**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: September 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**

 

**PINNACOR INC.**

**(Formerly 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:) |
| **ScreamingMedia Inc.**                                                        |
|                                                                                |                                                                 |        |                                      |        |

 

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

 

Yes ý No o

 

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

 

Yes o  No ý

 

As of November 5, 2002 therewere 40,519,033 shares of the Registrant’s common stock outstanding.

 

 

 

**PINNACOR INC.**

**(Formerly ScreamingMedia Inc.)**

 

**FORM 10-Q**

 

**QUARTER ENDED SEPTEMBER 30, 2002**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                          | 3      |
|----------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                           |   |
| Item 1.  | Consolidated Financial  Statements                                                                                             | 3      |
|     |                                                                                                                           |   |
|     | Consolidated Balance Sheets  – September 30, 2002 (unaudited) and December 31, 2001                                       | 3      |
|     |                                                                                                                           |   |
|     | Consolidated  Statements of Operations – Three and nine months ended September 30, 2002  (unaudited) and 2001 (unaudited) | 4      |
|     |                                                                                                                           |   |
|     | Consolidated  Statements of Cash Flows – Nine months ended September 30, 2002 (unaudited)  and 2001 (unaudited)           | 5      |
|     |                                                                                                                           |   |
|     | Notes to  Consolidated Financial Statements                                                                                    | 6      |
|     |                                                                                                                           |   |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    | 12     |
|     |                                                                                                                           |   |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                                    | 31     |
|     |                                                                                                                           |   |
| Item 4.  | Controls and Procedures                                                                                                        | 31     |
|     |                                                                                                                           |   |
| PART II. | OTHER INFORMATION                                                                                                              | 31     |
|     |                                                                                                                           |   |
| Item  1. | Legal  Proceedings                                                                                                             | 31     |
|     |                                                                                                                           |   |
| Item  2. | Changes  in Securities and Use of Proceeds                                                                                     | 31     |
|     |                                                                                                                           |   |
| Item 3.  | Defaults upon  Senior Securities                                                                                               | 31     |
|     |                                                                                                                           |   |
| Item  4. | Submission  of Matters to a Vote of Security Holders                                                                           | 31     |
|     |                                                                                                                           |   |
| Item  5. | Other  Information                                                                                                             | 32     |
|     |                                                                                                                           |   |
| Item 6.  | Exhibits and Reports  on Form 8-K                                                                                              | 32     |

 

 

2

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**PINNACOR INC.**

**(Formerly ScreamingMedia Inc.)**

 

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                                                                       |   | **SEPTEMBER  30,  2002** |        | **DECEMBER  31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-------------|-------------------------|--------|
|                                                                                                                                                                                       |   | **(Unaudited)**          |        |                    |   |
| ASSETS                                                                                                                                                                                     |   |                     |        |                    |   |
| CURRENT ASSETS:                                                                                                                                                                            |   |                     |        |                    |   |
| Cash and cash equivalents                                                                                                                                                                  |   | $                        | 15,679,318  |                    | $      | 15,189,440 |   |
| Marketable securities                                                                                                                                                                      |   | 38,859,298               |        | 48,925,499              |   |
| Accounts receivable, net of allowance for  doubtful accounts of $735,000 and $1,130,000 as of September 30, 2002 and  December 31, 2001, respectively                                      |   | 3,380,551                |        | 5,577,430               |   |
| Prepaid expenses                                                                                                                                                                           |   | 1,095,490                |        | 1,402,467               |   |
| Total current assets                                                                                                                                                                       |   | 59,014,657               |        | 71,094,836              |   |
|                                                                                                                                                                                       |   |                     |        |                    |   |
| PROPERTY AND EQUIPMENT–Net of  accumulated depreciation and amortization                                                                                                              |   | 5,869,907                |        | 11,007,497              |   |
| GOODWILL                                                                                                                                                                                   |   | 32,609,482               |        | 34,063,396              |   |
| OTHER INTANGIBLE ASSETS-Net of  accumulated amortization                                                                                                                                   |   | 2,420,833                |        | --                      |   |
| OTHER ASSETS                                                                                                                                                                               |   | 657,944                  |        | 1,009,224               |   |
| TOTAL ASSETS                                                                                                                                                                               |   | $                        | 100,572,823 |                    | $      | 117,174,953 |   |
|                                                                                                                                                                                       |   |                     |        |                    |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                 |   |                     |        |                    |   |
|                                                                                                                                                                                       |   |                     |        |                    |   |
| CURRENT LIABILITIES:                                                                                                                                                                       |   |                     |        |                    |   |
| Accounts payable and accrued expenses                                                                                                                                                      |   | $                        | 4,148,879   |                    | $      | 6,217,752 |   |
| Accrued restructuring and other expenses                                                                                                                                                   |   | 913,496                  |        | 4,452,883               |   |
| Deferred revenue                                                                                                                                                                           |   | 7,755,516                |        | 11,036,116              |   |
| Current portion of capital lease  obligations                                                                                                                                              |   | 1,715,267                |        | 2,138,723               |   |
| Total current liabilities                                                                                                                                                                  |   | 14,533,158               |        | 23,845,474              |   |
|                                                                                                                                                                                       |   |                     |        |                    |   |
| NONCURRENT LIABILITIES:                                                                                                                                                                    |   |                     |        |                    |   |
| Capital lease obligations, less current  portion                                                                                                                                           |   | 1,450,633                |        | 1,857,707               |   |
| Total liabilities                                                                                                                                                                          |   | 15,983,791               |        | 25,703,181              |   |
|                                                                                                                                                                                       |   |                     |        |                    |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                 |   |                     |        |                    |   |
| Common stock, $0.01 par value,  100,000,000 shares authorized and 44,760,309 and 43,901,678 issued and  40,508,030 and 42,350,139 outstanding at September 30, 2002 and December 31,  2001 |   | 447,605                  |        | 439,017                 |   |
| Additional paid-in capital                                                                                                                                                                 |   | 225,132,382              |        | 225,455,188             |   |
| Warrants                                                                                                                                                                                   |   | 1,708,304                |        | 1,638,388               |   |
| Deferred compensation                                                                                                                                                                      |   | (380,442                 | )           | (1,822,393              | )      |
| Treasury stock, 4,252,279 and 1,551,539  shares at September 30, 2002 and December 31, 2001, respectively, at cost                                                                         |   | (4,074,589               | )           | (968,738                | )      |
| Accumulated deficit                                                                                                                                                                        |   | (138,472,437             | )           | (133,630,005            | )      |
| Accumulated other comprehensive income                                                                                                                                                     |   | 228,209                  |        | 360,315                 |   |
| Total stockholders’ equity                                                                                                                                                            |   | 84,589,032               |        | 91,471,772              |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                           |   | $                        | 100,572,823 |                    | $      | 117,174,953 |   |

 

See accompanying notes toconsolidated financial statements.

 

 

