** **

**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

**(MARK ONE)**

 
| **ý****QUARTERLY REPORT  UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|----------------------------------------------------------------------------------------------------|
|                                                                                               |
| **FOR THE QUARTERLY PERIOD ENDED: June 30, 2002**                                                  |
|                                                                                               |
| **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**

 

**SCREAMINGMEDIA 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:) |
| **NOT APPLICABLE**                                                             |
|                                                                                |                                                                 |        |                                      |        |

 

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

 

As of August 6, 2002 therewere 42,805,811 shares of the Registrant’s common stock outstanding.

 

 

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**SCREAMINGMEDIA INC.**

 

**FORM 10-Q**

 

**QUARTER ENDED JUNE 30, 2002**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                    |
|----------|--------------------------------------------------------------------------------------------------------------------------|
|     |
| Item 1.  | Consolidated  Financial Statements                                                                                       |
|     |
|     | Consolidated Balance Sheets  – June 30, 2002 (unaudited) and December 31, 2001                                      |
|     |                                                                                                                     |
|     | Consolidated  Statements of Operations – Three and six months ended June 30, 2002 (unaudited)  and 2001 (unaudited) |
|     |                                                                                                                     |
|     | Consolidated  Statements of Cash Flows – Six months ended June 30, 2002 (unaudited) and  2001 (unaudited)           |
|     |                                                                                                                     |
|     | Notes to  Consolidated Financial Statements                                                                              |
|     |                                                                                                                     |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |
|     |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                              |
|     |
| PART II. | OTHER INFORMATION                                                                                                        |
|     |
| Item  1. | Legal  Proceedings                                                                                                       |
|     |
| Item  2. | Changes  in Securities and Use of Proceeds                                                                               |
|     |
| Item 3.  | Defaults upon  Senior Securities                                                                                         |
|     |
| Item  4. | Submission  of Matters to a Vote of Security Holders                                                                     |
|     |
| Item  5. | Other  Information                                                                                                       |
|     |
| Item 6.  | Exhibits and Reports  on Form 8-K                                                                                        |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**SCREAMINGMEDIA INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                                                                 |   | **JUNE  30,  2002** |        | **DECEMBER  31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|-------------------------|--------|
|                                                                                                                                                                                 |   | **(Unaudited)**     |        |                    |   |
| ASSETS                                                                                                                                                                               |   |                |        |                    |   |
| CURRENT ASSETS:                                                                                                                                                                      |   |                |        |                    |   |
| Cash and cash equivalents                                                                                                                                                            |   | $                   | 28,058,911  |                    | $      | 15,189,440 |   |
| Marketable securities                                                                                                                                                                |   | 32,016,518          |        | 48,925,499              |   |
| Accounts receivable, net of allowance for  doubtful accounts of $935,000 and $1,130,000 as of June 30, 2002 and December  31, 2001, respectively                                     |   | 3,257,302           |        | 5,577,430               |   |
| Prepaid expenses                                                                                                                                                                     |   | 735,897             |        | 1,402,467               |   |
| Total current assets                                                                                                                                                                 |   | 64,068,628          |        | 71,094,836              |   |
|                                                                                                                                                                                 |   |                |        |                    |   |
| PROPERTY AND EQUIPMENT–Net of  accumulated depreciation and amortization                                                                                                        |   | 6,793,559           |        | 11,007,497              |   |
| GOODWILL                                                                                                                                                                             |   | 34,988,044          |        | 34,063,396              |   |
| OTHER ASSETS                                                                                                                                                                         |   | 858,138             |        | 1,009,224               |   |
| TOTAL ASSETS                                                                                                                                                                         |   | $                   | 106,708,369 |                    | $      | 117,174,953 |   |
|                                                                                                                                                                                 |   |                |        |                    |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                           |   |                |        |                    |   |
|                                                                                                                                                                                 |   |                |        |                    |   |
| CURRENT LIABILITIES:                                                                                                                                                                 |   |                |        |                    |   |
| Accounts payable and accrued expenses                                                                                                                                                |   | $                   | 5,745,733   |                    | $      | 6,217,752 |   |
| Accrued restructuring expenses                                                                                                                                                       |   | 4,460,825           |        | 4,452,883               |   |
| Deferred revenue                                                                                                                                                                     |   | 8,123,797           |        | 11,036,116              |   |
| Current portion of capital lease  obligations                                                                                                                                        |   | 1,948,724           |        | 2,138,723               |   |
| Total current liabilities                                                                                                                                                            |   | 20,279,079          |        | 23,845,474              |   |
|                                                                                                                                                                                 |   |                |        |                    |   |
| NONCURRENT LIABILITIES:                                                                                                                                                              |   |                |        |                    |   |
| Capital lease obligations, less current  portion                                                                                                                                     |   | 1,776,396           |        | 1,857,707               |   |
| Total liabilities                                                                                                                                                                    |   | 22,055,475          |        | 25,703,181              |   |
|                                                                                                                                                                                 |   |                |        |                    |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                           |   |                |        |                    |   |
| Common stock, $0.01 par value,  100,000,000 shares authorized and 44,080,420 and 43,901,678 issued and  42,528,881 and 42,350,139 outstanding at June 30, 2002 and December 31, 2001 |   | 440,805             |        | 439,017                 |   |
| Additional paid-in capital                                                                                                                                                           |   | 224,188,767         |        | 225,455,188             |   |
| Warrants                                                                                                                                                                             |   | 1,638,388           |        | 1,638,388               |   |
| Deferred compensation                                                                                                                                                                |   | (752,720            | )           | (1,822,393              | )      |
| Treasury stock                                                                                                                                                                       |   | (968,738            | )           | (968,738                | )      |
| Accumulated deficit                                                                                                                                                                  |   | (140,142,617        | )           | (133,630,005            | )      |
| Accumulated other comprehensive income                                                                                                                                               |   | 249,009             |        | 360,315                 |   |
| Total stockholders’ equity                                                                                                                                                      |   | 84,652,894          |        | 91,471,772              |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                     |   | $                   | 106,708,369 |                    | $      | 117,174,953 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**SCREAMINGMEDIA INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(UNAUDITED)

 
|                                                                                                                                                                                                                                           |   | **Three  months ended  June 30,** |       | **Six  months ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                                                                                                                                                                                                           |   | **2002**                          |       | **2001**                        |   | **2002** |   | **2001** |   |
| NET REVENUE                                                                                                                                                                                                                                    |   | $                                 | 8,901,807  |                            | $      | 6,700,646 |   | $ | 18,312,802 |   | $ | 14,302,133 |   |
|                                                                                                                                                                                                                                           |   |                              |       |                            |   |   |   |   |   |
| OPERATING EXPENSES:                                                                                                                                                                                                                            |   |                              |       |                            |   |   |   |   |   |
| Cost of services (excluding depreciation  of $228,870 $258,662 $476,293 and $420,947 for the three months ended June  30, 2002 and 2001 and the six months ended June 30, 2002 and 2001,  respectively, shown below)                           |   | 2,851,252                         |       | 1,887,164                       |   | 5,839,112 |   | 4,105,912 |   |
| Research and development (excluding  stock-based compensation of $(99,342), $229,018, $(76,582) and $(272,581) for  the three months ended June 30, 2002 and 2001 and the six months ended June  30, 2002 and 2001, respectively, shown below) |   | 1,848,514                         |       | 1,955,065                       |   | 3,976,817 |   | 3,810,446 |   |
| Sales and marketing (excluding  stock-based compensation of $138,763 $429,959, $(595,717) and $558,723 for  the three months ended June 30, 2002 and 2001 and the six months ended June  30, 2002 and 2001, respectively, shown below)         |   | 2,412,636                         |       | 3,670,449                       |   | 5,528,779 |   | 7,990,449 |   |
| General and administrative (excluding  stock-based compensation of $141,391, $406,952, $282,782 and $677,199 for the  three months ended June 30, 2002 and 2001 and the six months ended June 30,  2002 and 2001, respectively, shown below)   |   | 1,765,926                         |       | 3,474,028                       |   | 3,886,017 |   | 7,312,584 |   |
| Depreciation and amortization                                                                                                                                                                                                                  |   | 1,091,026                         |       | 1,475,657                       |   | 2,327,727 |   | 2,962,183 |   |
| Stock-based compensation                                                                                                                                                                                                                       |   | 180,812                           |       | 1,065,929                       |   | (389,517 | ) | 963,341 |   |
| Restructuring and asset abandonment  charge                                                                                                                                                                                                    |   | 4,645,344                         |       | —                          |   | 4,645,344 |   | — |   |
| Total operating expenses                                                                                                                                                                                                                       |   | 14,795,510                        |       | 13,528,292                      |   | 25,814,279 |   | 27,144,915 |   |
| OPERATING LOSS                                                                                                                                                                                                                                 |   | (5,893,703                        | )          | (6,827,646                      | )      | (7,501,477 | ) | (12,842,782 | ) |
|                                                                                                                                                                                                                                           |   |                              |       |                            |   |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                                                                                                                                                                        |   |                              |       |                            |   |   |   |   |   |
| Interest income                                                                                                                                                                                                                                |   | 467,439                           |       | 1,139,077                       |   | 1,171,486 |   | 2,674,150 |   |
| Interest expense                                                                                                                                                                                                                               |   | (82,853                           | )          | (101,462                        | )      | (182,621 | ) | (230,017 | ) |
| Total other income, net                                                                                                                                                                                                                        |   | 384,586                           |       | 1,037,615                       |   | 988,865 |   | 2,444,133 |   |
|                                                                                                                                                                                                                                           |   |                              |       |                            |   |   |   |   |   |
| NET LOSS                                                                                                                                                                                                                                       |   | $                                 | (5,509,117 | )                               | $      | (5,790,031 | ) | $ | (6,512,612 | ) | $ | (10,398,649 | ) |
| Basic net loss per common share                                                                                                                                                                                                                |   | $                                 | (.13       | )                               | $      | (.15 | ) | $ | (.15 | ) | $ | (.27 | ) |
| Weighted-average number of shares of  common stock outstanding                                                                                                                                                                                 |   | 42,454,363                        |       | 38,096,795                      |   | 42,415,442 |   | 38,030,442 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**SCREAMINGMEDIA INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(UNAUDITED)

