,000 or 2%, from $5.8 million for the six months ended June30, 2002.  The acquisition of Inlumen,which occurred on November 20, 2002, accounted for approximately $703,000 ofincremental cost of services for the six months ended June 30, 2003.  As a percentage of revenue, and includingInlumen from its acquisition date, cost of services increased to approximately35% for the six months ended June 30, 2003 from approximately 32% for the sixmonths ended June 30, 2002.  Thisincrease as a percentage of revenue is due to higher cost of services as apercentage of revenues due to an increase in personnel costs related to clientcustomization.  This was partiallyoffset by cost savings including renegotiated content fee contracts, monthlyfees for housing our servers in third-party network data centers and othertelecom costs.

 

RESEARCH AND DEVELOPMENT.  Research and development costs decreased toapproximately $3.6 million for the six months ended June 30, 2003, a decreaseof approximately $400,000 or 10%, from $4.0 million for the six months endedJune 30, 2003.  This was primarily dueto a net decrease in personnel costs as a result of fully realizing the savingsfrom our restructuring plans and from the greater allocation of salaries intocost of services related to client customization.  As a percentage of revenue, and including Inlumen from itsacquisition date, research and development expenses decreased to approximately21% during the six months ended June 30, 2003 from approximately 22% for thesix months ended June 30, 2002.  Thisdecrease in research and development expense as a percentage of revenueresulted primarily from the reduction in research and development expensesoutpacing the decrease in revenue.

 

 

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SALES AND MARKETING.  Sales andmarketing expenses decreased to $3.2 million for the six months ended June 30,2003, a decrease of approximately $2.3 million or 42%, from $5.5 million forthe six months ended June 30, 2002. This was due to a decrease in marketing programs and a decrease incompensation expense and travel and entertainment costs associated with thereduction of our sales force.   As apercentage of revenue, and including Inlumen from the acquisition date, salesand marketing expenses decreased to approximately 19% for the six months endedJune 30, 2003 from approximately 30% for the six months ended June 30,2002.  The decrease in sales andmarketing expense as a percentage of revenue resulted primarily from thesignificant reductions in sales and marketing expenditures outpacing thedecrease in revenue.

 

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased to $3.0 million for thesix months ended June 30, 2003, a decrease of approximately $900,000 or 23%,from $3.9 million for the six months ended June 30,2002.  This was due to a significant decrease inbad debt expense, a decrease in facilities, personnel costs and professionalfees.  As a percentage of revenue, andincluding Inlumen from the acquisition date, general and administrativeexpenses decreased to approximately 18% for the six months ended June 30, 2003from approximately 21% for the six months ended June 30, 2002. The general andadministrative expense as a percentage of revenue resulted primarily from the significantreductions in general and administrative expenditures outpacing the decrease inrevenue.

 

DEPRECIATION ANDAMORTIZATION.  Depreciation andamortization expense decreased to approximately $1.7 million for the six monthsended June 30, 2003, a decrease of approximately $600,000 or 26%, from $2.3million for the six months ended June 30, 2002.  As a percentage of revenue, and including Inlumen from itsacquisition date, depreciation and amortization expense decreased toapproximately 10% for the six months ended June 30, 2003 from approximately 13%for the six months ended June 30, 2002. The decrease in depreciation and amortization expense as a percentage ofrevenue was due to the depreciation savings from the abandonment of $3.4million 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 $238,000 and approximately $138,000 ofdepreciation expense from capital assets acquired from Inlumen included in thestatement of operations for the six months ended June 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$33,000 and ($390,000) for the six months ended June 30, 2003 and 2002,respectively.  Included in stock-basedcompensation expense for the six months ended June 30, 2003 and 2002, theCompany has reversed previously recognized deferred stock-based compensationexpense of approximately $36,000 and $752,000, respectively.  This reversal relates to previously recognizedbut unearned stock-based compensation of forfeited, unvested stock optionsgranted to terminated employees. In addition, due to the forfeiture of theseoptions during the period, the Company reversed future amortization expense ofapproximately $65,000 and $1.5 million, included in the balance sheet asdeferred compensation, against paid-in capital for the six months ended June30, 2003 and 2002, respectively.  As apercentage of revenue, stock based compensation increased to 0% for the sixmonths ended June 30, 2003 from approximately (2)% for the six months endedJune 30, 2002.