3

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**PINNACOR INC.**

**(Formerly ScreamingMedia Inc.)**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(UNAUDITED)

 
|                                                                                                                                                                                                                                                       |   | **Three  months ended  September 30,** |      | **Nine  months ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|
|                                                                                                                                                                                                                                                       |   | **2002**                               |      | **2001**                              |   | **2002** |   | **2001** |   |
| NET REVENUE                                                                                                                                                                                                                                                |   | $                                      | 8,050,994 |                                  | $      | 7,244,617 |   | $ | 26,363,796 |   | $ | 21,546,751 |   |
|                                                                                                                                                                                                                                                       |   |                                   |      |                                  |   |   |   |   |   |
| OPERATING EXPENSES:                                                                                                                                                                                                                                        |   |                                   |      |                                  |   |   |   |   |   |
| Cost of services (excluding depreciation  of $164,354, $155,570, $640,647 and $576,517 for the three months ended  September 30, 2002 and 2001 and the nine months ended September 30, 2002 and  2001, respectively, shown below)                          |   | 2,719,283                              |      | 2,238,515                             |   | 8,558,395 |   | 6,344,427 |   |
| Research and development (excluding  stock-based compensation of $(39,026), $161,417, $(115,609) and $(111,164)  for the three months ended September 30, 2002 and 2001 and the nine months  ended September 30, 2002 and 2001, respectively, shown below) |   | 1,760,370                              |      | 2,150,151                             |   | 5,737,187 |   | 5,960,597 |   |
| Sales and marketing (excluding  stock-based compensation of $(66,615), $(473,193), $(662,332) and $85,530 for  the three months ended September 30, 2002 and 2001 and the nine months ended  September 30, 2002 and 2001, respectively, shown below)       |   | 1,972,508                              |      | 3,145,366                             |   | 7,501,287 |   | 11,135,815 |   |
| General and administrative (excluding  stock-based compensation of $139,083, $484,707, $421,866 and $1,161,906 for  the three months ended September 30, 2002 and 2001 and the nine months ended  September 30, 2002 and 2001, respectively, shown below)  |   | 1,511,281                              |      | 3,127,458                             |   | 5,397,298 |   | 10,440,042 |   |
| Depreciation and amortization                                                                                                                                                                                                                              |   | 906,287                                |      | 1,140,847                             |   | 3,234,014 |   | 4,103,030 |   |
| Stock-based compensation                                                                                                                                                                                                                                   |   | 33,442                                 |      | 172,931                               |   | (356,075 | ) | 1,136,272 |   |
| Restructuring, asset abandonment and  other charges                                                                                                                                                                                                        |   | (2,182,600                             | )    | 12,239,202                            |   | 2,462,744 |   | 12,239,202 |   |
| Total operating expenses                                                                                                                                                                                                                                   |   | 6,720,571                              |      | 24,214,470                            |   | 32,534,850 |   | 51,359,385 |   |
| OPERATING INCOME (LOSS)                                                                                                                                                                                                                                    |   | 1,330,423                              |      | (16,969,853                           | )      | (6,171,054 | ) | (29,812,634 | ) |
|                                                                                                                                                                                                                                                       |   |                                   |      |                                  |   |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                                                                                                                                                                                    |   |                                   |      |                                  |   |   |   |   |   |
| Interest income                                                                                                                                                                                                                                            |   | 399,242                                |      | 899,932                               |   | 1,570,728 |   | 3,471,099 |   |
| Interest expense                                                                                                                                                                                                                                           |   | (59,485                                | )         | (287,132                              | )      | (242,106 | ) | (414,166 | ) |
| Impairment of investments                                                                                                                                                                                                                                  |   | --                                     |      | (399,987                              | )      | -- |   | (399,987 | ) |
| Total other income, net                                                                                                                                                                                                                                    |   | 339,757                                |      | 212,813                               |   | 1,328,622 |   | 2,656,946 |   |
|                                                                                                                                                                                                                                                       |   |                                   |      |                                  |   |   |   |   |   |
| NET INCOME (LOSS)                                                                                                                                                                                                                                          |   | $                                      | 1,670,180 |                                  | $      | (16,757,040 | ) | $ | (4,842,432 | ) | $ | (27,155,688 | ) |
| Basic net income (loss) per common share                                                                                                                                                                                                                   |   | $                                      | .04       |                                  | $      | (.42 | ) | $ | (.11 | ) | $ | (.70 | ) |
| Diluted net income (loss) per common  share                                                                                                                                                                                                                |   | $                                      | .04       |                                  | $      | (.42 | ) | $ | (.11 | ) | $ | (.70 | ) |
| Basic weighted-average number of shares  of common stock outstanding                                                                                                                                                                                       |   | 42,754,640                             |      | 40,087,000                            |   | 42,528,508 |   | 38,716,000 |   |
| Effect  of dilutive stock options                                                                                                                                                                                                                          |   | 71,566                                 |      | --                                    |   | -- |   | -- |   |
| Diluted  weighted-average number of shares of common stock outstanding                                                                                                                                                                                     |   |    42,826,206                |      | 40,087,000                            |   | 42,528,508 |   | 38,716,000 |   |

 

See accompanying notes toconsolidated financial statements.

 

 

4

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**PINNACOR INC.**

**(Formerly ScreamingMedia Inc.)**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(UNAUDITED)

 
|                                                                         |   | **For  the nine months ended September 30,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                         |   | **2002**                                     |       | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |   |                                         |       |   |   |
| Net loss                                                                     |   | $                                            | (4,842,432 | ) | $ | (27,155,688 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                         |       |   |   |
| Depreciation and amortization                                                |   | 3,234,014                                    |       | 4,103,030 |   |
| Stock-based compensation                                                     |   | (356,075                                     | )          | 1,050,022 |   |
| Stock/warrants issued for services                                           |   | —                                       |       | 86,250 |   |
| Non-cash portion of restructuring charge                                     |   | 3,425,560                                    |       | 6,111,276 |   |
| Impairment of investments                                                    |   | —                                       |       | 399,987 |   |
| Changes in operating assets and  liabilities:                                |   |                                         |       |   |   |
| Decrease in accounts receivable                                              |   | 2,196,879                                    |       | 1,670,469 |   |
| Decrease (increase) in prepaid expenses  and other assets                    |   | 658,257                                      |       | (329,700 | ) |
| Decrease in accounts payable and accrued expenses                            |   | (1,087,682                                   | )          | (1,633,406 | ) |
| Decrease in deferred revenue                                                 |   | (3,747,137                                   | )          | (939,561 | ) |
| (Decrease) increase in accrued  restructuring expenses                       |   | (3,539,387                                   | )     | 5,331,645 |   |
| Net cash used in operating activities                                        |   | (4,058,003                                   | )          | (11,305,676 | ) |
|                                                                         |   |                                         |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |   |                                         |       |   |   |
| Purchase of property and equipment                                           |   | (493,680                                     | )          | (2,711,696 | ) |
| Sale (purchase) of investments and  marketable securities                    |   | 9,814,184                                    |       | (5,460,410 | ) |
| Payment for business acquired, net of  cash received                         |   | (105,650)                                    |       | (6,406,210 | ) |
| Payments of severance and other exit  costs related to business acquired     |   | (338,586                                     | )          | (712,146 | ) |
| Net cash provided by (used in) investing  activities                         |   | 8,876,268                                    |       | (15,290,462 | ) |
|                                                                         |   |                                         |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |   |                                         |       |   |   |
| Payment of capital lease obligations                                         |   | (1,890,667                                   | )          | (2,166,499 | ) |
| Proceeds from exercise of warrants, stock  options and stock purchases       |   | 548,220                                      |       | 528,875 |   |
| Payment for the repurchase of treasury  stock                                |   | (3,105,851                                   | )          | — |   |
| Repayment of debt                                                            |   | —                                       |       | (2,219 | ) |
| Net cash used in financing activities                                        |   | (4,448,298                                   | )          | (1,639,843 | ) |
| Effect of exchange rate changes on cash  and cash equivalents                |   | 119,911                                      |       | 64,236 |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                        |   | 489,878                                      |       | (28,171,745 | ) |
| CASH AND CASH EQUIVALENTS BEGINNING OF  PERIOD                               |   | 15,189,440                                   |       | 58,305,096 |   |
| CASH AND CASH EQUIVALENTS END OF PERIOD                                      |   | $                                            | 15,679,318 |   | $ | 30,133,351 |   |
|                                                                         |   |                                         |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                          |   |                                         |       |   |   |
| Cash paid for interest                                                       |   | $                                            | 242,106    |   | $ | 383,066 |   |
| SUPPLEMENTAL DISCLOSURES OF NON-CASH  TRANSACTIONS:                          |   |                                         |       |   |   |
| Fixed assets acquired under capital  leases                                  |   | $                                            | 1,060,137  |   | $ | 395,888 |   |
| Common stock issued to board member                                          |   | $                                            | —     |   | $ | 86,250 |   |

 

See accompanying notes toconsolidated financial statements.

 

 

5

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**PINNACOR INC.**

**(Formerly ScreamingMedia, Inc.)**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 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 (the “SEC”). 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. CHANGE OF COMPANY NAME

 

Effective October 29, 2002, ScreamingMediaInc. changed its name to Pinnacor Inc. The accompanying consolidated financialstatements include Pinnacor Inc. (formerly ScreamingMedia Inc.) and its whollyowned subsidiaries (collectively the “Company”). ScreamingMedia, Inc. wasincorporated in the state of Delaware on January 22, 1999, for the purpose ofreincorporating The InteractiveConnection, Inc., a corporation incorporated inthe state of New York on August 16, 1993. On January 28, 1999, a merger tookplace between these two companies with ScreamingMedia Inc. being the survivingcorporation. The merger was treated as if it were a pooling of interests. OnAugust 21, 2001 ScreamingMedia Inc. acquired Stockpoint, Inc. (See Note 6).