 
|                                                                         |   | **For  the six months ended June 30,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------------|------------|
|                                                                         |   | **2002**                               |       | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |   |                                   |       |   |   |
| Net loss                                                                     |   | $                                      | (6,512,612 | ) | $ | (10,398,649 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                   |       |   |   |
| Depreciation and amortization                                                |   | 2,327,727                              |       | 2,962,183 |   |
| Stock-based compensation                                                     |   | (389,517                               | )          | 877,091 |   |
| Stock/warrants issued for services                                           |   | —                                 |       | 86,250 |   |
| Non-cash portion of restructuring charge                                     |   | 3,425,560                              |       | — |   |
| Changes in operating assets and  liabilities:                                |   |                                   |       |   |   |
| Decrease in accounts receivable                                              |   | 2,320,128                              |       | 1,700,059 |   |
| Decrease (increase) in prepaid expenses  and other assets                    |   | 817,656                                |       | (1,355,579 | ) |
| Decrease in accounts payable and accrued expenses                            |   | (726,276                               | )          | (622,333 | ) |
| Decrease in deferred revenue                                                 |   | (3,378,856                             | )          | (441,557 | ) |
| Increase in accrued restructuring  expenses                                  |   | 7,942                                  |       | — |   |
| Net cash used in operating activities                                        |   | (2,108,248                             | )          | (7,192,535 | ) |
|                                                                         |   |                                   |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |   |                                   |       |   |   |
| Purchase of property and equipment                                           |   | (479,212                               | )          | (1,885,046 | ) |
| Sale (purchase)of investments and  marketable securities                     |   | 16,718,189                             |       | (20,912,899 | ) |
| Payments of severance and other exit  costs related to business acquired     |   | (203,854                               | )          | — |   |
| Net cash provided by (used in) investing  activities                         |   | 16,035,123                             |       | (22,797,945 | ) |
|                                                                         |   |                                   |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |   |                                   |       |   |   |
| Payment of capital lease obligations                                         |   | (1,331,447                             | )          | (1,455,195 | ) |
| Proceeds from exercise of warrants, stock  options and stock purchases       |   | 194,557                                |       | 360,974 |   |
| Net cash used in financing activities                                        |   | (1,136,890                             | )          | (1,094,221 | ) |
| Effect of exchange rate changes on cash  and cash equivalents                |   | 79,486                                 |       | 64,236 |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                        |   | 12,869,471                             |       | (31,020,465 | ) |
| CASH AND CASH EQUIVALENTS BEGINNING OF  PERIOD                               |   | 15,189,440                             |       | 58,305,096 |   |
| CASH AND CASH EQUIVALENTS END OF PERIOD                                      |   | $                                      | 28,058,911 |   | $ | 27,284,631 |   |
|                                                                         |   |                                   |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                          |   |                                   |       |   |   |
| Cash paid for interest                                                       |   | $                                      | 182,621    |   | $ | 230,017 |   |
| SUPPLEMENTAL DISCLOSURES OF NON-CASH  TRANSACTIONS:                          |   |                                   |       |   |   |
| Fixed assets acquired under capital  leases                                  |   | $                                      | 1,060,137  |   | $ | 318,614 |   |
| Common stock issued to board member                                          |   | $                                      | —     |   | $ | 86,250 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**SCREAMINGMEDIA INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2002**

(UNAUDITED)

 

1. BASIS OF PRESENTATION

 

The consolidated financialstatements of which these notes are part have been prepared pursuant to therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations; however, in theopinion of our management, the Consolidated Financial Statements include alladjustments, consisting only of normal recurring accruals, necessary to presentfairly the financial information for such periods. These Consolidated FinancialStatements should be read in conjunction with our Consolidated FinancialStatements and the notes thereto included in our Annual Report on Form 10-K,for the year ended December 31, 2001.

 

2. RECLASSIFICATIONS

 

Certain reclassificationshave been made in the June 30, 2001 financial statements to conform to theclassifications used in the June 30, 2002 financial statements.

 

3. IMPACT OF RECENTLY ISSUEDACCOUNTING STANDARDS

 

In June 2001, the FASBissued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill andOther Intangible Assets”. SFAS No. 141 prohibits the use of thepooling-of-interest method for business combinations initiated after June 30,2001 and also applies to all business combinations accounted for by thepurchase method that are completed after June 30, 2001. The Company has appliedthe provisions of SFAS No. 141 to its acquisition of Stockpoint. SFAS No. 142is effective for fiscal years beginning after December 15, 2001. Under SFAS No.142, goodwill and intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests. Otherintangible assets will continue to be amortized over their useful lives. Underthe transition provisions of SFAS No. 142, goodwill and long lived intangibleassets with indeterminate useful lives related to the Company’s Stockpointacquisition will not be periodically amortized. The Company has adopted thisstandard as of the beginning of its fiscal year 2002 (January 1, 2002). Seenote 11 of the notes to the consolidated financial statements for the effectsof adoption of this standard. The Company has evaluated goodwill for impairmentand has determined that no impairment exists at January 1, 2002.

 

In July 2001, the FASBissued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143is effective for fiscal years beginning after June 15, 2002, and establishes anaccounting standard requiring the recording of the fair value of liabilitiesassociated with the retirement of long-lived assets in the period in which theyare incurred. The Company is in the process of determining the future impactthat the adoption of SFAS No. 143 may have on our earnings and financialposition.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-livedAssets.” SFAS No. 144, which supercedes SFAS No. 121, “Accounting for theImpairment of Long-lived Assets and for Long-lived Assets to be Disposed Of”and the accounting and reporting provisions of APB Opinion No. 30, “ReportingResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, Extraordinary, Unusual and Infrequently occurring Events andTransactions, and amends ARB No. 51, “Consolidated Financial Statements,”addresses financial accounting and reporting for the impairment or disposal oflong-lived assets. SFAS No. 144 is effective for fiscal years beginning afterDecember 15, 2001, and interim periods within those fiscal years, with earlyadoption encouraged. The provisions of this Statement are generally to beapplied prospectively. The Company has adopted SFAS No. 144 as of January 1,2002. The adoption of SFAS No. 144 did not have a material effect on thefinancial condition or results of operations of the Company.

 

In November 2001, the FASBEmerging Task Force (“EITF”) reached a consensus on EITF Issue 01-09,ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER OR A RESELLER OFTHE VENDOR’S PRODUCTS, which is a codification of EITF 00-14, 00-22 and 00-25.This issue presumes that consideration from a vendor to a customer or resellerof the vendor’s products to be a reduction of the selling prices of thevendor’s products and, therefore, should be characterized as a reduction ofrevenue when recognized in the vendor’s income statement and could lead tonegative revenue under certain circumstances. Revenue reduction is requiredunless consideration relates to a separate identifiable benefit and thebenefit’s fair value can be

 

6

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established. This issue shouldbe applied no later than in annual or interim financial statements for periodsbeginning after December 15, 2001. The Company has applied EITF Issue 01-09 asof January 1, 2002 and this EITF did not have a material effect on theCompany’s consolidated financial statements.

 

In April 2002, the FASBissued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections”. This statement eliminatesthe automatic classification of gain or loss on extinguishment of debt as anextraordinary item of income and requires that such gain or loss be evaluatedfor extraordinary classification under the criteriaof Accounting PrinciplesBoard No. 30 “Reporting Results of Operations”. This statement also requiressales-leaseback accounting for certain lease modifications that have economiceffects that are similar to sales-leaseback transactions, and makes variousother technical corrections to existing pronouncements. This statement will beeffective for the Company for the year ending December 31, 2003. The Company isin the process of determining the future impact that the adoption of SFAS No.145 may have on our earnings and financial position.

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for the Costs Associated with Exit or DisposalActivities”. SFAS No. 146 will supersede EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” SFAS No.146 requires that costs associated with an exit or disposal plan be recognizedwhen incurred rather than at the date of a commitment to an exit or disposalplan. SFAS No. 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002. The Company is in the process ofdetermining the future impact that the adoption of SFAS No. 146 may have on ourearnings and financial position.

 

4. OTHER COMPREHENSIVE INCOME(LOSS)

 

The Company reports othercomprehensive income (loss) in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 130, which requires the disclosure ofcomprehensive income (loss).  SFAS No.130 requires that in addition to net income (loss), a Company should reportother comprehensive income (loss) consisting of gains and losses which bypassthe traditional income statement and are recorded directly into stockholders’equity (deficiency) on the balance sheet. The components of other comprehensive income for the Company consist ofunrealized gains and losses relating to the translation of foreign currency andunrealized gains and losses relating to the Company’s investments in marketablesecurities.  Comprehensive loss was $5.4million, $5.6 million, $6.6 and $10.2 million for the three and six monthsended June 30, 2002 and 2001, respectively.

 

5. ACQUISITION

 

On August 21, 2001, (the“Merger Date”) ScreamingMedia Inc. (the “Company”), acquired Stockpoint, Inc.(“Stockpoint”) pursuant to a merger of our newly-formed wholly-owned subsidiarySCRM Merger Corp. with and into Stockpoint with Stockpoint surviving as ourwholly-owned subsidiary (the “Merger”). The Company has accounted for thecombination with Stockpoint as a purchase business combination under SFAS No.141. Stockpoint is a provider of online financial applications, investmentanalysis tools and market information. As a result of the acquisition, theCompany has significantly strengthened its offerings to the financial servicesindustry, a key client sector. It also expects to reduce costs througheconomies of scale.

 

The results of Stockpoint’soperations have been included in the Company’s consolidated statement ofoperations since the Merger Date.

 

The total purchase priceagreed to was approximately $24.6 million and consisted of approximately$1,056,000 cash paid, 4.1 million shares of common stock issued, valued atapproximately $9.4 million determined based on the average closing market priceof ScreamingMedia’s common shares at the time of acquisition, warrants for thepurchase of 362,000 shares of common stock valued at approximately $699,000using the Black-Scholes Valuation Model, using an exercise price of $6.00,expected lives of 5 years, 146% volatility, 4.5% discount rate, and a Companystock price of $2.26, and Stockpoint debt of approximately $6.2 million paidoff at the Merger Date. As part of the approximate $24.6 million purchase priceagreed to and in addition to the aforementioned items, the Company paidapproximately $5.9 million in other assumed debt subsequent to the Merger Datethat was directly attributable to this transaction. Pursuant to the mergeragreement, the Company withheld ten percent of the consideration agreed to bepaid to Stockpoint’s equity holders, totaling approximately $1.1 million in cash,common stock and warrants for possible future purchase price adjustments. Thisholdback amount has not been placed in escrow and such withheld common sharesand warrants have not been issued. In addition, the Company incurredapproximately $1.4 million in acquisition expenses. The Company funded theacquisition through the use of its cash and cash equivalents.

 

The Company is in theprocess of obtaining an independent valuation of the assets and liabilities ithas acquired as well as identifying the intangible assets it has acquired inorder to 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 Merger Date.

 

7

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| Cash                   |   | $            | 675,829     |   |
|------------------------|--------|--------------|-------------|--------|
| Current assets         |   | 3,166,819    |        |
| Property and equipment |   | 1,333,810    |        |
| Goodwill               |   | 33,571,672   |        |
| Total assets acquired  |   | 38,748,130   |        |
| Current liabilities    |   | (14,1 22,343 | )           |
| Total purchase price   |   | $            | (24,625,787 | )      |

 

In connection with thisacquisition, the Company has recorded preliminary exit costs of $1,416,372 asof June 30, 2002 to exit certain Stockpoint activities. Of this amount,$1,085,664 was paid and $330,708 remains unpaid as of June 30, 2002. Such costsprimarily relate to employee terminations and lease terminations and have beenrecorded as additions to goodwill.

 

The unaudited pro formainformation below represents the consolidated results of operations as if themerger with Stockpoint had occurred as of January 1, 2001. The unaudited proforma information has been included for comparative purposes and is notindicative of the results of operations of the consolidated Company had themerger occurred as of January 1, 2001, nor is it necessarily indicative offuture results.