 

RESTRUCTURINGAND ASSET ABANDONMENT CHARGE.  In June2002 our management took certain actions to further increase operationalefficiencies and bring costs in line with revenues.  These measures included asset abandonment charges, theinvoluntary termination of 34 employees, from sales and marketing, research anddevelopment and general and administrative areas, and the closure of our UKsatellite office and data center.  As aresult of these actions, we recorded a $4.6 million charge to operations duringthe second quarter of 2002 for severance-related payments to terminatedemployees, the accrual of future lease costs (net of estimated sublease income)and the write-off of fixed assets for office locations that were closed orconsolidated and assets that were abandoned. As a result of these restructuring initiatives, we expect to achieveannualized savings of approximately $5.0 million in operating expenses,including depreciation expense. However, there can be no assurance that such cost reductions can besustained or that the estimated costs of such actions will not change.

 

We incurred nosuch restructuring or asset abandonment charges for the six months ended June30, 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 $562,000 for the six months ended June30, 2003, from approximately $989,000 for the six months ended June 30, 2002.This decrease was due to a reduction in overall interest rates and the interestincome earned on lower cash balances, cash equivalents and investments inmarketable securities.

 

**QUARTERLYOPERATING RESULTS**

 

The following table setsforth our unaudited quarterly operating results (in thousands) for each of ourlast eight quarters. This information has been derived from our unauditedinterim financial statements. In our opinion, this unaudited information hasbeen prepared on a basis consistent with our audited consolidated financialstatements elsewhere contained herein and includes all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of theinformation for the quarters presented. Historical results for any quarter arenot necessarily indicative of the results to be expected for any future period.

 

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**QUARTERLYOPERATING RESULTS**