 

3. RECLASSIFICATIONS

 

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

 

4. IMPACT OF RECENTLY ISSUEDACCOUNTING STANDARDS

 

In June 2001, the FinancialAccounting Standards Board "FASB" issued Statement of FinancialAccounting Standard No. 141 "SFAS" No. 141, “Business Combinations”,and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141prohibits the use of the pooling-of-interest method for business combinationsinitiated after June 30, 2001 and also applies to all business combinationsaccounted for by the purchase method that are completed after June 30, 2001.The Company has applied the provisions of SFAS No. 141 to its acquisition ofStockpoint. SFAS No. 142 is effective for fiscal years beginning after December15, 2001. Under SFAS No. 142, goodwill and intangible assets deemed to haveindefinite lives will no longer be amortized but will be subject to annualimpairment tests. Other intangible assets will continue to be amortized overtheir useful lives. Under the transition provisions of SFAS No. 142, goodwilland long lived intangible assets with indeterminate useful lives related to theCompany’s Stockpoint acquisition will not be periodically amortized. TheCompany has adopted this standard as of the beginning of its fiscal year 2002(January 1, 2002). See Note 12 of the notes to the consolidated financialstatements for the effects of adoption of this standard. The Company hasevaluated goodwill for impairment and has determined that no impairment existsat 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 its earnings and financial position.

 

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 

 

 

6

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generally to be appliedprospectively. The Company has adopted SFAS No. 144 as of January 1, 2002. Theadoption of SFAS No. 144 did not have a material effect on the financialcondition 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 established. This issue should be applied no laterthan in annual or interim financial statements for periods beginning afterDecember 15, 2001. The Company has applied EITF Issue 01-09 as of January 1,2002 and this EITF did not have a material effect on the Company’s consolidatedfinancial 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 criteria of 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 its 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 itsearnings and financial position.

 

5. 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 that 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 income (loss)was $1.7 million, $(16.5) million, $(4.8) and $(26.7) million for the three andnine months ended September 30, 2002 and 2001, respectively.

 

6. ACQUISITION

 

On August 21, 2001, (the“Merger Date”) the Company acquired Stockpoint, Inc. (“Stockpoint”) pursuant toa merger of our newly-formed wholly-owned subsidiary SCRM Merger Corp. with andinto Stockpoint with Stockpoint surviving as our wholly-owned subsidiary (the“Merger”). The Company has accounted for the combination with Stockpoint as apurchase business combination under SFAS No. 141. Stockpoint is a provider ofonline financial applications, investment analysis tools and marketinformation. As a result of the acquisition, the Company has significantly strengthenedits offerings to the financial services industry, a key client sector. 

 

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 the Company’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 

 

 

7

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and in addition to the aforementioneditems, the Company paid approximately $5.9 million in other assumed debtsubsequent to the Merger Date that was directly attributable to thistransaction. Pursuant to the merger agreement, the Company withheld ten percentof the consideration agreed to be paid to Stockpoint’s equity holders, totalingapproximately $1.1 million in cash, common stock and warrants for possiblefuture purchase price adjustments. This holdback amount had not been placed inescrow and such withheld common shares, warrants, and cash was issued in fullduring the three months ended September 30, 2002. In addition, the Companyincurred approximately $1.4 million in acquisition expenses. The Company fundedthe acquisition through the use of its cash and cash equivalents.

 

The Company obtained anindependent valuation of the assets (including other intangibles) andliabilities it has acquired and finalized its allocation of the purchase price of the transaction duringthe third quarter ended September 30, 2002. The following table summarizes thefair values of the assets acquired and liabilities assumed at the Merger Date.

 

| Cash                                              |   | $                   | 675,829     |   |
|---------------------------------------------------|--------|---------------------|-------------|--------|
| Current assets                                    |   | 3,166,819           |        |
| Property and equipment                            |   | 1,222,546           |        |
|     Other intangible  assets  |   | 2,500,000           |        |
|     Goodwill                       |   | 31,192,240          |        |
| Total assets acquired                             |   | 38,757,434          |        |
| Current liabilities                               |   |    (14,131,647 | )           |
| Total purchase price                              |   | $                   | (24,625,787 | )      |

 

In connection with thisacquisition, the Company has recorded preliminary exit costs of $1,417,242 asof September 30, 2002 to exit certain Stockpoint activities. Of this amount,$1,209,878 was paid and $207,364 remains unpaid as of September 30, 2002. Suchcosts primarily relate to employee terminations and lease terminations and havebeen recorded as additions to goodwill.

 

The other intangible assetsacquired from Stockpoint were its Trade Name valued at $600,000 and CustomerList valued at $1,900,000.  The TradeName is an intangible asset with an indefinite life and is not amortized, butrather reviewed annually for impairment (or more frequently if impairmentindicators arise). The Customer List is being amortized on a straight–linebasis over 4 years, from the date that the value of the intangible was finallydetermined, August 2002. 

 

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 September 30,  2001** |    | **Nine Months  Ended September 30,  2001** |   |
|----------------------------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------------|--------|
|                                                           |   | **(000’s)**                            |    | **(000’s)**                           |   |
|                                                           |   |                                        |    |                                       |   |
| Net revenue                                                    |   | $                                           | 9,703   |                                       | $      | 34,597 |   |
|                                                           |   |                                        |    |                                       |   |
| Net loss applicable to common  stockholders                    |   | $                                           | (17,434 | )                                          | $      | (27,832 | ) |
|                                                           |   |                                        |    |                                       |   |
| Pro forma basic and diluted net loss per  common share         |   | $                                           | (0.42   | )                                          | $      | (0.66 | ) |
|                                                           |   |                                        |    |                                       |   |
| Weighted-average number of shares of  common stock outstanding |   | 41,991                                      |    | 41,835                                     |   |

 

 

 

7. RESTRUCTURING, ASSETABANDONMENT AND OTHER CHARGES

 

 

In September 2002, ourmanagement negotiated an early termination of a lease related to a facilitypreviously restructured in 2001.  Thenegotiated terms included a cash payment of approximately $690,000 which waspaid during the quarter ended September 30, 2002 and the forfeiture of a$128,000 security deposit.   Thisresulted in a reversal of previously recognized 

 

 

8

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restructuring expense ofapproximately $2.4 million. This was offset by approximately $200,000 ofcertain other non-recurring expenses related to our name change. The remainingunpaid balance of approximately $164,000 for the other non-recurring namechange expense is classified in the Company’s Consolidated Balance Sheet aspart of accrued restructuring and other expenses. 

 

During the quarter endedJune 30, 2002, we recorded a $4.6 million restructuring and asset abandonmentcharge (the “2002 Plan). This charge consisted of $3.4 million of assetabandonment charges, workforce reduction costs of approximately $700,000, andthe shutdown or other rationalization of certain sales facilities and a datacenter of approximately $520,000. The 2002 Plan was materially completed as ofJune 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 and developmentand general and administrative areas. The affected employees received severancebenefits pursuant to established severance policies or by governmentallymandated labor regulations. 

 

As of September 30, 2002, allof the planned employee eliminations were completed. Cash severance payments ofapproximately $700,000 were made during the nine months ended September 30,2002. 

 

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 Company’s 2002 Plan:

 
|                     |   | **Cost**  |      | **Utilized** |   | **Balance Remaining at  September 30, 2002** |   |
|--------------------------|--------|-----------|-----------|--------------|--------|----------------------------------------------|--------|
| Facility shutdowns       |   | $         | 520,430   |         | $      | 148,596                                      |   | $ | 371,834 |   |
| Workforce reductions     |   | 699,354   |      | 699,354      |   | —                                       |   |
| Asset impairment charges |   | 3,425,560 |      | 3,425,560    |   | —                                       |   |
|                     |   | $         | 4,645,344 |         | $      | 4,273,510                                    |   | $ | 371,834 |   |

 

During fiscal year 2001, werecorded a $12.2 million restructuring charge (the “2001 Plan”). This chargeconsisted of $6.0 million for the shutdown or other rationalization of certainsales facilities, workforce reduction costs of $1.3 million and assetimpairment charges of $4.9 million. The 2001 Plan was materially completed atthe 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 September 30, 2002. Cash severancepayments of approximately $975,000 and $322,000 were made during the year endedDecember 31, 2001 and the nine months ended September 30, 2002, respectively.