 

|                                                           |   | **Three Months  Ended June 30, 2001** |   | **Six Months  Ended June 30, 2001** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                                           |   | **(000’s)**                      |   | **(000’s)**                    |   |
|                                                           |   |                                  |   |                                |   |
| Net Revenue                                                    |   | $                                     | 11,715 |                                | $      | 24,893 |   |
|                                                           |   |                                  |   |                                |   |
| Net loss applicable to common  stockholders                    |   | $                                     | (6,452 | )                                   | $      | (12,668 | ) |
|                                                           |   |                                  |   |                                |   |
| Proforma Basic net loss per common share                       |   | $                                     | (0.15  | )                                   | $      | (0.30 | ) |
|                                                           |   |                                  |   |                                |   |
| Weighted-average number of shares of  common stock outstanding |   | 41,823                                |   | 42,757                              |   |

 

6. RESTRUCTURING AND ASSETABANDONMENT CHARGE

 

During the quarter endedJune 30, 2002, we recorded a  $4.6million restructuring and asset abandonment charge. This charge consisted of$3.4 million of asset abandonment charges, workforce reduction costs ofapproximately $700,000, and the shutdown or other rationalization of certainsales facilities and a data center of approximately $520,000. The plan wasmaterially completed as of June 30, 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 charges consisted of $520,000 of lease cancellationpayments through June, 2005.

 

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

 

8

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As of June 30, 2002, all of theplanned employee eliminations were completed. Cash severance payments ofapproximately $464,000 were made during the quarter ended June 30, 2002. AtJune 30, 2002 the remaining balance of the unpaid severance was classified inthe Consolidated Balance Sheet as part of accrued restructuring expenses. Theremaining balance for employee severance was approximately $235,000 at June 30,2002. The remaining balance for accrued severance relates to 7 employees andwill be funded from operations and is not expected to significantly impact theCompany’s liquidity.

 

The $3.4 million assetabandonment charge consists of approximately $2.0 million for the abandonmentof software modules and related professional services incurred in the design ofour computing infrastructure and MIS systems as well as $1.4 million for theabandonment of leasehold improvements, furniture and fixtures, and computer andnetwork equipment in conjunction with our facility and data center closures.

 

The following tablesummarizes the components of the restructuring charge:

 
|                     |   | **Cost**  |      | **Utilized** |   | **Balance Remaining at  June 30, 2002** |   |
|--------------------------|--------|-----------|-----------|--------------|--------|-----------------------------------------|--------|
| Facility shutdowns       |   | $         | 520,430   |         | $      | —                                  |   | $ | 520,430 |   |
| Workforce reductions     |   | 699,354   |      | 464,091      |   | 235,263                                 |   |
| Asset impairment charges |   | 3,425,560 |      | 3,425,560    |   | —                                  |   |
|                     |   | $         | 4,645,344 |         | $      | 3,889,651                               |   | $ | 755,693 |   |

 

During the fiscal year 2001,we recorded a $12.2 million restructuring charge. This charge consisted of $6.0million for the shutdown or other rationalization of certain sales facilities,workforce reduction costs of $1.3 million and asset impairment charges of $4.9million. The plan was materially completed at the end of fiscal year 2001.

 

Rationalization entails theconsolidation, shutdown or movement of facilities to achieve more efficientoperations. Six locations, located in both the United States and Europe, wereaffected by these actions. Facility shutdown charges consisted of $4.8 millionof lease cancellation payments and $1.2 million for expense recognition relatedto the termination of warrants issued to lessors.

 

The workforce reductioncharge of $1.3 million included involuntary employee separation costs for 74employees worldwide. The Company reduced headcount in sales and marketing,research and development and general and administrative areas. The affectedemployees received severance benefits pursuant to established severancepolicies or by governmentally mandated labor regulations. All of the plannedemployee eliminations were completed as of June 30, 2002. Cash severancepayments of approximately $975,000 and $301,000 were made during the year endedDecember 31, 2001 and the six months ended June 30, 2002, respectively.

 

The $4.9 million assetimpairment charge consists of $3.4 million for the abandonment of softwaremodules and related professional services incurred in the design of ourcomputing infrastructure and MIS systems as well as $1.5 million for theabandonment of leasehold improvements, furniture and fixtures and computerequipment in conjunction with our facility shutdowns.

 

The following tablesummarizes the components of the restructuring charge:

 
|                     |   | **Cost**  |            | **Utilized** |   | **Balance Remaining at  June 30, 2002** |   |
|--------------------------|--------|-----------|-----------------|--------------|--------|-----------------------------------------|--------|
| Facility shutdowns       |   | $         |  6,028,201 |         | $      |  2,343,647                         |   | $ |  3,684,554 |   |
| Workforce reductions     |   | 1,297,019 |            | 1,276,441    |   | 20,578                                  |   |
| Asset impairment charges |   | 4,913,982 |            | 4,913,982    |   | —                                  |   |
|                     |   | $         | 12,239,202      |         | $      | 8,534,070                               |   | $ | 3,705,132 |   |

 

9

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7. CASH AND CASH EQUIVALENTS

 

The Company considers allhighly liquid investments purchased with original maturities of three months orless to be cash equivalents. At June 30, 2002 and December 31, 2001, theCompany had cash and cash equivalents of $28.1 million and $15.2 million, respectively.

 

8. MARKETABLE SECURITIES

 

Marketable securitiesinvestments as of June 30, 2002 consist of the following:

 
|                      |   | **COST** |       | **UNREALIZED  HOLDING  GAINS** |   | **FAIR  VALUE** |   |
|---------------------------|--------|----------|------------|--------------------------------|--------|-----------------|--------|
| Corporate Notes and Bonds |   | $        | 31,835,067 |                           | $      | 181,451         |   | $ | 32,016,518 |   |
|                           |        |          |            |                                |        |                 |        |  |  |  |

 
|                                  |   | **COST** |       | **FAIR  VALUE** |   |
|---------------------------------------|--------|----------|------------|-----------------|--------|
| Due within one year                   |   | $        | 7,722,787  |            | $      | 7,727,245 |   |
| Due after one year through five years |   | $        | 24,112,280 |            | $      | 24,289,273 |   |
| Total marketable securities           |   | $        | 31,835,067 |            | $      | 32,016,518 |   |

 

Available-for-salesecurities are carried at fair value, with unrealized gains and losses reportedas a separate component of stockholders’ equity as of June 30, 2002 andDecember 31, 2001. The Company does not hold these securities for speculativeor trading purposes.

 

9. STOCK BASED COMPENSATION

 

In connection with the grantof stock options to employees, the Company has reversed previously recognizeddeferred stock based compensation expense of approximately $(113,000) and$(683,000) for the three and six months ended June 30, 2002, respectively. Thisreversal relates to previously recognized but unearned stock based compensationof forfeited, unvested stock options granted to terminated employees. Inaddition, the Company reversed future amortization expense of approximately$200,000 and $1.5 million within the balance sheet from deferred compensationto additional paid in capital, reflecting the forfeiture of these options forthe three and six months ended June 30, 2002, respectively.

 

10. NET LOSS PER COMMONSHARE

 

Basic net loss per share wascomputed by dividing net loss attributable to common stockholders by theweighted average number of common shares outstanding. Diluted net loss pershare has not been presented since the impact of options, warrants and theconversion of preferred shares would have been antidilutive.

 

11.  GOODWILL

 

Effective January 1, 2002, thebeginning of ScreamingMedia’s fiscal year 2002, the Company adopted SFAS No.142, “Goodwill and Other Intangible Assets,” under which goodwill is no longeramortized but instead is assessed for impairment at least annually.  Under the transition provisions of SFAS No.142, there was no goodwill impairment at January 1, 2002.

 

The Company operates in onereporting unit, the same as its one principal business segment, for purposes ofevaluating the recoverability of goodwill.

 

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The changes in the carryingamount of goodwill for the six months ended June 30, 2002 are as follows:

 
| Balance as of January 1, 2002                                                                        |   | $       | 34,063,396 |   |
|------------------------------------------------------------------------------------------------------|--------|---------|------------|--------|
|                                                                                                 |   |    |       |
| Additional transaction costs Related to the  Stockpoint acquisition                                  |   | 22,730  |       |
|                                                                                                 |   |    |       |
| Purchase price allocation adjustments  related to Liabilities acquired in the Stockpoint acquisition |   | 901,918 |       |
|                                                                                                 |   |    |       |
| Balance as of June 30, 2002                                                                          |   | $       | 34,988,044 |   |

 

All of the goodwill relatesto the Company’s acquisition of Stockpoint in August 2001 (See note 5). Therewas no amortization related to goodwill recorded during the three and six monthperiods ended June 30, 2002 and 2001. The Company has not finalized thevaluation and identification of the intangible assets it has acquired in orderto finalize the allocation of the purchase price of the Stockpoint acquisitionas of June 30, 2002. The Company expects to complete this valuation andidentification during the quarter ended September 30, 2002.

 

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

 

The following discussion andanalysis of our financial condition and results of operations should be readtogether with our consolidated financial statements and related notes containedherein and the information contained in our Annual Report on Form 10-K for theyear ended December 31, 2001, as filed with the Securities and ExchangeCommission on April 1, 2002. This discussion contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended and Section 21E of the Securities Exchange Act of 1934, as amended. Wemay identify these statements by the use of words such as “believe”, “expect”,“anticipate”, “intend”, “plan” and similar expressions. These forward-lookingstatements involve several risks and uncertainties.

 

Our actual results maydiffer materially from those set forth in these forward-looking statements as aresult of a number of factors, including those described under the caption“Risk Factors” herein and in our Annual Report on Form 10-K as filed with theUnited States Securities and Exchange Commission. These forward-lookingstatements speak only as of the date of this quarterly report, and we cautionyou not to rely on these statements without also considering the risks anduncertainties associated with these statements and our business as addressedelsewhere in this quarterly report.

 

**OVERVIEW**

 

ScreamingMedia providesinformation management solutions to the enterprise. The Company providesturnkey solutions to customers in target segments where information ismission-critical, namely Financial Services, Corporate Websites & Intranetsand Access Providers. ScreamingMedia’s solutions encompass technology for integratingthird party information and internal information into business systems,applications to present and analyze that information, a range of licensedinformation from various sources, and services to enable customization andintegration of this information into any platform including websites,intranets, wireless solutions and interactive television services.

 

**CRITICALACCOUNTING POLICIES**

 

The Securities and ExchangeCommission (“SEC”) recently issued disclosure guidance for “critical accountingpolicies”. The SEC defines “critical accounting policies” as those that requireapplication of management’s most difficult, subjective or complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain and may 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 10K for the year ended December 31, 2001 as filed with the SECon April 01, 2002. In many cases, the accounting treatment of a particulartransaction is specifically dictated by generally accepted accountingprinciples, with no need for management’s judgment in their application. Thereare also areas in which management’s judgment in selecting any availablealternative would not produce a materially different result.

 

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. For the fiscal years ended 2001 and 2000, theCompany recognized revenue over the life of the applicable contracts.

 

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During Fiscal 2002, we maysell our software and, under certain circumstances, will recognize revenue inaccordance with the provisions of the American Institute of Certified PublicAccountants’ Statement of Position 97-2, “Software Revenue Recognition” (SOP97-2). During the quarter and six months ended June 30, 2002, we did notrecognize revenue in accordance with SOP 97-2. All other software sales will berecognized over the life of the applicable contracts in accordance with theprovisions of the American Institute of Certified Public Accountants’ Statementof Position 81-1, “Accounting for Performance of Construction Type Contracts”(Sop 81-1).

 

SOFTWARE CAPITALIZATION:Until 2002, we did not sell software as a standalone product. During 2001, wemade a decision to modify certain existing internal use software and attempt tosell it as “Actrellis”. At the time this decision was made, we determined thatwe would need to modify our existing software capitalization policy, such thatin the future, we would now follow the guidance of SFAS 86, “Accounting for theCosts of Computer Software to Be Sold, Leased, or Otherwise Marketed” forsoftware to be sold externally. The internal use software predecessor toActrellis was developed prior to the issuance of 98-1, “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use”. SOP 98-1requires certain costs attributable to internally developed software to becapitalized in the application development stage. Since the applicationdevelopment of Actrellis’ predecessor occurred prior to the issuance of SOP98-1, no amounts related to Actrellis’ development were capitalized to date.