**(In thousands exceptper share data)**

 
|                                                                                                                                                                                                                 |   | **September 30,  2001** |    | **December 31,  2001** |   | **March 31,  2002** |   | **June 30,  2002** |   | **September 30,  2002** |   | **December 31,  2002** |   | **March 31,  2003** |   | **June 30,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|--------------------------|--------|-------------------------|--------|------------------------------|--------|-----------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Total revenue                                                                                                                                                                                                        |   | $                            | 7,244   |                        | $      | 9,405                    |   | $                       | 9,411  |                         | $      | 8,902                       |   | $                        | 8,051  |                    | $      | 8,203 |   | $ | 8,341 |   | $ | 8,440 |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Operating expenses:                                                                                                                                                                                                  |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Cost of services (excluding depreciation of  $156, $227, $247, $229, $164, $132,  $102 and $103 in the third quarter of 2001 through the second  quarter of 2003, respectively, as shown below)            |   | 2,239                        |    | 2,866                       |   | 2,988                    |   | 2,851                   |   | 2,719                        |   | 2,922                       |   | 2,958                    |   | 2,930                   |   |
| Research and development (excluding stock-based compensation of $161,  $236, $23, $(99), $(39), $187, $3 and $(3) in the third quarter of 2001 through  the second quarter of 2003, respectively, as shown below)    |   | 2,150                        |    | 1,893                       |   | 2,128                    |   | 1,849                   |   | 1,760                        |   | 1,676                       |   | 1,783                    |   | 1,792                   |   |
| Sales and marketing (excludes stock-based compensation of $(473),  $(196), $(734), $139, $(67), $(266), $17 and $(7) in the third quarter of  2001 through the second quarter of 2003, respectively, as shown below) |   | 3,145                        |    | 3,377                       |   | 3,116                    |   | 2,413                   |   | 1,973                        |   | 1,551                       |   | 1,558                    |   | 1,623                   |   |
| General and administrative (excludes stock-based compensation of $485,  $(296), $141, $141, $139, $246, $24 and $(1) in the third quarter of 2001  through the second quarter of 2003, respectively, as shown below) |   | 3,128                        |    | 2,671                       |   | 2,120                    |   | 1,766                   |   | 1,513                        |   | 1,804                       |   | 1,608                    |   | 1,391                   |   |
| Depreciation and amortization                                                                                                                                                                                        |   | 1,141                        |    | 1,353                       |   | 1,236                    |   | 1,091                   |   | 906                          |   | 901                         |   | 878                      |   | 808                     |   |
| Stock-based compensation                                                                                                                                                                                             |   | 173                          |    | (256                        | )      | (570                     | )      | 181                     |   | 33                           |   | 167                         |   | 44                       |   | (11                     | )      |
| Restructuring and asset abandonment                                                                                                                                                                                  |   | 12,239                       |    | —                      |   | —                   |   | 4,645                   |   | (2,183                       | )      | —                      |   | —                   |   | —                  |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Total operating expenses                                                                                                                                                                                             |   | 24,215                       |    | 11,904                      |   | 11,018                   |   | 14,796                  |   | 6,721                        |   | 9,021                       |   | 8,829                    |   | 8,533                   |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Operating income (loss)                                                                                                                                                                                              |   | (16,971                      | )       | (2,499                      | )      | (1,607                   | )      | (5,894                  | )      | 1,330                        |   | (818                        | )      | (488                     | )      | (93                     | )      |
| Other income                                                                                                                                                                                                         |   | 213                          |    | 607                         |   | 604                      |   | 385                     |   | 340                          |   | 328                         |   | 327                      |   | 235                     |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Income (loss) attributable to common stockholders                                                                                                                                                                    |   | $                            | (16,758 | )                           | $      | (1,892                   | )      | $                       | (1,003 | )                            | $      | (5,509                      | )      | $                        | 1,670  |                    | $      | (490 | ) | $ | (161 | ) | $ | 142 |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Basic net income (loss) per common share                                                                                                                                                                             |   | $                            | (0.42   | )                           | $      | (0.04                    | )      | $                       | (0.02  | )                            | $      | (0.13                       | )      | $                        | 0.04   |                    | $      | (0.01 | ) | $ | 0.00 |   | $ | 0.00 |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Diluted net income (loss) per common share                                                                                                                                                                           |   | $                            | (0.42   | )                           | $      | (0.04                    | )      | $                       | (0.02  | )                            | $      | (0.13                       | )      | $                        | 0.04   |                    | $      | (0.01 | ) | $ | 0.00 |   | $ | 0.00 |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Weighted-average number of shares used in computation of basic net  loss per share                                                                                                                                   |   | 40,087                       |    | 42,256                      |   | 42,377                   |   | 42,454                  |   | 42,755                       |   | 40,483                      |   | 40,762                   |   | 40,470                  |   |
|                                                                                                                                                                                                                 |   |                         |    |                        |   |                     |   |                    |   |                         |   |                        |   |                     |   |                    |   |
| Weighted-average number of shares used in computation of diluted net  loss per share                                                                                                                                 |   | 40,087                       |    | 42,256                      |   | 42,377                   |   | 42,454                  |   | 42,826                       |   | 40,483                      |   | 40,762                   |   | 41,351                  |   |

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* Certain reclassifications have been made to the 2001 financialstatements to conform with the 2002 and 2003 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 the beginningof the period (or at the time of issuance, if later) and as if funds obtainedthereby were used to purchase common stock at the average market price duringthe period.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

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 June 30, 2003, we hadcash and cash equivalents and marketable securities of approximately$47.9 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         |   | $         | 1,753,878 |                  | $      | 1,099,576      |   | $              | 654,302   |               | $      | — |   | $ | — |   |
| Operating leases                  |   | $         | 4,716,000 |                  | $      | 723,000        |   | $              | 1,963,000 |               | $      | 1,244,000 |   | $ | 786,000 |   |

 

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We operate from leased premises in New York, satellite offices in SanFrancisco, Iowa, and Israel. Our current aggregate annual rental obligationsunder these leases, including our abandoned UK office, are approximately $1.4million for the year ended December 31, 2003. For the year endedDecember 31, 2002, we negotiated a favorable buyout of one of our realestate leases for approximately $2.2 million. As a result of this buyout,we reduced our expected future minimum lease payment obligation byapproximately $3.3 million. For the six months ended June 30, 2003 and2002, our capital expenditures were approximately $432,000 and $479,000,respectively. Capital expenditures were primarily for computers, hardware,software and networking equipment.