 

The $4.9 million asset impairmentcharge consists of $3.4 million for the abandonment of software modules andrelated professional services incurred in the design of our computinginfrastructure and MIS systems as well as $1.5 million for the abandonment ofleasehold improvements, furniture and fixtures and computer equipment inconjunction with our facility shutdowns.

 

The following tablesummarizes the components of the Company’s 2001 Plan:

 

 

9

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|                     |   | **Cost**  |            | **Utilized** |   | **Balance Remaining at  September 30, 2002** |   |
|--------------------------|--------|-----------|-----------------|--------------|--------|----------------------------------------------|--------|
| Facility shutdowns       |   | $         |  6,028,201 |         | $      | 5,650,239                                    |   | $ | 377,962 |   |
| Workforce reductions     |   | 1,297,019 |            | 1,297,019    |   | —                                       |   |
| Asset impairment charges |   | 4,913,982 |            | 4,913,982    |   | —                                       |   |
|                     |   | $         | 12,239,202      |         | $      | 11,861,240                                   |   | $ | 377,962 |   |

 

 

 

 

8. CASH AND CASH EQUIVALENTS

 

The Company considers allhighly liquid investments purchased with original maturities of three months orless to be cash equivalents. At September 30, 2002 and December 31, 2001, theCompany had cash and cash equivalents of approximately $15.7 million and $15.2million, respectively.

 

9. MARKETABLE SECURITIES

 

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

 
|                      |   | **COST** |       | **UNREALIZED  HOLDING  GAINS** |   | **FAIR  VALUE** |   |
|---------------------------|--------|----------|------------|--------------------------------|--------|-----------------|--------|
| Corporate Notes and Bonds |   | $        | 38,739,073 |                           | $      | 120,225         |   | $ | 38,859,298 |   |
|                           |        |          |            |                                |        |                 |        |  |  |  |

 
|                                  |   | **COST** |       | **FAIR  VALUE** |   |
|---------------------------------------|--------|----------|------------|-----------------|--------|
| Due within one year                   |   | $        | 13,414,449 |            | $      | 13,404,084 |   |
| Due after one year through five years |   | $        | 25,324,624 |            | $      | 25,455,214 |   |
| Total marketable securities           |   | $        | 38,739,073 |            | $      | 38,859,298 |   |

 

Available-for-salesecurities are carried at fair value, with unrealized gains and losses reportedas a separate component of stockholders’ equity. The Company does not holdthese securities for speculative or trading purposes.

 

10. STOCK BASED COMPENSATION

 

In connection with the grantof stock options to employees, we recognized (reversed) deferred stock-basedcompensation expense of approximately $33,000 and  $(356,000) for the three and nine months ended September 30,2002, respectively. Stock-based compensation is a result of the issuance ofstock options to employees, directors and affiliated parties with exerciseprices per share determined for financial reporting purposes to be below thefair market value per share of our common stock at the date of the applicablegrant. This difference is recorded as a reduction of stockholders’ equity andamortized as non-cash compensation expense on an accelerated basis over thevesting period of the related options. In addition, the Company reversed future amortization expense ofapproximately $300,000 and $1.8 million within the consolidated balance sheetfrom deferred compensation to additional paid-in capital, reflecting theforfeiture of these options for the three and nine months ended September 30,2002, respectively.

 

11. BASIC AND DILUTED NETINCOME (LOSS) PER COMMON SHARE

 

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

 

The conversion of 6,968,957 and 5,688,918outstanding options and warrants outstanding as of September 30, 2002 and 2001were not considered in the calculation of diluted net loss per share during thenine months ended September 30, 2002 and three and nine months ended September30, 2001 as the effect would be anti-dilutive. 

 

 

10

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12.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

Effective January 1, 2002, theCompany adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” underwhich goodwill and indefinite lived intangible assets are no longer amortizedbut instead are assessed for impairment at least annually.  Under the transition provisions of SFAS No.142, the Company tested goodwill for impairment and has determined that noimpairment exists 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.

 

The changes in the carryingamount of goodwill for the nine months ended September 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 |   | 912,092    |       |
| Fair market value study adjustment-  property and equipment                                          |   | 111,264    |       |
| Identified intangible assets                                                                         |   | (2,500,000 | )          |
|                                                                                                 |   |       |       |
| Balance as of September 30, 2002                                                                     |   | $          | 32,609,482 |   |

 

All of the goodwill relatesto the Company’s acquisition of Stockpoint in August 2001 (See note 6). Therewas no amortization related to goodwill recorded during the three and ninemonth periods ended September 30, 2002 and 2001. The Company finalized thevaluation and identification of the other intangible assets and has completedthe allocation of the purchase price of the Stockpoint acquisition during thethree months ended September 30, 2002. 

 

At September 30, 2002 otherintangible assets identified from the acquisition of Stockpoint consisted of theCustomer List which is being amortized over four years with amortizationexpense being recorded in depreciation and amortization. In addition the TradeName which has an indefinite life is not being amortized, but instead will beassessed for impairment at least annually.

 
|                          |   | **As of  September 30, 2002** |      | **As of  September 30, 2001**        |   |
|-------------------------------|--------|-------------------------------|-----------|--------------------------------------|--------|
|                          |   | **Carrying  Value**           |      | **Gross  Accumulated  Amortization** |   | **Gross  Carrying  Value** |   | **Accumulated  Amortization** |   |
| Amortized Intangible Assets   |   |                          |      |                                 |   |   |   |   |   |
| Customer List                 |   | $                             | 1,900,000 |                                 | $      | 79,167 |   | — |   | — |   |
|                          |   |                          |      |                                 |   |   |   |   |   |
| Unamortized Intangible Assets |   |                          |      |                                 |   |   |   |   |   |
| Trade Name                    |   | $                             | 600,000   |                                 | — |   | — |   | — |   |
|                               |        |                               |           |                                      |        |  |  |  |  |  |  |

 

Theaggregate amortization expense for the three and nine months ended September30, 2002 was $79,167. There was no amortization expense during the three andnine months ended September 30, 2001.

 

At December 31, 2001,estimated amortization expense for other intangible assets for the next fiveyears is as follows

 
| **Year** |   | **Estimated  Amortization Expense:** |    |
|----------|--------|--------------------------------------|---------|
| 2002     |   | $                                    | 198,000 |   |
| 2003     |   | $                                    | 475,000 |   |
| 2004     |   | $                                    | 475,000 |   |
| 2005     |   | $                                    | 475,000 |   |
| 2006     |   | $                                    | 277,000 |   |

** **

 

11

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13.STOCK REPURCHASE

 

During the third quarterended September 30, 2002, the Board of Directors authorized the Company torepurchase 2,700,740 shares at a price of $1.15 per share from the estate of aformer board member for a total purchase price of approximately$3.1million.  The purchase price wasbelow the closing fair market value of the Company's common stock on the dateof purchase.  The repurchase wascompleted as of September 30, 2002.

** **

14.SUBSEQUENT EVENTS

 

In October 2002, the Company’s Board of Directors authorized a stock buyback program to repurchase up to 2 million shares of the Company's common stock and approved the Company's decision to change its name to Pinnacor Inc.

As a result, the Company's Nasdaq National Market symbol has changed to "PCOR," effective November 1, 2002.

In addition, the Company entered into an agreement to acquire the operating assets of Inlumen, a provider of information and technology to the financial services industry. The acquisition is subject to customary closing conditions.

 

** **

**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 SEC on April 1, 2002. Thisdiscussion contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended and Section 21E of the SecuritiesExchange Act of 1934, as amended. We may identify these statements by the useof words such as “believe”, “expect”, “anticipate”, “intend”, “plan” andsimilar expressions. These forward-looking statements involve several risks anduncertainties.

 

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 theSEC. These forward-looking statements speak only as of the date of thisquarterly report, and we caution you not to rely on these statements withoutalso considering the risks and uncertainties associated with these statementsand our business as addressed elsewhere in this quarterly report.