 

Under SFAS No. 86, researchand development costs are expensed as incurred. Additionally, softwaredevelopment costs are subject to capitalization beginning when a product’stechnological feasibility has been established and ending when a product isavailable for release to customers. The Company’s Actrellis software wasreleased soon after technological feasibility was established in the firstquarter ended March 31, 2002. As a result, capitalizable costs subsequent toachieving technological feasibility under SFAS No. 86 have not been incurredbefore the first quarter of 2002 and all software development costs have beenexpensed to date.

 

GOODWILL: The Company’sintangibles consist primarily of goodwill from our acquisition of Stockpointaccounted for under the purchase method. The Company is in the process ofobtaining 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.Under the transition provisions of Statement of Financial Accounting Standards(“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, goodwill related tothe Company’s Stockpoint acquisition has not been periodically amortized duringthe six months ended June 31, 2002.

 

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 reported period. Actual results could differ from theseestimates.

 

**REVENUE**

 

We derive our revenue fromthe sales of licensable applications, customized data, processing and deliveryof information as well as set up and professional services.

 

HOSTED APPLICATIONS: We selland host end user applications that enable customers to present information. Wesell individual applications such as stock quotes or charts and bundle many ofour applications into business solutions which include the Financial ServicesProduct Suite, the Business Information Product Suite and the Consumer ProductSuite. We recognize the revenue from hosted applications on a subscriptionbasis once the product has been implemented.

 

SOFTWARE: ScreamingMediasells the Actrellis Integration Server Software, formerly known as Siteware,which consumers install behind their firewall in order to receive informationfrom ScreamingMedia. The revenue from this product is recognized ratably overthe contract term.  

 

In 2002, we began sellingour Actrellis Enterprise Software Suite which customers can use to integrateand present information without receiving any data or recurring services fromScreamingMedia. This stand-alone software is sold as a perpetual or annuallicense fee and the fees vary according to the version and functionality ofsoftware selected. In accordance with the provisions of the American Instituteof Certified Public Accountants’ Statement of Position 97-2, “Software RevenueRecognition” (SOP 97-2), software license revenue is generally recognized when,the contracted is executed, all delivery obligations have been met, the fee isfixed and determinable, collectibility is probable and vendor specificobjective evidence is determinable. For some arrangements, we may provideservices that are essential to the functionality of the software selected. Forthese arrangements both the license revenue and services revenue will berecognized in accordance with the provisions of the American Institute ofCertified Public Accountants’ Statement of Position 81-1, “Accounting forPerformance of Construction Type Contracts” (SOP 81-1). We will account forthese arrangements under the percentage of completion contract method pursuantto SOP 81-1.

 

Maintenance revenue fortechnical product support is recognized ratably over the term of the contract.

 

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CUSTOMIZED DATA: We provideclients with information, which is provided as either customized data feeds orpresented in our applications. We charge clients based on the type and volumeof information, and recognize this revenue on a subscription basis.

 

PROCESSING AND DELIVERY: Forclients that have direct relationships with information providers and for ourSyndication!Connect product, we provide a technology platform for the deliveryand integration of information. We charge a processing and delivery fee basedon the amount of data delivered. This revenue is recognized on a subscriptionbasis.

 

SET-UP FEES: Most of ourproducts require a one-time set-up fee which include charges for buildingcustom filters, which enable the customer to receive customized information,and integration kits that enable deeper integration of our informationmanagement solutions with third party software such as content managementsystems and enterprise information portals that customers use to operate theirsite. Set-up revenue is recognized ratably over the term of the contract.

 

PROFESSIONAL SERVICES: Weoffer professional services, which include customization of products, systemsintegration services and other special projects including editorial servicesand consulting. Depending on the nature of the customization, this revenue isgenerally recognized as the service is performed or over the life of thecontract .

 

We record billed amounts duefrom clients in excess of revenue recognized as deferred revenue on our balancesheet. Our contracts typically have lengths of one or two years. We report ourrevenue net of allowances and rebates.

 

**COST OFSERVICES**

 

Cost of services consists ofroyalties to information providers as well as costs for bandwidth, storage of ourservers in third-party network data centers and certain costs associated withthe maintenance of our infrastructure. We also include certain payroll andrelated expenses pertaining to staff associated with client implementation,developing custom applications, performing editorial and quality assuranceservices and maintaining our network operations.

 

We have several differentarrangements with information providers. The majority of our contracts arebased on royalty fees that are calculated monthly, based on the volume of aprovider’s information relayed to our customers. In certain cases, thecontractual agreement is based on fixed fees or subject to a minimum charge.Certain of these fixed fee arrangements include additional fees at a variablerate once our clients exceed a specified usage volume. In other cases, welicense information based on a per client basis.

 

**RESEARCHAND DEVELOPMENT EXPENSES**

 

Research and developmentexpenses consist primarily of salaries and related personnel costs associated withthe research, design and development of software applications and servicessupporting our business. These include engineers that are developing andmaintaining our software and infrastructure and our product managers. Researchand development costs are expensed as incurred until technological feasibilityis established for software to be sold. To date, we believe under our currentsoftware engineering processes that the establishment of technologicalfeasibility and general release, have substantially coincided. As a result, nosoftware development costs have been capitalized to date for software developedfor external sales. For software developed for internal use, expenses arecapitalized while in the application development stage and expensed while inthe preliminary and post implementation stages.

 

**SALES ANDMARKETING EXPENSES**

 

Sales and marketing expensesinclude costs of sales and marketing personnel, as well as business developmentand customer support personnel, related overhead, commissions, advertising andpromotion expenses, travel and entertainment expenses and other selling andmarketing costs.

 

**GENERAL ANDADMINISTRATIVE EXPENSES**

 

General and administrativeexpenses consist primarily of personnel and related costs for general corporatefunctions including accounting, finance, human resources, legal and otheradministrative functions, as well as provisions for doubtful accounts and baddebt expense.

 

**STOCK BASEDCOMPENSATION**

 

In connection with the grantof stock options to employees, we recognized deferred stock-based compensationexpense of  $180,812, $(389,517),$1,065,929 and $963,341 for the three and six months ended June 30, 2002 and2001, respectively. Stock-based compensation is a result of the issuance ofstock options to employees, directors and affiliated parties with exerciseprices per share determined for financial reporting purposes to be below thefair market value per share of our common stock at the date of the applicablegrant. This difference is recorded as a reduction of stockholders’ equity andamortized as non-cash compensation expense on an accelerated basis over thevesting period of the related options.

 

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Included in stock-basedcompensation expense for the quarter ended June 30, 2002, the Company hasreversed previously recognized deferred stock based compensation expense ofapproximately $(113,000). This reversal relates to previously recognized butunearned stock based compensation of forfeited, unvested stock options grantedto terminated employees. In addition, the Company reversed future amortizationexpense of approximately $200,000 within the balance sheet from deferredcompensation to additional paid in capital, reflecting the forfeiture of theseoptions during the current quarter.

 

**RESULTS OFOPERATIONS**

 

The results of operationsfor the three and six months ended June 30, 2001 do not include the results ofoperations of Stockpoint as the Merger Date of this acquisition was August 21,2001. The following table sets forth our results of operations as a percentageof revenue for the periods indicated.

 
|                                                                                                                                                                           |   | **FOR THE THREE   MONTHS ENDED  June 30,** |   | **FOR THE SIX  MONTHS ENDED  June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                                                                                           |   | **2002**                                   |   | **2001**                                |   | **2002** |   | **2001** |   |
| Revenue                                                                                                                                                                        |   | 100                                        | %      | 100                                     | %      | 100 | % | 100 | % |
|                                                                                                                                                                           |   |                                       |   |                                    |   |   |   |   |   |
| Operating expenses:                                                                                                                                                            |   |                                       |   |                                    |   |   |   |   |   |
|                                                                                                                                                                           |   |                                       |   |                                    |   |   |   |   |   |
| Cost of services (excluding depreciation  of 3%, 4%, 3% and 3% for the three and six months ended June 30, 2002 and  2001 respectively, shown below)                           |   | 32                                         | %      | 28                                      | %      | 32 | % | 29 | % |
| Research and development  (excluding stock-based compensation of (2)%, 4%, 0%, and (2)% for the three  and six months ended June 30, 2002 and 2001, respectively, shown below) |   | 21                                         |   | 29                                      |   | 22 |   | 27 |   |
| Sales and  marketing (excluding stock-based compensation of 2%, 6%,(4)%, and 4% for the  three and six months ended June 30, 2002 and 2001, respectively, shown below)         |   | 27                                         |   | 55                                      |   | 30 |   | 56 |   |
| General and  administrative (excluding stock-based compensation of 2%, 6%, 2% and 5% for  the three and six months ended June 30, 2002 and 2001, respectively, shown  below)   |   | 20                                         |   | 52                                      |   | 21 |   | 51 |   |
| Depreciation and amortization                                                                                                                                                  |   | 12                                         |   | 22                                      |   | 13 |   | 21 |   |
| Stock-based compensation                                                                                                                                                       |   | 2                                          |   | 16                                      |   | (2 | ) | 7 |   |
| Restructuring and asset abandonment  charge                                                                                                                                    |   | 52                                         |   | —                                  |   | 25 |   | — |   |
| Total operating expenses                                                                                                                                                       |   | 166                                        |   | 202                                     |   | 141 |   | 191 |   |
| Operating loss                                                                                                                                                                 |   | (66                                        | )      | (102                                    | )      | (41 | ) | (91 | ) |
| Other income (expense), net                                                                                                                                                    |   | 4                                          |   | 15                                      |   | 5 |   | 17 |   |
| Net loss                                                                                                                                                                       |   | (62%                                       | )      | (87%                                    | )      | (36% | ) | (74% | ) |

 

Certain reclassificationshave been made in the June 30, 2001 financial statements to conform to theclassifications used in the June 30, 2002 financial statements.

 

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**THREEMONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001**

 

REVENUE. Total revenueincreased to $8.9 million for the three months ended June 30, 2002, an increaseof $2.2 million or 33% from $6.7 million for the three months ended June 30,2001. This increase was primarily due to the acquisition of Stockpoint, whichaccounted for $4.7 million of revenue. After adjusting for the acquisition, ourunderlying revenues would have decreased by 37%. This decrease adjusted for theacquisition of Stockpoint is due to a decrease in our customer base partiallyoffset by an increase in the average contract value per customer.  Although our total revenue has generallyincreased year over year, we cannot be certain that total revenue will grow infuture periods or that it will grow at similar rates as in the past.

 

COST OF SERVICES. Cost ofservices increased to $2.9 million for the three months ended June 30, 2002, anincrease of approximately $1.0 million or 51% from $1.9 million for the threemonths ended June 30, 2001. After adjusting for the cost of servicesattributable to the acquisition of Stockpoint of approximately $1.1 million,our underlying cost of services decreased by 10%. This decrease was due to adecrease in the number of employees in the implementation and data engineering,network operations and professional services departments, as well as a decreasein corresponding revenue. As a percentage of revenue, and including Stockpoint,cost of services increased to approximately 32% for the three months ended June31, 2002 from 28% for the three months ended June 30, 2001.