 

As of June 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 $1.7 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.

 

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For the six months ended June 30, 2003 and 2002, the net cash usedin operating activities was approximately $800,000 and $2.1 million,respectively.  The net cash used inoperating activities for the six months ended June 30, 2003 resultedprimarily from a decrease in accounts payable and accrued expenses ofapproximately $584,000, a non-cash decrease in deferred revenue of $2.7million, a decrease in accrued restructuring expenses of $148,000, and anincrease in prepaid expenses of $213,000. This was offset by non-cash chargesof approximately $1.7 million and a decrease in accounts receivable ofapproximately $1.2 million.  The netcash used in operating activities for the six months ended June 30, 2002resulted primarily from net losses of $6.5 million, a decrease in accountspayable and accrued expenses of approximately $726,000 and a non-cash decreasein deferred revenue of $3.4 million. This was offset by non-cash charges of approximately $5.4 million, adecrease in accounts receivable of approximately $2.3 million and a decrease inprepaid expenses and other current assets of approximately $818,000.

 

For the sixmonths ended June 30, 2003 and 2002, the net cash provided by investingactivities was approximately $8.9 million and $16.0 million,respectively.  The net cash provided byinvesting activities for the six months ended June 30, 2003 resultedprincipally from the proceeds of matured long-term marketable securitiesreinvested into cash equivalents of approximately $9.7 million, offset byapproximately $350,000 for the payments of exit costs associated with theacquisitions of Stockpoint and Inlumen, and approximately $432,000 for thepurchase of property and equipment.  Thenet cash provided by investing activities for the six months endedJune 30, 2002 resulted principally from the proceeds of matured long-termmarketable securities reinvested into cash equivalents of approximately$16.7 million, offset by approximately $204,000 for the payments of exitcosts associated with the acquisition of Stockpoint, and approximately $479,000for the purchase of property and equipment.

 

For the six months ended June 30, 2003 and 2002, the net cash usedin financing activities was approximately $1.1 million, respectively.  The net cash used in financing activitiesfor the six months ended June 30, 2003 was primarily from repayments ofour capital lease obligations of approximately $1.0 million and approximately$155,000 used for the repurchase of treasury stock offset by proceeds ofapproximately $94,000 from the exercise of stock options and stock purchases byemployees.  The net cash used infinancing activities for the six months ended June 30, 2002 was primarilyfrom repayments of our capital lease obligations of approximately $1.3 millionoffset by proceeds of approximately $195,000 from the exercise of stock optionsand stock purchases by employees.

 

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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 were 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;

•      Activitiesrelating to the merger and related uncertainties may divert our management'sattention from our day-to-day business and cause disruptions among ouremployees and to our relationships with customers and business partners, thusdetracting from our ability to grow revenue and minimize costs and possiblyleading to a loss of revenue and market position that we may not be able toregain if the transaction does not occur;

•      Themarket price of our common stock could decline following an announcement thatthe transaction has been abandoned, to the extent that the current market pricereflects a market assumption that the transaction will be completed;

•      Wecould be required to pay MarketWatch a termination fee and providereimbursement to MarketWatch for certain costs incurred;

•      Wewould remain liable for our costs related to the transaction, such as legal andaccounting fees and the financial advisory fees;

•      Wemay not be able to take advantage of alternative business opportunities oreffectively respond to competitive pressures.

 

In connection with the proposed transaction,we and MarketWatch expect to file a joint proxy statement/prospectus with theSEC. The joint proxy statement/prospectus will be mailed to all holders of ourstock and will contain important information about us, MarketWatch and theproposed merger, risks relating to the transaction and the combined company, andrelated matters. We urge all of our stockholders to read the joint proxystatement/prospectus when it becomes available.

 

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

 

It is difficult to value our business and evaluate our 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 OF SIGNIFICANT OPERATINGLOSSES.**

 

Until the quarter ended June 30, 2003 we had incurred operatinglosses (excluding non-recurring reversals of prior restructuring charges in thethird quarter of 2002) in every quarter since we began our current line ofbusiness in 1998. While our operating losses have narrowed significantly inrecent quarters, our ability to achieve profitability will depend on ourability to generate and sustain higher net sales while maintaining reasonableexpense levels. We cannot be certain that if we were to achieve profitability,we would be able to sustain or increase that profitability.