 

** **

** **

** **

**OVERVIEW**

 

 

Pinnacor (formerlyScreamingMedia, Inc.) (the Company) is a provider of information and analytical applications to financialservices companies and global corporations. Aligned across three keymarkets, The Company's solutions encompass: targeted market data, investment analysistools and wealth management solutions for financial services firms; criticalbusiness information for the enterprise; and messaging services, portalapplications and personalized content delivered mainly to wireless and internetservice providers.

 

**CRITICALACCOUNTING POLICIES**

 

The SEC recently issueddisclosure guidance for “critical accounting policies”. The SEC defines“critical accounting policies” as those that require application ofmanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain 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 10-K for the year ended December 31, 2001 as filed with the SECon April 1, 2002. In many cases, the accounting treatment of a particulartransaction is specifically dictated by accounting principles generallyaccepted in the United States of America, with no need for management’sjudgment in their application. There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.

 

 

12

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

 

REVENUE RECOGNITION: Ourrevenue recognition policy is significant as our revenue is a key component ofour results of operations. For the fiscal years ended 2001 and 2000, theCompany recognized revenue over the life of the applicable contracts. DuringFiscal 2002, we may sell our software and, under certain circumstances, willrecognize revenue in accordance with the provisions of the American Instituteof Certified Public Accountants’ Statement of Position 97-2, “Software RevenueRecognition” (SOP 97-2). All other software sales were recognized over the lifeof the applicable contracts in accordance with the provisions of the AmericanInstitute of Certified Public Accountants’ Statement of 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 SFAS86, “Accounting for theCosts of Computer Software to Be Sold, Leased, or Otherwise Marketed” for softwareto be sold externally. The internal use software predecessor to Actrellis wasdeveloped prior to the issuance of SOP98-1, “Accounting for the Costs of Computer Software Developed orObtained for Internal Use” ("SOP98-1") . SOP 98-1 requires certain costsattributable to internally developed software to be capitalized in theapplication development stage. Since the application development of Actrellis’predecessor occurred prior to the issuance of SOP 98-1, no amounts related toActrellis’ 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 AND OTHER INTANGIBLE ASSETS: TheCompany’s intangibles consist primarily of goodwill from our acquisition ofStockpoint accounted for under the purchase method and the other intangibleassets it has acquired as a result of this acquisition.  The Company has finalized an independentvaluation of the assets and liabilities it has acquired and has identifiedCustomer List and Trade Name intangibles. Under the transition provisions ofSFAS No. 142, “Goodwill and Other Intangible Assets”, the goodwill andindefinite lived Trade Name related to the Company’s Stockpoint acquisitionhave not been periodically amortized during the nine months ended September 30,2002, but instead are assessed for impairment at least annually. Under thetransition provisions of SFAS142, the Company evaluated goodwill for impairmentas of January 1, 2002 and has determined that no impairment exists. The Customer List is carried at cost lessaccumulated amortization. The Customer List is being amortized on astraight-line basis over its expected life, which is estimated to be fouryears. 

 

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 Services,Business Information, and Access Solutions Product Suites. We recognize therevenue from hosted applications on a subscription basis once the product hasbeen implemented.

 

SOFTWARE: We sell theActrellis Integration Server Software, formerly known as Siteware, whichconsumers install behind their firewall in order to receive information fromus. The revenue from this product is recognized ratably over the contractterm.  

 

 

13

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In 2002, we began sellingour Actrellis Enterprise Software Suite which customers can use to integrateand present information without receiving any data or recurring services fromus. This stand-alone software is sold as a perpetual or annual license fee andthe fees vary according to the version and functionality of software selected.In accordance with the provisions of SOP97-2, “Software Revenue Recognition”(SOP 97-2), software license revenue is generally recognized when, the contractis executed, all delivery obligations have been met, the fee is fixed anddeterminable, collectibility is probable and vendor specific objective evidenceis determinable. For some arrangements with significant customization, we mayprovide services that are essential to the functionality of the softwareselected. For these arrangements both the license revenue and services revenuewill be recognized in accordance with the provisions of SOP81-1, “Accountingfor Performance of Construction Type Contracts”. We will account for thesearrangements under the percentage of completion contract method pursuant to SOP81-1.

 

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

 

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 over the subscription.

 

PROCESSING AND DELIVERY: Forclients that have direct relationships with information providers and for mediaclients with direct relationships to their customers, we provide a technologyplatform for the delivery and integration of information. We charge aprocessing and delivery fee based on the amount of data delivered. This revenueis recognized over the subscription.

 

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 relatedcontract.

 

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 therelated contract .

 

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 ofour servers in third-party network data centers and certain costs associatedwith the 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 or on a per client basis. Incertain cases, the contractual agreement is based on fixed fees or subject to aminimum charge. Certain of these fixed fee arrangements include additional feesat a variable rate once our clients exceed a specified usage volume.

 

**RESEARCHAND DEVELOPMENT EXPENSES**

 

Research and developmentexpenses consist primarily of salaries and related personnel costs associatedwith the 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.

 

 

14

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**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 (income) of  $33,000, $173,000,$(356,000) and $1.1 million for the three and nine months ended September 30,2002 and 2001, respectively. Stock-based compensation is a result of theissuance of stock options to employees, directors and affiliated parties withexercise prices per share determined for financial reporting purposes to bebelow the fair market value per share of our common stock at the date of theapplicable grant. This difference is recorded as a reduction of stockholders’equity and amortized as non-cash compensation expense on an accelerated basisover the vesting period of the related options.

 

Included in stock-basedcompensation expense for the quarter ended September 30, 2002, the Company hasreversed previously recognized deferred stock-based compensation expense ofapproximately $(60,000).  This reversalrelates to previously recognized but unearned stock-based compensation offorfeited, unvested stock option granted to terminated employees.  In addition, due to the forfeiture of theseoptions during the current quarter, the Company reversed future amortizationexpense of approximately $300,000, included in the balance sheet as deferredcompensation, against additional paid-in capital.

 

**SUBSEQUENT EVENTS**

** **

In October 2002, the Company’s Board of Directors authorized a stock buyback program to repurchase up to 2 million shares of the company's common stock and approved the Company's decision to change its name to Pinnacor Inc.

As a result, the Company's Nasdaq National Market symbol has changed to "PCOR," effective November 1, 2002.

In addition, the Company entered into an agreement to acquire the operating assets of Inlumen, a provider of information and technology to the financial services industry. The acquisition is subject to customary closing conditions.

 

 

 

 

 

**RESULTS OFOPERATIONS**

 

The results of operationsfor the three and nine months ended September 30, 2002 and 2001 include theresults of operations of Stockpoint as of the Merger Date of August 21, 2001.The following table sets forth our results of operations as a percentage ofrevenue for the periods indicated.

 
|                                                                                                                                                                                |   | **FOR THE THREE   MONTHS ENDED  September 30,** |    | **FOR THE NINE  MONTHS ENDED  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|---------|-----------------------------------------------|--------|
|                                                                                                                                                                                |   | **2002**                                        |    | **2001**                                      |   | **2002** |   | **2001** |   |
| Revenue                                                                                                                                                                             |   | 100                                             | %       | 100                                           | %      | 100 | % | 100 | % |
|                                                                                                                                                                                |   |                                            |    |                                          |   |   |   |   |   |
| Operating expenses:                                                                                                                                                                 |   |                                            |    |                                          |   |   |   |   |   |
|                                                                                                                                                                                |   |                                            |    |                                          |   |   |   |   |   |
| Cost of services (excluding depreciation  of 2%, 2%, 2% and 3% for the three and nine months ended September 30, 2002  and 2001, respectively, shown below)                         |   | 34                                              | %       | 31                                            | %      | 32 | % | 29 | % |
| Research and development  (excluding stock-based compensation of (0)%, 2%, 0%, and (1)% for the three  and nine months ended September 30, 2002 and 2001 respectively, shown below) |   | 22                                              |    | 30                                            |   | 22 |   | 28 |   |
| Sales and  marketing (excluding stock-based compensation of (1)%, 7%, (3)%, and 0% for the  three and nine months ended September 30, 2002 and 2001, respectively, shown  below)    |   | 25                                              |    | 43                                            |   | 28 |   | 52 |   |
| General and  administrative (excluding stock-based compensation of 1%, 7%, 2% and 6% for the  three and nine months ended September 30, 2002 and 2001, respectively, shown  below)  |   | 19                                              |    | 43                                            |   | 20 |   | 48 |   |
| Depreciation and amortization                                                                                                                                                       |   | 11                                              |    | 16                                            |   | 12 |   | 19 |   |
| Stock-based compensation                                                                                                                                                            |   | 0                                               |    | 2                                             |   | (1 | ) | 5 |   |
| Restructuring, asset abandonment and  other charges                                                                                                                                 |   | (27                                             | )  | 169                                           |   | 10 |   | 57 |   |
| Total operating expenses                                                                                                                                                            |   | 83                                              |    | 334                                           |   | 123 |   | 238 |   |
| Operating income (loss)                                                                                                                                                             |   | 17                                              |    | (234                                          | )      | (23 | ) | (138 | ) |
| Other income (expense), net                                                                                                                                                         |   | 4                                               |    | 3                                             |   | 5 |   | 12 |   |
| Net income (loss)                                                                                                                                                                   |   | 21                                              | %       | (231                                          | )%     | (18 | )% | (126 | )% |