 

RESEARCH AND DEVELOPMENT.Research and development expenses decreased to $1.8 million for the threemonths ended June 30, 2002, a decrease of approximately $200,000 or 10% from$2.0 million for the three months ended June 30, 2001. After adjusting forresearch and development costs attributable to the Stockpoint acquisition ofapproximately $596,000 our underlying research and development costs decreasedby approximately 36%. This is due to a decrease in personnel costs. As apercentage of revenue and including Stockpoint for the current quarter,research and development expenses decreased to approximately 21% for the threemonths ended June 30, 2002 from approximately 29% for the three months endedJune 30, 2001. The decrease in research and development as a percentage oftotal revenue resulted primarily because total revenue growth outpacedincreases in research and development expenditures.

 

SALES AND MARKETING. Salesand marketing expenses decreased to $2.4 million for the three months endedJune 30, 2002, a decrease of approximately $1.3 million or 34%, from $3.7million for the three months ended June 30, 2001. After adjusting for sales andmarketing costs attributable to the Stockpoint acquisition of approximately$561,000, our underlying sales and marketing costs decreased by approximately50%. As a percentage of revenue and including Stockpoint for the current quarter,sales and marketing costs decreased to approximately 27% for the three monthsended June 30, 2002 from approximately 55% for the three months ended June 30,2001. This decrease in sales and marketing expense was due to a significantdecrease in marketing programs, and a decrease in compensation expenseassociated with the reduction of our sales force and customer support. Thedecrease in sales and marketing, as a percentage of revenue resulted primarilybecause total revenue growth outpaced significant reductions in sales andmarketing expenditures.

 

GENERAL AND ADMINISTRATIVE.General and administrative expenses decreased to $1.8 million for the threemonths ended June 30, 2002, a decrease of approximately $1.7 million or 49%,from $3.5 million for the three months ended June 30, 2001. After adjusting forgeneral and administrative costs attributable to the Stockpoint acquisition ofapproximately $486,000, our underlying general and administrative costsdecreased by approximately 63%. This was due to a significant decrease in baddebt expense, a decrease in facilities and personnel costs, professional feesand travel expenses. As a percentage of revenue, and including Stockpoint forthe current quarter,  general andadministrative expenses decreased to approximately 20% for the three monthsended June 30, 2002 from 52% for the three months ended June 30, 2001. Generaland administrative expenses decreased as a percentage of total revenueprimarily because revenue growth outpaced increases in general andadministrative expenditures.

 

AMORTIZATION OF INTANGIBLES.In connection with the acquisition of Stockpoint, we are in the process ofobtaining an independent valuation of the assets and liabilities acquired, aswell as identifying the intangible assets acquired in order to finalize theallocation of the purchase price of the transaction. The valuation will befinalized within one year of the acquisition date. For the year ending December31, 2002 we will incur amortization expense once we have identified theintangible assets related to the acquisition.

 

STOCK-BASED COMPENSATION. Inconnection with the grant of stock options to employees, the Company hasrecognized deferred stock based compensation expense of approximately $181,000and $1.1 million for the three months ended June 30, 2002 and 2001,respectively.  As a percentage ofrevenue, stock-based compensation decreased to approximately 2% for the threemonths ended June 30, 2002, from 16% for the three months ended June 30, 2001.

 

Included in stock-basedcompensation expense for the quarter ended June 30, 2002, the Company hasreversed previously recognized deferred stock based compensation expense ofapproximately $(113,000). This reversal relates to previously recognized butunearned stock based compensation of forfeited, unvested stock options grantedto terminated employees.

 

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RESTRUCTURING AND ASSETABANDONMENT CHARGE.  In June 2002 ourmanagement took certain actions to further increase operational efficienciesand bring costs in line with revenues. These measures included assetabandonment charges, the involuntary terminations of 34 employees, from salesand marketing, research and development and general and administrative areas,and the closure of our UK satellite office and data center.  As a consequence, we recorded a $4.6 millioncharge to operations during the second quarter of 2002 for severance-relatedpayments to terminated employees, the accrual of future lease costs (net ofestimated sublease income) and the write-off of fixed assets for officelocations that were closed or consolidated and 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, there can be no assurance that such costreductions can be sustained or that the estimated costs of such actions willnot change.

 

We incurred no suchrestructuring or asset abandonment charges for the three months ended June 30,2001.

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and  cash equivalents and marketable securities offset by interest oncapital leases. Other income, net, decreased to approximately $385,000 for thethree months ended June 30, 2002, from approximately $1.0 million for the threemonths ended June 30, 2001. The significant decrease was due to a decrease ininterest income earned on declining cash balances, cash equivalents andinvestments in marketable securities.

 

**SIX MONTHSENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001**

 

REVENUE. Total revenueincreased to $18.3 million for the six months ended June 30, 2002, an increaseof $4.0 million or 28% from $14.3 million for the six months ended June 30,2001. This increase was primarily due to the acquisition of Stockpoint, whichaccounted for $9.3 million of revenue. After adjusting for the acquisition, ourunderlying revenues would have decreased by 37%. This decrease adjusted for theacquisition of Stockpoint is due to a decrease in our customer base partiallyoffset by an increase in the average contract value per customer.  Although our total revenue has generallyincreased year over year, we cannot be certain that total revenue will grow infuture periods or that it will grow at similar rates as in the past.

 

COST OF SERVICES. Cost ofservices increased to $5.8 million for the six months ended June 30, 2002, anincrease of approximately $1.7 million or 42% from $4.1 million for the sixmonths ended June 30, 2001. After adjusting for the cost of servicesattributable to the acquisition of Stockpoint of approximately $2.4 million,our underlying cost of services decreased by approximately  17%. This decrease was due to a decrease inthe number of employees in the implementation and data engineering, networkoperations and professional services departments, as well as a decrease incorresponding revenue. As a percentage of revenue, and including Stockpoint forthe current period, cost of services increased to approximately 32% for the sixmonths ended June 31, 2002 from 29% for the six months ended June 30, 2001.

 

RESEARCH AND DEVELOPMENT.Research and development expenses increased slightly to $4.0 million for thesix months ended June 30, 2002, an increase of approximately $200,000 or 5%,from $3.8 million for the six months ended June 30, 2001. After adjusting forresearch and development costs attributable to the Stockpoint acquisition ofapproximately $1.4 million, our underlying research and development costsdecreased by approximately $1.2 million or 32%. This is due to a decrease inpersonnel costs. As a percentage of revenue and including Stockpoint for thecurrent period, research and development expenses decreased to approximately 22%for the six months ended June 30, 2002 from approximately 27% for the sixmonths ended June 30, 2001. The decrease in research and development as apercentage of total revenue resulted primarily because total revenue growthoutpaced increases in research and development expenditures.

 

SALES AND MARKETING. Salesand marketing expenses decreased to $5.5 million for the six months ended June30, 2002, a decrease of approximately 2.5 million or 31%, from $8.0 million forthe six months ended June 30, 2001. After adjusting for sales and marketingcosts attributable to the Stockpoint acquisition of approximately $1.3 millionour underlying sales and marketing costs decreased by approximately 47%. As apercentage of revenue and including Stockpoint for the current period, salesand marketing costs decreased to approximately 30% for the six months endedJune 30, 2002 from approximately 56% for the six months ended June 30, 2001.This decrease in sales and marketing expense was due to a significant decreasein marketing programs, and a decrease in compensation expense associated withthe reduction of our sales force and customer support. The decrease in salesand marketing, as a percentage of revenue resulted primarily because totalrevenue growth outpaced significant reductions in sales and marketingexpenditures.

 

GENERAL AND ADMINISTRATIVE.General and administrative expenses decreased to $3.9 million for the sixmonths ended June 30, 2002, a decrease of approximately $3.4 million or 47%,from $7.3 million for the six months ended June 30, 2001. After adjusting forgeneral and administrative costs attributable to the Stockpoint acquisition ofapproximately $1.0 million, our underlying general and administrative costsdecreased significantly by approximately 61%. This was due to a significantdecrease in bad debt expense, a decrease in facilities and personnel costs,professional fees and travel expenses. As a percentage of revenue, andincluding Stockpoint for the current period, general and administrative expenses decreased to approximately 21% forthe six months ended June 30, 2002 from 51% for the six months ended June 30,2001. General and administrative expenses decreased as a percentage of totalrevenue primarily because revenue growth outpaced increases in general andadministrative expenditures.

 

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AMORTIZATION OF INTANGIBLES.In connection with the acquisition of Stockpoint, we are in the process ofobtaining an independent valuation of the assets and liabilities acquired, aswell as identifying the intangible assets acquired in order to finalize theallocation of the purchase price of the transaction. The valuation will befinalized within one year of the acquisition date. For the year ending December31, 2002 we will incur amortization expense once we have identified theintangible assets related to the acquisition.

 

STOCK-BASEDCOMPENSATION. In connection with the grant of stock options to employees, theCompany has recognized  deferred stockbased compensation expense of approximately $(390,000) and $963,000 for the sixmonths ended June 30, 2002 and 2001, respectively.  The reversal for the six months ended June 30, 2002,relates to previously recognized but unearned stock based compensation offorfeited, unvested stock options granted to terminated employees.

 

RESTRUCTURING AND ASSETABANDONMENT CHARGE.  In June 2002 ourmanagement took certain actions to further increase operational efficienciesand bring costs in line with revenues. These measures included asset impairmentand abandonment charges, the involuntary terminations of 34 employees, fromsales and marketing, research and development and general and administrativeareas, and the closure of our UK satellite office.  As a consequence, we recorded a $4.6 million charge to operationsduring the 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 or impaired. As a result of theserestructuring initiatives, we expect to achieve annualized savings ofapproximately $5.0 million in operating expenses, including depreciationexpense.  However, there can be noassurance that such cost reductions can be sustained or that the estimatedcosts of such actions will not change.

 

We incurred no suchrestructuring or asset abandonement charges for the six months ended June 30,2001.

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and  cash equivalents and marketable securities offset by interest oncapital leases. Other income, net, decreased to approximately $989,000 for thesix months ended June 30, 2002, from $2.4 million for the six months ended June30, 2001. The significant decrease was due to a decrease in interest incomeearned on declining cash balances, cash equivalents and investments inmarketable securities.