 

**OUR QUARTERLY FINANCIAL RESULTS MAY BEVOLATILE 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:

 

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•                  the demand for our services;

 

•                  the value, timing and renewal of contracts withcustomers;

 

•                  the amount and timing of operating costs andcapital expenditures;

 

•                  the performance of our technology;

 

•                  actions taken by our competitors, including newproduct 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 UPON FINANCIAL 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 INTENSE COMPETITION THAT COULD IMPAIROUR ABILITY TO RETAIN EXISTING CUSTOMERS, ATTRACT NEW CUSTOMERS AND ACHIEVEPROFITABILITY.**

 

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 and informationaggregators, who aggregate information and either host private-labelapplications that use that data or deliver that data in the form of feeds tocustomers;

 

•                  financial software vendors, who have already, ormay in the future, develop extensions to their software capabilities to be ableto manage external information as efficiently as internal information;

 

•                  the in-house development staffs of many of ourclients, who develop technology solutions often in conjunction with consultingand 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 significantadvantages over us. In addition, larger, well-established and well-financedentities may acquire, invest in or form joint ventures with our competitors.Increased competition from these or other competitors could adversely affectour business.

 

**WE DO NOT HAVE A PROVEN TRACK RECORD OFSELLING 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 CUSTOMERS ARE STARTUP COMPANIESWHO POSE CREDIT RISKS. THE FAILURE OF THESE CUSTOMERS TO PAY THEIR BILLS HASLED 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 ofJune 30, 2003 was approximately $570,000. While our bad debt expense hasnarrowed 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 CONTINUE TO DEVELOP OURTECHNOLOGY, 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 OR THIRD-PARTY SYSTEM OR EQUIPMENTFAILURES 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 SOFTWARE ERRORS OR FAILURES FOUNDIN NEW PRODUCTS MAY RESULT IN LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OURPRODUCTS 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 MAJOR INFORMATION PROVIDERS MAY LEAVEUS WITH INSUFFICIENT INFORMATION TO RETAIN AND ATTRACT 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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serviceswould be less attractive to customers. In addition, we cannot be certain thatwe will be able to license content or data from our current or new providers onfavorable terms in the future, if at all.

 

**WE RECENTLY CHANGED OUR NAME TOPINNACOR INC., A NAME THAT HAS NO PRIOR NAME RECOGNITION IN OUR INDUSTRY.IF WE ARE UNABLE TO MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION, WEMAY HAVE DIFFICULTY ATTRACTING NEW BUSINESS AND RETAINING CURRENT CUSTOMERS ANDEMPLOYEES, AND OUR BUSINESS MAY SUFFER.**

 

We believe that establishing and maintaining a good reputation and namerecognition is critical for attracting and retaining customers and employees.We also believe that the importance of reputation and name recognition isincreasing, and will continue to increase. If our reputation is damaged ordiminished because of our name change in October of 2002, or if potential customersare not familiar with us or the services we provide, we may be unable toattract new, or retain existing, customers and employees. Promotion andenhancement of our name will depend largely on our success in continuing toprovide effective services. If customers do not perceive our services to beeffective or of high quality, our brand name and reputation will suffer.

 

**PROTECTION OF OUR INTELLECTUAL PROPERTY ISLIMITED AND EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY 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 unauthorizedreproduction or other misappropriation of our trademarks or other intellectualproperty could diminish the value of our proprietary rights or reputation. Inaddition, the laws of some foreign countries do not protect proprietary rightsto the same extent as do U.S. laws. Moreover, potential competitors might beable to develop 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 MAY CLAIM THAT WE HAVE BREACHEDTHEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD DIVERT MANAGEMENT’S ATTENTIONAND 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 WE DISTRIBUTE IS UNLAWFULOR 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 DISTRIBUTE INFORMATION TO UNAUTHORIZEDRECIPIENTS, WE MAY HAVE TO PAY DAMAGES TO OUR INFORMATION 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 UNCERTAINTIES AND GOVERNMENT REGULATIONOF 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 AND REGULATIONS AFFECTING CORPORATEGOVERNANCE MAY IMPEDE OUR ABILITY TO RETAIN AND ATTRACT COMPETENT BOARDMEMBERS, A CHIEF EXECUTIVE OFFICER, AND A CHIEF FINANCIAL 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 OUR SECURITIES**