 

 

15

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

 

**THREEMONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDEDSEPTEMBER 30, 2001**

 

REVENUE. Total revenueincreased to $8.1 million for the three months ended September 30, 2002, anincrease of approximately $800,000 or 11% from $7.2 million for the threemonths ended September 30, 2001. This increase was primarily due to theacquisition of Stockpoint, which accounted for $4.1 million of revenue for thequarter ended September 30, 2002 compared to $2.2 million recognized during thequarter ended September 30, 2001.  Thestatement of operations for the three months ended September 30, 2001 includesthe results of operations of Stockpoint commencing on August 21, 2001, the dateof acquisition.  Assuming that revenuesfrom the operations of Stockpoint were included in the consolidated results ofoperations for the entire quarter ended September 30, 2001, revenues would havedecreased by approximately $1.4 million or 15% from $9.5 million for the threemonths ended September 30, 2001 to $8.1 million for the three months endedSeptember 30, 2002.  This decrease isdue to a decrease in our customer base partially offset by an increase in theaverage contract value per customer.

 

COST OF SERVICES. Cost ofservices increased to $2.7 million for the three months ended September 30,2002, an increase of approximately $481,000 or 21% from $2.2 million for thethree months ended September 30, 2001. This increase was primarily due to theacquisition of Stockpoint, which accounted for approximately $1.3 million of costof services for the quarter ended September 30, 2002 compared to $600,000recognized during the quarter ended September 30, 2001.   The statement of operations for thethree months ended September 30, 2001 includes the results of operations ofStockpoint commencing on August 21, 2001, the date of acquisition.  Asa percentage of revenue, and including Stockpoint from the acquisition date ofAugust 21, 2001, cost of services increased to approximately 34% for the threemonths ended September 30, 2002 from 31% for the three months ended September30, 2001. This increase as a percentage of revenue is due to a one-time expenserelated to outsourced development work recognized during the quarter endedSeptember 30, 2002.  Assuming that costof services from the operations of Stockpoint were included in the consolidatedresults of operations for the entire quarter ended September 30, 2001, cost ofservices would have decreased by approximately $500,000 or 16% from $3.2million for the three months ended September 30, 2001 to $2.7 million for thethree months ended September 30, 2002. This decrease was due to a decrease in the number of employees in theimplementation and data engineering, network operations and professionalservices departments.

 

RESEARCH AND DEVELOPMENT.Research and development expenses decreased to $1.8 million for the threemonths ended September 30, 2002, a decrease of approximately $390,000 or 18%from $2.2 million for the three months ended September 30, 2001. This wasprimarily due to a decrease in personnel costs as a result of our 2001restructuring plan.  As a percentage ofrevenue, and including Stockpoint from the acquisition date of August 21, 2001,research and development expenses decreased to approximately 22% for the threemonths ended September 30, 2002 from approximately 30% for the three monthsended September 30, 2001. The decrease in research and development expense as apercentage of total revenue resulted primarily because total revenue increasedwhile we had significant reductions in research and developmentexpenditures.  Assuming research 

 

 

16

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and development expense fromthe operations of Stockpoint were included in the consolidated results ofoperations for the entire quarter ended September 30, 2001, research anddevelopment would have decreased by approximately $900,000 or 33% from $2.7million for the three months ended September 30, 2001 to $1.8 million for thethree months ended September 30, 2002. This was due to a decrease in personnel costs as a result of our 2001restructuring plan.

 

SALES AND MARKETING. Salesand marketing expenses decreased to $2.0 million for the three months endedSeptember 30, 2002, a decrease of approximately $1.1 million or 35%, from $3.1million for the three months ended September 30, 2001. This was due to adecrease in marketing programs and a decrease in compensation expenseassociated with the reduction of our sales force.  As a percentage of revenue, and including Stockpoint from theacquisition date of August 21, 2001, sales and marketing costs decreased toapproximately 25% for the three months ended September 30, 2002 fromapproximately 43% for the three months ended September 30, 2001. The decreasein sales and marketing expense as a percentage of total revenue resultedprimarily because total revenue increased while we had significant reductionsin sales and marketing expenditures. Assuming sales and marketing expense from the operations of Stockpointwere included in the consolidated results of operations for the entire quarterended September 30, 2001, sales and marketing would have decreased byapproximately $1.9 million or 49% from $3.9 million for the three months endedSeptember 30, 2001 to $2.0 million for the three months ended September 30,2002.  This decrease in sales andmarketing expense was due to a significant decrease in marketing programs and adecrease in compensation expense associated with the reduction of our salesforce and customer support personnel.

 

GENERAL AND ADMINISTRATIVE.General and administrative expenses decreased to $1.5 million for the threemonths ended September 30, 2002, a decrease of approximately $1.6 million or49%, from $3.1 million for the three months ended September 30, 2001. This wasdue to a significant decrease in bad debt expense and a decrease in facilitiesand personnel costs, professional fees and travel expenses.  As a percentage of revenue, and includingStockpoint from the acquisition date of August 21, 2001, general and administrativecosts decreased to approximately 19% for the three months ended September 30,2002 from 43% for the three months ended September 30, 2001. The decrease ingeneral and administrative expense as a percentage of revenue resultedprimarily because total revenue increased while we made significant reductionsin general and administrative expenditures. Assuming general and administrativeexpense from the operations of Stockpoint were included in the consolidatedresults of operations for the entire quarter ended September 30, 2001, generaland administrative expense would have decreased by approximately $2.2 millionor 59% from $3.7 million for the three months ended September 30, 2001 to $1.5million for the three months ended September 30, 2002.  This was due to a significant decrease inbad debt expense and a decrease in facilities and personnel costs, professionalfees and travel expenses.

 

AMORTIZATION OF INTANGIBLES.In connection with the acquisition of 

 

 

17

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Stockpoint, during thequarter ended September 30, 2002, an independent valuation of the assets andliabilities acquired was finalized resulting in the identification of otherintangible assets acquired. As a result, we have recognized approximately$80,000 in amortization expense during the quarter ended September 30, 2002related to our customer list intangible.

 

STOCK-BASED COMPENSATION. Inconnection with the grant of stock options to employees, the Company hasrecognized deferred stock based compensation expense of approximately $33,000and $173,000 for the three months ended September 30, 2002 and 2001,respectively.

 

Included instock-based compensation expense for the quarter ended September 30, 2002, theCompany has reversed previously recognized deferred stock based compensationexpense of approximately $(60,000). This reversal relates to previouslyrecognized but unearned stock based compensation of forfeited, unvested stockoptions granted to terminated employees.

 

RESTRUCTURING, ASSETABANDONMENT AND OTHER CHARGES.  InSeptember 2002, management negotiated an early termination of a lease relatedto a facility previously restructured in 2001. This resulted in a reversal ofpreviously recognized restructuring expense of approximately $2.4 million. Thiswas offset by approximately $200,000 of certain other non-recurring expensesrelated to our name change.

 

We recorded a $12.2 millioncharge to operations during the third quarter of 2001 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 orimpaired.