 

**QUARTERLYOPERATING RESULTS**

 

The following table setsforth our unaudited quarterly operating results for each of our last eightquarters. This information has been derived from our unaudited interimfinancial statements. In our opinion, this unaudited information has beenprepared 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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|                                                                                                                                                                                                                       |   | **THREE MONTHS ENDED**                    |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                                                                                                                                                       |   | **SEPTEMBER 30,2000**                |       | **DECEMBER 31,2000** |   | **MARCH 31,2001** |   | **JUNE 30,****2001** |   | **SEPTEMBER 30,  2001** |   | **DECEMBER 31,2001** |   | **MARCH 31,2002** |   | **JUNE 30,2002** |   |
|                                                                                                                                                                                                                       |   | **(IN THOUSANDS EXCEPT PER  SHARE DATA)** | ** ** |
| Total revenue                                                                                                                                                                                                              |   | $                                         | 6,584      |   | $ | 7,856 |   | $ | 7,601 |   | $ | 6,701 |   | $ | 7,244 |   | $ | 9,405 |   | $ | 9,411 |   | $ | 8,902 |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                                                                                                                                                        |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of services (excluding depreciation  of $256, $151, $162, $259, $156, $227, $247 and $229 in the third quarter of  2000 through the second quarter of 2002, respectively, as shown below)                             |   | 1,985                                     |       | 1,543 |   | 2,219 |   | 1,887 |   | 2,239 |   | 2,866 |   | 2,988 |   | 2,851 |   |
| Research and development(excluding  stock-based compensation of $439, $431, $(502), $229, $161, $236, $23 and  $(99) in the third quarter of 2000 through the second quarter of 2002,  respectively, as shown below)       |   | 1,835                                     |       | 1,960 |   | 1,855 |   | 1,955 |   | 2,150 |   | 1,893 |   | 2,128 |   | 1,849 |   |
| Sales and marketing (excludes stock-based  compensation of $1,171, $812, $129, $430, $(473), $(196) $(735) and $139 in  the third quarter of 2000 through the second quarter of 2002, respectively,  as shown below)       |   | 6,156                                     |       | 5,884 |   | 4,320 |   | 3,670 |   | 3,145 |   | 3,377 |   | 3,116 |   | 2,413 |   |
| General and administrative (excludes  stock-based compensation of $2,499, $2,373, $270, $407, $485, $(296), $141  and $141 in the third quarter of 2000 through the second quarter of 2002,  respectively, as shown below) |   | 2,199                                     |       | 4,071 |   | 3,839 |   | 3,474 |   | 3,128 |   | 2,671 |   | 2,120 |   | 1,766 |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                                                                                                                                              |   | 936                                       |       | 1,417 |   | 1,487 |   | 1,476 |   | 1,141 |   | 1,353 |   | 1,236 |   | 1,091 |   |
| Stock-based compensation                                                                                                                                                                                                   |   | 4,109                                     |       | 3,616 |   | (103 | ) | 1,066 |   | 173 |   | (256 | ) | (570 | ) | 181 |   |
| Restructuring and asset  abandonment/impairment charge                                                                                                                                                                     |   | —                                    |       | — |   | — |   | — |   | 12,239 |   | — |   | — |   | 4,645 |   |
| Total operating expenses                                                                                                                                                                                                   |   | 17,220                                    |       | 18,491 |   | 13,617 |   | 13,528 |   | 24,215 |   | 11,904 |   | 11,018 |   | 14,796 |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                                                                                                                                                                             |   | (10,636                                   | )          | (10,635 | ) | (6,016 | ) | (6,827 | ) | (16,971 | ) | (2,499 | ) | (1,607 | ) | (5,894 | ) |
| Other income                                                                                                                                                                                                               |   | 1,161                                     |       | 1,521 |   | 1,407 |   | 1,039 |   | 213 |   | 607 |   | 604 |   | 385 |   |
| Net loss                                                                                                                                                                                                                   |   | (9,475                                    | )          | (9,114 | ) | (4,609 | ) | (5,790 | ) | (16,758 | ) | (1,892 | ) | (1,003 | ) | (5,509 | ) |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deemed preferred stock dividends                                                                                                                                                                                           |   | (50,215                                   | )          | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Loss attributable to common stockholders                                                                                                                                                                                   |   | $                                         | (59,690    | ) | $ | (9,114 | ) | $ | (4,609 | ) | $ | (5,790 | ) | $ | (16,758 | ) | $ | (1,892 | ) | $ | (1,003 | ) | $ | (5,509 | ) |
| Basic net loss per common share                                                                                                                                                                                            |   | $                                         | (2.16      | ) | $ | (.24 | ) | $ | (.12 | ) | $ | (.15 | ) | $ | (.42 | ) | $ | (.04 | ) | $ | (.02 | ) | $ | (.13 | ) |
| Weighted-average number of shares used in  computation of basic net loss per share                                                                                                                                         |   | 27,594                                    |       | 37,932 |   | 37,964 |   | 38,097 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| PRO FORMA BASIC NET LOSS PER COMMON SHARE                                                                                                                                                                                  |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss attributable to common stockholders  .                                                                                                                                                                                |   | $                                         | (59,690    | ) | $ | (9,114 | ) | $ | (4,609 | ) | $ | (5,790 | ) | $ | (16,758 | ) | $ | (1,892 | ) | $ | (1,003 | ) | $ | (5,509 | ) |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Add amortization of deferred stock-based  compensation                                                                                                                                                                     |   | 4,109                                     |       | 3,616 |   | (103 | ) | 1,066 |   | 173 |   | (256 | ) | (570 | ) | 181 |   |
| Add deemed preferred stock dividends ..                                                                                                                                                                                    |   | 50,215                                    |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Add restructuring and asset abandonment charge                                                                                                                                                                             |   | —                                    |       | — |   | — |   | — |   | 12,239 |   | — |   | — |   | 4,645 |   |
| Add provision for impairment of  investments                                                                                                                                                                               |   | —                                    |       | — |   | — |   | — |   | 400 |   | — |   | — |   | — |   |
| Net loss in computing pro forma basic net  loss per common share excluding deemed preferred stock dividends, stock based  compensation, restructuring charges, and provision for the impairment of  investments            |   | $                                         | (5,366     | ) | $ | (5,498 | ) | $ | (4,712 | ) | $ | (4,724 | ) | $ | (3,946 | ) | $ | (2,148 | ) | $ | (1,573 | ) | $ | (683 | ) |
| Shares used in computation of basic net  loss per common share                                                                                                                                                             |   | 27,594                                    |       | 37,932 |   | 37,964 |   | 38,097 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Add proforma adjustment to reflect  weighted Average effect of the assumed conversion of Convertible preferred  stock                                                                                                      |   | 6,958                                     |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in computation of pro forma  basic net loss per common share excluding  deemed preferred stock dividends, restructuring charges, and provision for  the impairment of investments                              |   | 34,552                                    |       | 37,932 |   | 37,964 |   | 38,097 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   |
|                                                                                                                                                                                                                       |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Proforma basic net loss per common share                                                                                                                                                                                   |   | $                                         | (.16       | ) | $ | (.14 | ) | $ | (.12 | ) | $ | (.12 | ) | $ | (.10 | ) | $ | (.05 | ) | $ | (.04 | ) | $ | (.02 | ) |

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*Certain reclassifications have been made to the 2000 and 2001 financialstatements to conform with the 2002 presentation- See footnotes to thefinancial statements included elsewhere herein.

 

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**NET LOSSPER COMMON SHARE**

 

Basic net loss per share wascomputed by dividing net loss attributable to common stockholders by theweighted average number of common shares outstanding. Diluted net loss pershare has not been presented since the impact of options, warrants and theconversion of preferred shares would have been antidilutive.

 

Pro forma basic net lossexcludes the amortization of deferred stock compensation and deemed preferredstock dividends, restructuring and asset abandonment charge, and the provisionfor impairment of investments of $54,324, $3,616, $(103), $1,066, $12,812, $(256), $(570) and $4,826 forthe three months ending September 30, 2000 through the three months ended June30, 2002 (in thousands), respectively.

 

Pro forma basic net loss percommon share has been computed as described above and also gives effect, evenif anti-dilutive, to common equivalent shares from preferred stock as if suchconversion had occurred at the beginning of the period or at the date oforiginal issuance, if later.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

We have financed ouroperations through private sales of equity and debt securities and through ourinitial public offering. Sales of equity securities include $57.9 million ofnet proceeds from our August 2000 initial public offering of common stock and$46.2 million of net proceeds received from the July 2000 private placement ofconvertible preferred stock, which converted into common stock upon thecompletion of our initial public offering. As of June 30, 2002, we had cash andcash equivalents and marketable securities of approximately $60.1 million.

 

We operate from leasedpremises in New York, satellite offices in San Francisco, and Iowa. Our currentaggregate annual rental obligations under these leases, including our abandonedUK office, are approximately $2.1 million for the year ended December 31, 2002.Our net capital expenditures were approximately $480,000 and $1.9 million, forthe six months ended June 30, 2002 and 2001, respectively, consistingprincipally of computers, hardware, software and professional services todesign our new financial systems, networking equipment and the build-out of ouroffices.

 

As of June 30, 2002, ourprincipal commitments consisted of obligations outstanding under a series ofcapital leases of computer and networking equipment and our facilities leases.Additionally, we entered into other capital leases for the design andimplementation of our financial systems. A leasing company is the beneficiaryof a $3.6 million standby letter of credit with a bank securing our leasearrangement with them.  The $3.6 millionstandby letter of credit securing our lease arrangement was reduced by $1.0million to $2.6 million at July 31, 2002. At the end of each lease term, we have the option to purchase theequipment, typically at the lesser of fair market value or 10% of gross assetvalue. We presently intend to exercise the purchase option for the majority ofthe leases. In connection with the acquisition of Stockpoint Inc., a financialinstitution acting as a trustee for debenture holders is the beneficiary of anirrevocable standby letter of credit for $6.3 million.  Our obligation regarding the $6.3 millionletter of credit has been 99% satisfied as of June 30, 2002.  Our landlord is the beneficiary of a$175,000 irrevocable standby letter of credit with a financial institutionsecuring our San Francisco office lease arrangement with them.

 

For the six months endedJune 30, 2002 and 2001, the net cash used in operating activities wasapproximately $2.1 million and $7.2 million, respectively. The net cash used inoperating activities for the six months ended June 30, 2002 resulted primarilyfrom net losses of $6.5 million, a decrease in deferred revenue of $3.4 millionand a decrease in accounts payable and accrued expenses of $726,000. This wasoffset by $5.4 million in net non-cash charges, a decrease in trade accountsreceivable of $2.3 million, and a decrease in prepaid expenses and other assetsof $817,000. The net cash used in operating activities for the six months endedJune 30, 2001 resulted primarily from net losses of $10.4 million offset by$3.9 million in non-cash charges and an increase in prepaid expenses and otherassets of $1.4 million. This is offset by a decrease in accounts receivable of$1.7 million and a decrease in accounts payable and accrued expenses anddeferred revenue of $622,000 and $442,000, respectively.

 

For the six months ended June30, 2002 and 2001, net cash provided by (used) in investing activities was$16.0 million and $(22.8) million, respectively. The net cash provided byinvesting activities for the six months ended June 30, 2002 was principallyfrom the sale of marketable securities reclassified into cash and cashequivalents of $16.8 million, offset by approximately $480,000 for the purchaseof property and equipment and approximately $204,000 for the payment ofseverance and exit costs. The net cash used in

 

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investing activities for thesix months ended June 30, 2001 was for the purchase of marketable securitiesand equipment of $20.9 million and $1.9 million, respectively.

 

For the six months endedJune 30, 2002 and 2001 net cash used in financing activities was $1.1 million,respectively. Net cash used in financing activities for the six months endedJune 30, 2002 and 2001 was primarily from repayments of our capital leaseobligations of $1.3 million and 1.5 million offset by proceeds from theexercise of stock options of approximately $194,000 and $361,000, respectively.

 

We believe that the netproceeds from our initial public offering, together with the net proceeds fromthe Series C preferred stock offering and our current cash and cashequivalents, and marketable securities will be sufficient to meet our operatingexpenses, for at least the next twelve months. In addition, if we undertakesignificant acquisitions or make significant strategic investments, we may needto raise additional funds within that time. We may also need to raiseadditional funds if competitive pressures force us to make unforeseenexpenditures, such as to acquire or develop new technology. If we need to raiseadditional funds, we will likely do so through the issuance and sale of equitysecurities. If this were to occur, the percentage ownership of our stockholderscould be reduced, our stockholders may experience additional dilution andthese  securities may have rights,preferences or privileges senior to those of our stockholders. We cannot assureyou that additional financing will be available on terms favorable to us, or atall. If adequate funds are not available or are not available on acceptableterms, our ability to fund our expansion, take advantage of unanticipatedopportunities, develop or enhance services or products or otherwise respond tocompetitive pressures would be significantly limited. Our business, results ofoperations and financial condition could be materially adversely affected bythese limitations.