 

**VOLATILITY OF OUR STOCK PRICE COULD ADVERSELYAFFECT STOCKHOLDERS.**

 

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

 

•                  variations in our actual or anticipated quarterlyoperating results or those of our competitors;

 

•                  announcements of technological innovations by usor our competitors;

 

•                  introduction of new products or services by us orour competitors;

 

•                  conditions or trends in the technology or Internetindustry;

 

•                  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 or jointventures.

 

**WE DO NOT INTEND TO PAY DIVIDENDS.**

 

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

 

**WE ARE EFFECTIVELY CONTROLLED BY OUREXECUTIVE OFFICERS AND DIRECTORS AND THE INTERESTS OF THESE STOCKHOLDERS COULDCONFLICT WITH YOUR INTERESTS.**

 

Our executive officers and directors, in the aggregate, beneficiallyown approximately 32% of our outstanding common stock on a fully diluted basis.As a result, these stockholders, if acting together, would be able to exertconsiderable influence on any matters requiring approval by our stockholders,including the election of directors, amendments to our charter and by-laws andthe approval of mergers or other business combination transactions. Theownership position of these stockholders could delay, deter or prevent a changein control of Pinnacor and could adversely affect the price that investorsmight be willing to pay in the future for shares of our common stock.

 

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**RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In November 2002, the Financial Accounting Standards Board("FASB") issued Interpretation No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness to Others” (“FIN 45”) which elaborates on the disclosures tobe made by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also clarifies thata guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and measurement provisions of FIN 45are applicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002. The disclosure requirements in this Interpretation areeffective for financial statements of interim or annual periods ending afterDecember 15, 2002. The adoption of FIN 45 since January 1, 2003 has nothad a material effect on our financial position and operating 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 is not expected to have a significantimpact on our consolidated financial position and results of 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 performmultiple revenue generating activities. The EITF will be effective for fiscalyears beginning after June 15, 2003. The Company is currently evaluatingthe effects of this change on their consolidated financial position andoperating results.

 

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 No. 148 as of December 31,2002 (see  Note 7  to the condensed consolidated FinancialStatements). The adoption of SFAS No. 148 did not have a significant impacton the Company’s financial position and results of 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. The adoptionof this Statement has not had a material effect on our financial position andoperating results.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No.150 establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). Many of thoseinstruments were previously classified as equity. This Statement will becomeeffective for financial instruments entered into or modified after May 31,2003, and otherwise shall be effective at the beginning of the first interimperiod beginning after June 15, 2003. For financial instruments created beforethe issuance date of this Statement and still existing at the beginning of theinterim period of adoption, transition shall be achieved by reporting thecumulative effect of a change in an accounting principle by initially measuringthe financial instruments at fair value or other measurement attribute requiredby this Statement. The adoption of this Statement is not expected to have amaterial impact on the Company’s consolidated financial position or results ofoperations.

 

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**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 of June30, 2003 the effect of foreign exchange rate fluctuations was not material.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

(a) Evaluation of DisclosureControls and Procedures.

The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of a date within 90 days prior to the filingdate of this quarterly report (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its wholly owned subsidiaries)required to be included in the Company’s reports filed or submitted under theExchange Act.

 

(b)  Changes in Internal Controls.  Since the Evaluation Date, there have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly affect such controls.

 

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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., certain of Pinnacor’s current officers and directors, andMarketWatch.com in the Delaware Chancery Court. The lawsuit purports to be aclass action filed on behalf of holders of Pinnacor’s common stock as of thedate of the announcement of the proposed acquisition of Pinnacor byMarketWatch.com.   The lawsuit alleges that the Pinnacor directorsbreached their fiduciary duties in proceeding with the sale of Pinnacor toMarketWatch.com by agreeing to an inadequate proposed purchase price whichfails adequately to compensate Pinnacor shareholders for the loss of control ofthe company.  The lawsuit seeks an unspecified amount of damages and alsoprays for an injunction against consummation of the proposed transaction.