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and cash equivalents andmarketable securities offset by interest expense on capital leases. Otherincome, net, increased to approximately $340,000 for the three months endedSeptember 30, 2002, from approximately $213,000 for the three months endedSeptember 30, 2001. This increase was due to a charge for the impairment ofinvestments of approximately $400,000 in the three months ended September 30,2001 for which there were no such charge in the current quarter, offset by adecrease in interest income earned as a result of declining cash balances, cashequivalents and investments in marketable securities.

 

**NINE MONTHSENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001**

 

REVENUE. Total revenueincreased to $26.4 million for the nine months ended September 30, 2002, anincrease of $4.8 million or 22% from $21.5 million for the nine months endedSeptember 30, 2001. This increase was primarily due to the acquisition ofStockpoint, which accounted for $13.4 million of revenue for the nine monthsended September 30, 2002 compared to $2.2 million recognized during the ninemonths ended 

 

 

18

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September 30, 2001.  The statement of operations for the ninemonths ended September 30, 2001 includes the results of operations ofStockpoint commencing on August 21, 2001, the date of acquisition.  Assuming that revenues from the operationsof Stockpoint were included for the entire nine months ended September 30,2001, revenues would have decreased by approximately $8.2 million or 24% from$34.6 million for the nine months ended September 30, 2001 to $26.4 million forthe nine months ended September 30, 2002. This decrease is due to a decrease in our customer base partially offsetby an increase in the average contract value per customer.

 

COST OF SERVICES. Cost ofservices increased to $8.6 million for the nine months ended September 30,2002, an increase of approximately $2.3 million or 35% from $6.3 million forthe nine months ended September 30, 2001. This increase was primarily due tothe acquisition of Stockpoint, which accounted for approximately $3.4 millionof cost of services for the nine months ended September 30, 2002 compared to$600,000 recognized during the quarter ended September 30, 2001.   The statement of operations for thenine months ended September 30, 2001 includes the results of operations ofStockpoint commencing on August 21, 2001, the date of acquisition.  Asa percentage of revenue, and including Stockpoint from the acquisition date ofAugust 21, 2001, cost of services increased to approximately 32% for the ninemonths ended September 30, 2002 from 29% for the nine months ended September30, 2001.  This increase as a percentageof revenue is due to a one-time expense related to outsourced development workas well as certain fixed minimum charges for our information providersrecognized during the nine months ended September 30, 2002.  Assuming that cost of services from theoperations of Stockpoint were included for the entire nine months endedSeptember 30, 2001, cost of services would have decreased by approximately $2.1million or 20% from $10.7 million for the nine months ended September 30, 2001to $8.6 million for the nine months ended September 30, 2002.  This decrease was due to a decrease in thenumber of employees in the implementation and data engineering, networkoperations and professional services departments, as well as a decrease incorresponding revenue.

 

RESEARCH AND DEVELOPMENT.Research and development expense decreased to $5.7 million for the nine monthsended September 30, 2002, a decrease of approximately $300,000 or 5%, from $6.0million for the nine months ended September 30, 2001. This was primarily due toa decrease in personnel costs as a result of our 2001 restructuring plan.  As a percentage of revenue, and includingStockpoint from the acquisition date of August 21, 2001, research anddevelopment expense decreased to approximately 22% for the nine months endedSeptember 30, 2002 from approximately 28% for the nine months ended September30, 2001. The decrease in research and development expense as a percentage oftotal revenue resulted primarily because total revenue increased while ourexpenditures for research and development expenses decreased.  Assuming that research and developmentexpenses from the operations of Stockpoint were included for the entire ninemonths ended September 30, 2001, research and development expense would havedecreased by approximately $2.8 million or 33% from $8.5 million for the ninemonths ended September 30, 2001 to $5.7 million for the nine months endedSeptember 30, 2002.  This was primarilydue to a decrease in personnel costs as a result of our 2001 restructuringplan.

 

19

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SALES AND MARKETING. Salesand marketing expense decreased to $7.5 million for the nine months endedSeptember 30, 2002, a decrease of approximately $3.6 million or 33%, from $11.1million for the nine months ended September 30, 2001. This decrease in salesand marketing expense was due to a decrease in marketing programs andcompensation expense associated with the reduction of our sales force andcustomer support. As a percentage of revenue and including Stockpoint from theacquisition date of August 21, 2001, sales and marketing expense decreased toapproximately 28% for the nine months ended September 30, 2002 fromapproximately 52% for the nine months ended September 30, 2001.  The decrease in sales and marketing expenseas a percentage of revenue resulted primarily because total revenue increasedwhile expenditures for sales and marketing decreased substantially.  Assuming that sales and marketing expensesfrom the operations of Stockpoint were included for the entire nine monthsended September 30, 2001, sales and marketing expense would have decreased byapproximately $7.9 million or 51% from $15.4 million for the nine months endedSeptember 30, 2001 to $7.5 million for the nine months ended September 30,2002.  This decrease in sales andmarketing expense was due to a significant decrease in marketing programs andcompensation expense associated with the reduction of our sales force andcustomer support personnel.

 

GENERAL AND ADMINISTRATIVE.General and administrative expense decreased to $5.4 million for the ninemonths ended September 30, 2002, a decrease of approximately $5.0 million or48%, from $10.4 million for the nine months ended September 30, 2001. This wasdue to a significant decrease in bad debt expense and a decrease in facilitiesand personnel costs, professional fees and travel expenses. As a percentage ofrevenue, and including Stockpoint from the acquisition date of August 21, 2001,general and administrative expense decreased to approximately 20% for the nine monthsended September 30, 2002 from 48% for the nine months ended September 30, 2001.This decrease in general and administrative expense as a percentage of totalrevenue resulted primarily because total revenue increased while ourexpenditures for general and administrative expenses decreased substantially.Assuming that general and administrative expenses from the operations ofStockpoint were included for the entire nine months ended September 30, 2001,general and administrative expense would have decreased by approximately $8.0million or 60% from $13.4 million for the nine months ended September 30, 2001to $5.4 million for the nine months ended September 30, 2002.  This was due to a significant decrease inbad debt expense and a decrease in facilities and personnel costs, professionalfees and travel expenses.

 

AMORTIZATION OFINTANGIBLES.  In connection with theacquisition of Stockpoint, during the quarter ended September 30, 2002, anindependent valuation of the assets and liabilities acquired was finalizedresulting in the identification of other intangible assets acquired. As aresult we have recognized approximately $80,000 in amortization expense duringthe nine months ended September 30, 2002. There was no amortization ofintangibles for the nine months ended September 30, 2001.

 

STOCK-BASEDCOMPENSATION. In connection with the grant of stock options to 

 

20

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employees, theCompany has recognized deferred stock based compensation expense of approximately$(356,075) and $1.1 million for the nine months ended September 30, 2002 and2001, respectively.  The reversalfor the nine months ended September 30, 2002, relates to previously recognizedbut unearned stock based compensation of forfeited, unvested stock optionsgranted to terminated employees.

 

RESTRUCTURING, ASSETABANDONMENT AND OTHER CHARGES.  TheCompany recognized approximately $2.5 million and $12.2 million inrestructuring charges for the nine months ended September 30, 2002 and 2001,respectively. In June 2002 our management took certain actions to furtherincrease operational efficiencies and bring costs in line with revenues. Thesemeasures included asset impairment and abandonment charges, the involuntaryterminations of 34 employees, from sales and marketing, research anddevelopment and general and administrative areas, and the closure of our UKsatellite office.  As a consequence, werecorded a $4.6 million charge to operations during the second quarter of 2002for severance-related payments to terminated employees, the accrual of futurelease costs (net of estimated sublease income) and the write-off of fixedassets for office locations that were closed or consolidated and assets thatwere abandoned or impaired.  InSeptember 2002, the Company’s management negotiated an early termination of alease related to a facility previously restructured. This resulted in areversal of previously recognized restructuring expense of approximately $2.4million. This was offset by approximately $200,000 of certain othernon-recurring expenses related to our name change.

 

We recorded a $12.2 millioncharge to operations during the nine months ended September 30, 2001 forseverance-related payments to terminated employees, the accrual of future leasecosts (net of estimated sublease income) and the write-off of fixed assets foroffice locations that were closed or consolidated and assets that wereabandoned or impaired.