 

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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**

 

**BECAUSE WEHAVE A LIMITED OPERATING HISTORY, IT WILL BE DIFFICULT FOR YOU TO EVALUATE OURBUSINESS.**

 

It is difficult to value ourbusiness and evaluate our prospects because of our limited operating history.We began our current line of business at the end of 1998 and expanded our lineof business with the acquisition of Stockpoint, Inc. in August of 2001.Accordingly, we have limited financial and operating data for evaluating ourbusiness.

 

**WE HAVE AHISTORY OF SIGNIFICANT OPERATING LOSSES.**

 

We have incurred operatinglosses in every quarter since we began our current line of business in 1998. Weexpect to incur additional losses in 2002. Our ability to achieve profitabilitywill depend on our ability to generate and sustain higher net sales whilemaintaining reasonable expense levels. We cannot be certain that if we were toachieve profitability, we would be able to sustain or increase thatprofitability.

 

**OURQUARTERLY FINANCIAL RESULTS MAY BE VOLATILE AND COULD CAUSE OUR STOCK PRICE TOFLUCTUATE.**

 

Our revenues and operatingresults may vary significantly from quarter to quarter. Because of thesefluctuations, our results in any quarter may not be indicative of futureperformance and it may be difficult for investors to properly evaluate our results.It is possible that in some future periods our revenues or earnings may fallbelow the expectations of investors and result in the market price of ourcommon stock declining. The factors that may cause our financial results tovary from quarter to quarter include:

 

• the demand for our services;

 

• the value, timing and renewal of contractswith customers;

 

• the amount and timing of operating costs andcapital expenditures;

 

• the performance of our technology;

 

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

 

• adverse changes in the financial markets.

 

These factors, some of whichare beyond our control, make it difficult to forecast our future revenues orresults of operations accurately. A portion of our operating expenses arerelated to costs which cannot be adjusted quickly. Our operating expense levelsreflect, in part, our expectations of future revenues. If actual revenues on aquarterly basis are below management’s expectations, or if our expenses exceedincreased revenues, results of operations would be materially adverselyaffected.

 

**IF WE DONOT CONTINUE TO DEVELOP OUR TECHNOLOGY, OUR SERVICES MAY QUICKLY BECOMEOBSOLETE.**

 

The market we compete in ischaracterized by rapidly changing technology, evolving industry standards andcustomer demands and

 

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frequent new productintroductions and enhancements. To be successful, we will have to continuallyimprove the performance, features and reliability of our products and services.We cannot assure you that our technological development will advance at thepace necessary to sustain our growth.

 

Additionally, newtechnologies may require us to alter our technology and products to avoidbecoming obsolete. Improving our current products and developing andintroducing new products will require significant research and development.

 

**WE DO NOTHAVE A PROVEN TRACK RECORD OF SELLING OUR NEW TECHNOLOGY OFFERINGS.**

 

We have developed andintroduced new products and services that have a very limited track record. Wecannot assure you whether there will be a significant demand for our newproducts and services by either our current clients or prospective clients. Ifthe investment we have made in producing and selling these new products andservices does not result in significant sales, our business may be materiallyadversely affected.

 

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

 

Our systems and operationsare vulnerable to damage or interruption from a variety of factors, includinghuman error, natural disasters, power loss, telecommunication failures,break-ins, sabotage (physical or electronic), computer viruses, vandalism andsimilar unexpected adverse events. Moreover, while we presently have multipledata centers and have implemented internal redundancy measures, we presently donot have all functionality of all data centers available in multiple sites. Wepresently have a computer center at our Iowa facilities, and in addition, someof our computer operations are located in facilities owned by third parties(known as “co-location facilities”). Any failure of the computer equipment weuse or the third-party telecommunications networks and data centers on which werely for distribution could interrupt or delay our service. This could lead tocustomers canceling contracts and could damage our reputation, which couldlimit our ability to attract additional customers, decrease our revenue andlead to a drop in the value of our common stock.

 

**WE FACEINTENSE COMPETITION THAT COULD IMPAIR OUR ABILITY TO GROW AND ACHIEVEPROFITABILITY.**

 

We face significantcompetition in our markets. We may experience greater competition in the futureas we address a wider range of market segments, additional entrants join themarket and existing competitors offer new or upgraded products. Barriers to newentrants are relatively low. 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:

 

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

 

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

 

• financial and other enterprise softwarevendors, who have already or may in the future develop extensions to theirsoftware capabilities to be able to manage external information as efficientlyas internal information;

 

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

 

We expect all of these formsof competition to continue to intensify. Some of our existing competitors, aswell as a number of potential new competitors, have longer operating histories,greater name recognition, larger client bases and significantly greaterfinancial, technical and marketing resources than we do. These factors mayprovide them with significant advantages over us. In addition, larger,well-established and well-financed entities may acquire, invest in or formjoint ventures with our competitors. Increased competition from these or othercompetitors could adversely affect our business.

 

**SOME OF OURCUSTOMERS ARE INTERNET COMPANIES WHO POSE CREDIT RISKS. THE FAILURE OF THESECUSTOMERS TO PAY THEIR BILLS HAS LED TO A LOSS OF REVENUE, A TREND WHICH MAYCONTINUE.**

 

While our strategy is toattract large and mid-sized enterprise customers, a number of our customers aresmaller Internet companies. Many of these companies have limited operatinghistories, operate at a loss and have limited cash reserves and limited accessto additional capital. With some of these customers, we have experienceddifficulties collecting accounts receivable. As a result, our allowance fordoubtful accounts as of June 30, 2002 was approximately $935,000. We maycontinue to encounter these

 

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difficulties in the future.If any significant part of our customer base is unable or unwilling to pay ourfees for any reason, our business will suffer.

 

**FAILURE TORETAIN EXISTING CUSTOMERS AND ATTRACT NEW CUSTOMERS COULD ADVERSELY AFFECT OURBUSINESS AND OPERATING RESULTS.**

 

Many of the customers welost were emerging Internet companies with limited operating histories, limitedcash reserves and operating at a loss. While our strategy is to continue totarget large and mid-sized enterprise customers, a significant number of ourcustomers continue to comprise smaller Internet companies similar to those thatwe lost in 2001. We cannot assure you that we will be able to continue toattract new customers at the same rate as we have done in the past, or that wewill be able to retain existing customers.

 

**LOSINGMAJOR INFORMATION PROVIDERS MAY LEAVE US WITH INSUFFICIENT INFORMATION TORETAIN AND ATTRACT CUSTOMERS.**

 

We do not generate originalcontent or data and are therefore highly dependent upon third-party informationproviders. If we were to lose several of our major information providers andwere not able to obtain similar content or data from other sources our 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.

 

**PROTECTIONOF OUR INTELLECTUAL PROPERTY IS LIMITED AND EFFORTS TO PROTECT OUR INTELLECTUALPROPERTY MAY BE INADEQUATE, TIME-CONSUMING AND EXPENSIVE.**

 

We regard our trademarks,service marks, copyrights, trade secrets and similar intellectual property ascritical to our success. The unauthorized reproduction or other misappropriationof our trademarks or other intellectual property could diminish the value ofour proprietary rights or reputation. In addition, the laws of some foreigncountries do not protect proprietary rights to the same extent as do U.S. laws.Moreover, potential competitors might be able to develop technologies orservices similar to ours without infringing our patents. In addition, if ouragreements with employees, consultants and others who participate in productand service development activities are breached, we may not have adequateremedies, and our trade secrets may become known or independently developed bycompetitors. If this were to occur, our business could be materially andadversely affected.

 

We rely upon a combinationof trademark and copyright law, patent law, trade secret protection andconfidentiality and license agreements with our employees, customers and othersto protect our proprietary rights. We have received and have filed a number oftrademarks and service marks, and have filed several patent applications withthe United States Patent and Trademark Office. However, registrations andpatents may only be granted in selected cases, and there can be no assurancethat we will be able to secure these or additional registrations or patents.Furthermore, policing and enforcement against the unauthorized use of ourintellectual property rights could entail significant expenses and could provedifficult or impossible.

 

**THIRDPARTIES MAY CLAIM THAT WE HAVE BREACHED THEIR INTELLECTUAL PROPERTY RIGHTS, WHICHCOULD DIVERT MANAGEMENT’S ATTENTION AND RESULT IN EXPENSE TO DEFEND OR SETTLECLAIMS.**

 

Third parties may bringclaims of copyright or trademark infringement, patent violation ormisappropriation of creative ideas or formats against us with respect to informationthat we distribute or our technology or marketing techniques and terminology.These claims, with or without merit, could be time consuming to defend, resultin costly litigation, divert management attention, require us to enter intocostly royalty or licensing arrangements or limit our ability to distributeinformation or prevent us from utilizing important technologies, ideas orformats.

 

**IF THEINFORMATION WE DISTRIBUTE IS UNLAWFUL OR CAUSES INJURY, WE MAY HAVE TO PAYFINES OR DAMAGES.**

 

The publication ordissemination of information that we have distributed may give rise toliability for defamation, negligence, breach of copyright, patent, trade secretor trademark infringement or other claims or charges based on the nature of theinformation. As a distributor of this information, we may be directly orindirectly liable to claims or charges of this nature. In addition, we could beexposed to liability arising from the activities of our customers or theirusers with respect to the unauthorized duplication of, or insertion ofinappropriate material into, the information we supply. Although we carrygeneral liability insurance, our insurance may not cover claims of these typesor may be inadequate to indemnify us for all liability that may be imposed onus.

 

**IF WEDISTRIBUTE INFORMATION TO UNAUTHORIZED RECIPIENTS, WE MAY HAVE TO PAY DAMAGESTO OUR INFORMATION PROVIDERS.**

 

Our proprietary softwaretechnologies enable us to deliver information we receive from participatinginformation providers only to customers who have been authorized to access thatinformation. We might inadvertently distribute information to a customer who is

 

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not authorized to receiveit, which could subject us to a claim for damages from the information provideror harm our reputation in the marketplace.

 

**ACQUISITIONSAND STRATEGIC INVESTMENTS MAY RESULT IN INCREASED EXPENSES, DIFFICULTIES ININTEGRATING TARGET COMPANIES AND DIVERSION OF MANAGEMENT’S ATTENTION.**

 

We anticipate that from timeto time we may be reviewing one or more acquisitions or strategic investmentsor other opportunities to expand our range of technology and products and togain access to new markets. Growth through acquisitions or strategicinvestments entails many risks, including the following:

 

• our management’s attention may be divertedduring the acquisition and integration process;

 

• we may face costs, delays and difficultiesof integrating the acquired company’s operations, technologies and personnel intoour existing operations, organization and culture;

 

• we may issue new equity securities to payfor acquisitions, which would dilute the holdings of existing stockholders;

 

• the timing of an acquisition or our failureto meet operating expectations for acquired businesses may impact adversely onour financial condition; and

 

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

 

If realized, any of theserisks could have a material adverse effect on our business, financial conditionand operating results. Any of these risks and our limited experience inintegrating acquisitions could affect any possible future acquisitions.