 

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

 

From the date of receipt offunds from our initial public offering through June 30, 2003, the net proceedsof the offering have been used to support our domestic sales and marketingactivities, our international operations, product development and for generalcorporate purposes. We also may use a portion of the net proceeds to invest incomplementary businesses or technologies. None of the net proceeds from theoffering

 

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was paid directly orindirectly to any director, officer, general partner or their associates, or toany persons owning 10% or more of any class of equity securities. Pendingapplication of the net proceeds towards one of the above uses, the net proceedshave 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 and regulatoryrestrictions on the payment of dividends and other factors that our board ofdirectors deems relevant.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

 On June 12, 2003 the Company held its annual meeting ofstockholders. The matters on which the stockholders voted, in person or byproxy, were (1) the election of three nominees as class III directors to serveuntil the 2006 annual meeting of stockholders and until their respective successorsare duly elected and qualified, and (2) the ratification of the selection ofDeloitte & Touche LLP as the independent auditors of the Company for thefiscal year ending December 31, 2003. The three nominees were elected andDeloitte & Touche LLP was ratified as the independent auditors of theCompany for the fiscal year ending December 31, 2003. The results of the votingare set forth below:

 
| **Election of directors** |   | **Votes  for** |   | **Votes  against** |   | **Votes  abstained** |   |
|---------------------------|--------|----------------|--------|--------------------|--------|----------------------|--------|
| James Davis               |   | 34,998,527     |   | 367,511            |   |                 |   |
| Kevin Clark               |   | 35,002,295     |   | 363,743            |   |                 |   |
| David Hodgson             |   | 33,684,052     |   | 1,681,986          |   |                 |   |
|                      |   |           |   |               |   |                 |   |
| Ratification of auditors  |   | 35,283,032     |   | 77,284             |   | 5,722                |   |

 

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**ITEM 5. OTHER INFORMATION**

 

On July 22, 2003 the Companyand MarketWatch.com,Inc. announced that they signed a definitive agreement whereby MarketWatch.comwill acquire Pinnacor.  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 oneshare of stock in the combined company for each share of MarketWatch.com stock.The aggregate 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, Pinnacorwill 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 is expectedto 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, datedJuly 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc., PinnacorInc., Maple Merger Sub, Inc. and Pine Merger Sub, Inc. (incorporated byreference to Form 8-K filed with the SEC on July 24, 2003).

 

10.1   Voting and Waiver Agreement, datedJuly 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc., PinnacorInc., CBS Broadcasting Inc. and Pearson International Finance Ltd.(incorporated by reference to Form 8-K filed with the SEC on July 24,2003)

 

10.2   Form of Voting Agreement, dated as ofJuly 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc. and each ofcertain individual stockholders of Pinnacor Inc. (incorporated by reference toForm 8-K filed with the SEC on July 24, 2003)

 

10.3   Form of Affiliate Agreement, dated as ofJuly 22, 2003, by and among NMP, Inc., MarketWatch.com, Inc. and each ofcertain individual stockholders of Pinnacor Inc. (incorporated by reference toForm 8-K filed with the SEC on July 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)           Reportson Form 8-K

On May 5, 2003 the registrantsubmitted a report on Form 8-K under Item 12 to file a press release datedApril 29, 2003 reporting its financial results for the first quarter of 2003and a transcript of the registrant’s conference call held on April 29, 2003reporting its financial results for such quarter.

 

On July 24, 2003 the registrantsubmitted a report on Form 8-K under Item 5 to file a merger agreement, votingagreements, affiliate agreements and a press release in connection with thesigning of a definitive merger agreement dated July 22, 2003 wherebyMarketWatch.com will acquire the registrant

 

On July 29, 2003 the registrantsubmitted a report on Form 8-K under Item 12 to file a press release dated July29, 2003 reporting its financial results for the second 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                                                     |   | August 14, 2003 |
| Kirk Loevner         |   |                                                                                                       |   |            |
|                 |   |                                                                                                       |   |            |
| /s/ DAVID M. OBSTLER |   | Chief Financial Officer, Executive  Vice President of Corporate  Development & Strategy and  Treasurer |   | August 14, 2003 |
| David M. Obstler     |   |                                                                                                       |   |            |

 

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