 

**LEGALUNCERTAINTIES AND GOVERNMENT REGULATION OF THE INTERNET COULD INHIBIT GROWTH OFTHE INTERNET.**

 

Many legal questionsrelating to the Internet remain unclear and these areas of uncertainty may beresolved in ways that damage our business. It may take years to determinewhether and how existing laws governing matters such as intellectual property,privacy, libel and taxation apply to the Internet. In addition, new laws andregulations that apply directly to Internet communications, commerce andadvertising are becoming more prevalent. For example, the U.S. Congress haspassed Internet-related legislation concerning copyrights, taxation, and theonline privacy of children. As the use of the Internet grows, there may becalls for further regulation, such as more stringent consumer protection laws.Finally, our distribution arrangements and customer contracts could subject usto the laws of foreign jurisdictions in unpredictable ways.

 

These possibilities couldaffect us adversely in a number of ways. New regulations could make theInternet less attractive to users, resulting in slower growth in its use andacceptance than we expect. Complying with new regulations could result inadditional cost to us, which could reduce our margins, or it could leave us atrisk of potentially costly legal action. We may be affected indirectly bylegislation that fundamentally alters the practicality or cost-effectiveness ofutilizing the Internet, including the cost of transmitting over various formsof network architecture, such as telephone networks or cable systems, or theimposition of various forms of taxation on Internet-related activities.Regulators continue to evaluate the best telecommunications policy regardingthe transmission of Internet traffic.

 

**RISKSRELATED TO OUR SECURITIES**

 

**VOLATILITYOF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.**

 

The stock market in general,the market for technology or Internet-related stocks in particular, hasexperienced extreme price fluctuations. At times, technology orInternet-related stocks have traded at prices and multiples that aresubstantially above the historical levels of the stock market in general. Sinceestimates of the value of technology or Internet-related companies have littlehistorical basis and often vary widely, fluctuations in our stock price may notbe correlated in a predictable way to our performance or operating results. Ourstock price may also fluctuate as a result of factors that are beyond ourcontrol or unrelated to our operating results. We expect our stock price tofluctuate as a result of factors such as:

 

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

 

• announcements by us or our competitors oftechnological innovations;

 

• introduction of new products or services byus or our competitors;

 

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• conditions or trends in the technology orInternet industry;

 

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

 

• announcements by us or our competitors ofsignificant acquisitions; and

 

• our entry into strategic partnerships orjoint ventures.

 

**WE DO NOTINTEND TO PAY DIVIDENDS.**

 

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

 

**WE AREEFFECTIVELY CONTROLLED BY OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEINTERESTS OF THESE STOCKHOLDERS COULD CONFLICT WITH YOUR INTERESTS.**

 

Our executive officers anddirectors, in the aggregate, beneficially own approximately 36% of ouroutstanding common stock on a fully diluted basis. As a result, thesestockholders, if acting together, would be able to exert considerable influenceon any matters requiring approval by our stockholders, including the electionof directors, amendments to our charter and by-laws and the approval of mergersor other business combination transactions. The ownership position of thesestockholders could delay, deter or prevent a change in control ofScreamingMedia and could adversely affect the price that investors might bewilling to pay in the future for shares of our common stock.

 

**IT MAY BEDIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD DEPRESS OURSTOCK PRICE.**

 

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

 

• a staggered board of directors, so that itwould take three successive annual meetings to replace all directors;

 

• prohibition of stockholder action by writtenconsent; and

 

• advance notice requirements for thesubmission by stockholders of nominations for election to the board ofdirectors and for proposing matters that can be acted upon by stockholders at ameeting.

 

In addition, we have enteredinto a stockholder rights agreement that makes it more difficult for a thirdparty to acquire us without the support of our board of directors and principalstockholders.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the FASBissued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill andOther Intangible Assets”. SFAS No. 141 prohibits the use of thepooling-of-interest method for business combinations initiated after June 30,2001 and also applies to all business combinations accounted for by thepurchase method that are completed after June 30, 2001. The Company has appliedthe provisions of SFAS No. 141 to its acquisition of Stockpoint. SFAS No. 142is effective for fiscal years beginning after December 15, 2001. Under SFAS No.142, goodwill and intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests. Otherintangible assets will continue to be amortized over their useful lives. Underthe transition provisions of SFAS No. 142, goodwill and long lived intangibleassets with indeterminate useful lives related to the Company’s Stockpointacquisition will not be periodically amortized. The Company has adopted thisstandard as of the beginning of its fiscal year 2002 (January 1, 2002). Seenote 11 of the notes to consolidated financial statements for the effects ofadoption of this standard. The Company has evaluated goodwill for impairmentand has determined that no impairment exists at January 1, 2002.

 

In July 2001, the FASBissued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143is effective for fiscal years beginning after June 15, 2002, and establishes anaccounting standard requiring the recording of the fair value of liabilitiesassociated with the retirement of long-lived assets in the period in which theyare incurred. The Company is in the process of determining the future impactthat the adoption of SFAS No. 143 may have on our earnings and financialposition.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-livedAssets.” SFAS No. 144,

 

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which supercedes SFAS No.121, “Accounting for the Impairment of Long-lived Assets and for Long-livedAssets to be Disposed Of” and the accounting and reporting provisions of APBOpinion No. 30, “Reporting Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, Extraordinary, Unusual and Infrequentlyoccurring Events and Transactions, and amends ARB No. 51, “ConsolidatedFinancial Statements,” addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. SFAS No. 144 is effective forfiscal years beginning after December 15, 2001, and interim periods withinthose fiscal years, with early adoption encouraged. The provisions of thisStatement are generally to be applied prospectively. The Company has adoptedSFAS No. 144 as of January 1, 2002. The adoption of SFAS No. 144 did not have amaterial effect on the financial condition or results of operations of theCompany.

 

In November 2001, the FASBEmerging Task Force (“EITF”) reached a consensus on EITF Issue 01-09,ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER OR A RESELLER OF THEVENDOR’S PRODUCTS, which is a codification of EITF 00-14, 00-22 and 00-25. Thisissue presumes that consideration from a vendor to a customer or reseller ofthe vendor’s products to be a reduction of the selling prices of the vendor’sproducts and, therefore, should be characterized as a reduction of revenue whenrecognized in the vendor’s income statement and could lead to negative revenueunder certain circumstances. Revenue reduction is required unless considerationrelates to a separate identifiable benefit and the benefit’s fair value can beestablished. This issue should be applied no later than in annual or interimfinancial statements for periods beginning after December 15, 2001. The Companyhas applied EITF Issue 01-09 as of January 1, 2002 and this EITF did not have amaterial effect on the Company’s consolidated financial statements.

 

In April 2002, the FASBissued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections”. This statement eliminatesthe automatic classification of gain or loss on extinguishment of debt as anextraordinary item of income and requires that such gain or loss be evaluatedfor extraordinary classification under the criteriaof Accounting Principles BoardNo. 30 “Reporting Results of Operations”. This statement also requiressales-leaseback accounting for certain lease modifications that have economiceffects that are similar to sales-leaseback transactions, and makes variousother technical corrections to existing pronouncements. This statement will beeffective for the Company for the year ending December 31, 2003. The Company isin the process of determining the future impact that the adoption of SFAS No.145 may have on our earnings and financial position.

 

In July 2002, the FASB issuedSFAS No. 146, “Accounting for the Costs Associated with Exit or DisposalActivities”. SFAS No. 146 will supersede EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” SFAS No.146 requires that costs associated with an exit or disposal plan be recognizedwhen incurred rather than at the date of a commitment to an exit or disposalplan. SFAS No. 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002. The Company is in the process ofdetermining the future impact that the adoption of SFAS No. 146 may have on ourearnings and financial position.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

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 U.K. We anticipate that in the future, the proportion of ouroperating expenses paid in foreign currencies will increase and that the numberof foreign currencies in which we earn our revenue will also increase.Accordingly, we may be subject to exposure from adverse movements in foreigncurrency exchange rates in relation to these revenues and expenses. We do notcurrently use derivative financial instruments. As of June 30, 2002 the effectof foreign exchange rate fluctuations was not material.

 

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

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

 

From the date of receipt offunds from our initial public offering through December 31, 2000, the netproceeds of the offering have been used to support our domestic sales andmarketing activities, our international operations, product development and forgeneral

 

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corporate purposes. We alsomay use a portion of the net proceeds to invest in complementary businesses ortechnologies, although we have no present commitments or agreements withrespect to any material acquisition or investment. None of the net proceedsfrom the offering was paid directly or indirectly to any director, officer,general partner or their associates, or to any persons owning 10% or more ofany class of equity securities. Pending application of the net proceeds towardsone of the above uses, the net proceeds have been invested in interest-bearing,investment-grade securities.

 

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

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

On June 11, 2002 the Companyheld its annual meeting of stockholders. The matters on which the stockholdersvoted, in person or by proxy, were (1) the election of three nominees as classII directors to serve until the 2005 annual meeting of stockholders and untiltheir respective successors are duly elected and qualified, (2) the approval ofthe Company’s amendments to the 2000 Equity Incentive Plan, and (3) theratification of the selection of Deloitte & Touche LLP as the independentauditors of the Company for the fiscal year ending December 31, 2002. The threenominees were elected, the amendments to the 2000 Equity Incentive Plan wereapproved and Deloitte & Touche LLP was ratified as the independent auditorsof the Company for the fiscal year ending December 31, 2002. The results of thevoting are set forth below:

 
| **Election  of directors**                |   | **Votes  for** |   | **Votes  against** |   | **Votes  abstained** |   |
|-------------------------------------------|--------|----------------|--------|--------------------|--------|----------------------|--------|
| Alan Ellman                               |   | 25,581,228     |   | 0                  |   | 116,696              |   |
| Kevin O’Connor                       |   | 25,581,773     |   | 0                  |   | 116,151              |   |
| John Sculley                              |   | 25,581,773     |   | 0                  |   | 116,151              |   |
|                                      |   |           |   |               |   |                 |   |
| Amendments  to 2000 Equity Incentive Plan |   | 24,325,745     |   | 1,175,733          |   | 196,446              |   |
|                                      |   |           |   |               |   |                 |   |
| Ratification of auditors                  |   | 25,539,513     |   | 68,469             |   | 89,942               |   |

 

**ITEM 5. OTHER INFORMATION**

 

Jay Chiat served as ChairmanEmeritus and a director of the registrant until he passed away on April 23,2002. It is currently anticipated that the Board of Directors will elect adirector to fill such vacancy upon the location of a suitable candidate.

 

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

 

(a) Exhibits 

 

99.1            CEO certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

99.2            CFO certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

(b) Reports on Form 8-K

None

 

 

**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.

 

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**SCREAMINGMEDIA INC.**

(Registrant)

 
| **SIGNATURE**        |   | **TITLE**                                        |   | **DATE**        |
|----------------------|--------|--------------------------------------------------|--------|-----------------|
|                 |   |                                             |   |            |
| /s/ KIRK LOEVNER     |   | President, Chief Executive Officer and  Director |   | August 14, 2002 |
| Kirk Loevner         |   |                                             |   |            |
|                 |   |                                             |   |            |
| /s/ DAVID M. OBSTLER |   | Chief Financial Officer and Treasurer            |   | August 14, 2002 |
| David M. Obstler     |   |                                             |   |            |

 

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