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and cash equivalents andmarketable securities offset by interest on capital leases. Other income, net,decreased to approximately $1.3 million for the nine months ended September 30,2002, from $2.7 million for the nine months ended September 30, 2001. Thedecrease was due to a decrease in interest income earned on declining cashbalances, cash equivalents and investments in marketable securities.

 

 

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**QUARTERLYOPERATING RESULTS**

 

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

 
|                                                                                                                                                                                                                            |   | **THREE  MONTHS ENDED**   |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|
| **(In thousands except per share data)**                                                                                                                                                                                        |   | **DECEMBER 31,2000** |       | **MARCH 31,2001** |   | **JUNE 30,****2001** |   | **SEPTEMBER 30,  2001** |   | **DECEMBER 31,2001** |   | **MARCH 31,2002** |   | **JUNE 30,2002** |   | **SEPTEMBER  30,  2002** |   |
|                                                                                                                                                                                                                            |   |                      | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total revenue                                                                                                                                                                                                                   |   | $                         | 7,856      |   | $ | 7,601 |   | $ | 6,701 |   | $ | 7,244 |   | $ | 9,405 |   | $ | 9,411 |   | $ | 8,902 |   | $ | 8,051 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                                                                                                                                                             |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of services (excluding  depreciation of $151, $162, $259, $156, $227, $247, $229 and $164 in the  fourth quarter of 2000 through the third quarter of 2002, respectively, as  shown below)                                 |   | 1,543                     |       | 2,219 |   | 1,887 |   | 2,239 |   | 2,866 |   | 2,988 |   | 2,851 |   | 2,719 |   |
| Research and development(excluding  stock-based compensation of  $431,  $(502), $229, $161, $236, $23, $(99) and $(39) in the fourth quarter of 2000  through the third quarter of 2002, respectively, as shown below)     |   | 1,960                     |       | 1,855 |   | 1,955 |   | 2,150 |   | 1,893 |   | 2,128 |   | 1,849 |   | 1,760 |   |
| Sales and marketing (excludes  stock-based compensation of  $812,  $129, $430, $(473), $(196) $(735), $139 and $(67) in the fourth quarter of  2000 through the third quarter of 2002, respectively, as shown below)       |   | 5,884                     |       | 4,320 |   | 3,670 |   | 3,145 |   | 3,377 |   | 3,116 |   | 2,413 |   | 1,973 |   |
| General and administrative  (excludes stock-based compensation of   $2,373, $270, $407, $485, $(296), $141, $141 and $139 in the fourth  quarter of 2000 through the third quarter of 2002, respectively, as shown  below) |   | 4,071                     |       | 3,839 |   | 3,474 |   | 3,128 |   | 2,671 |   | 2,120 |   | 1,766 |   | 1,513 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                                                                                                                                                   |   | 1,417                     |       | 1,487 |   | 1,476 |   | 1,141 |   | 1,353 |   | 1,236 |   | 1,091 |   | 906 |   |
| Stock-based compensation                                                                                                                                                                                                        |   | 3,616                     |       | (103 | ) | 1,066 |   | 173 |   | (256 | ) | (570 | ) | 181 |   | 33 |   |
| Restructuring, asset abandonment  and other charges                                                                                                                                                                             |   | —                    |       | — |   | — |   | 12,239 |   | — |   | — |   | 4,645 |   | (2,183 | ) |
| Total operating expenses                                                                                                                                                                                                        |   | 18,491                    |       | 13,617 |   | 13,528 |   | 24,215 |   | 11,904 |   | 11,018 |   | 14,796 |   | 6,721 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                                                                                                                                                                         |   | (10,635                   | )          | (6,016 | ) | (6,827 | ) | (16,971 | ) | (2,499 | ) | (1,607 | ) | (5,894 | ) | 1,330 |   |
| Other income                                                                                                                                                                                                                    |   | 1,521                     |       | 1,407 |   | 1,039 |   | 213 |   | 607 |   | 604 |   | 385 |   | 340 |   |
| Net income (loss)                                                                                                                                                                                                               |   | (9,114                    | )          | (4,609 | ) | (5,790 | ) | (16,758 | ) | (1,892 | ) | (1,003 | ) | (5,509 | ) | 1,670 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) attributable to  common stockholders                                                                                                                                                                              |   | $                         | (9,114     | ) | $ | (4,609 | ) | $ | (5,790 | ) | $ | (16,758 | ) | $ | (1,892 | ) | $ | (1,003 | ) | $ | (5,509 | ) | $ | 1,670 |   |
| Basic net loss per common share                                                                                                                                                                                                 |   | $                         | (.24       | ) | $ | (.12 | ) | $ | (.15 | ) | $ | (.42 | ) | $ | (.04 | ) | $ | (.02 | ) | $ | (.13 | ) | $ | 04 |   |
| Diluted net loss per common share                                                                                                                                                                                               |   | $                         | (.24       | ) | $ | (.12 | ) | $ | (.15 | ) | $ | (.42 | ) | $ | (.04 | ) | $ | (.02 | ) | $ | (.13 | ) | $ | 04 |   |
| Weighted-average number of shares  used in computation of basic net loss per share                                                                                                                                              |   | 37,932                    |       | 37,964 |   | 38,097 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   | 42,755 |   |
| Diluted weighted-average number of  shares used in computation of diluted net loss per share                                                                                                                                    |   | 37,932                    |       | 37,964 |   | 38,097 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   | 42,941 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| PRO-FORMA BASIC NET LOSS PER COMMON  SHARE                                                                                                                                                                                      |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) attributable to  common stockholders .                                                                                                                                                                            |   | $                         | (9,114     | ) | $ | (4,609 | ) | $ | (5,790 | ) | $ | (16,758 | ) | $ | (1,892 | ) | $ | (1,003 | ) | $ | (5,509 | ) | $ | 1,670 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Add amortization of deferred  stock-based compensation                                                                                                                                                                          |   | 3,616                     |       | (103 | ) | 1,066 |   | 173 |   | (256 | ) | (570 | ) | 181 |   | 33 |   |
| Add  restructuring, asset  abandonment and other charges                                                                                                                                                                   |   | —                    |       | — |   | — |   | 12,239 |   | — |   | — |   | 4,645 |   | (2,183 | ) |
| Add provision for impairment of  investments                                                                                                                                                                                    |   | —                    |       | — |   | — |   | 400 |   | — |   | — |   | — |   | — |   |
| Net loss in computing pro-forma  basic net loss per common share excluding, stock based compensation,  restructuring, asset abandonment and other charges, and provision for the  impairment of investments                     |   | $                         | (5,498     | ) | $ | (4,712 | ) | $ | (4,724 | ) | $ | (3,946 | ) | $ | (2,148 | ) | $ | (1,573 | ) | $ | (683 | ) | $ | (480 | ) |
| Shares used in computation of basic  net loss per common share                                                                                                                                                                  |   | 37,932                    |       | 37,964 |   | 38,097 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   | 42,755 |   |
|                                                                                                                                                                                                                            |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pro-forma basic net loss per  common share                                                                                                                                                                                      |   | $                         | (.14       | ) | $ | (.12 | ) | $ | (.12 | ) | $ | (.10 | ) | $ | (.05 | ) | $ | (.04 | ) | $ | (.02 | ) | $ | (.01 | ) |

 

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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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**BASIC AND DILUTEDNET INCOME (LOSS) PER COMMON SHARE**

 

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

 

The conversion of 6,968,957 and 5,688,916outstanding options and warrants outstanding as of September 30, 2002 and 2001were not considered in the calculation of diluted net loss per share during thenine months ended September 30, 2002 and three and nine months ended September30, 2001 as the effect would be anti-dilutive. 

 

Pro forma basic net lossexcludes the amortization of deferred stock compensation and restructuring,asset abandonment and other charges, and the provision for impairment ofinvestments of  $3,616, $(103), $1,066,$12,812, $(256), $(570), $4,826 and $(2,150) for the three months endingDecember 31, 2000 through the three months ended September 30, 2002 (inthousands), respectively.

 

 

**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 September 30, 2002, we hadcash and cash equivalents and marketable securities of approximately $54.5million.

 

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 $2.0 million for the year ended 

 

 

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December 31, 2002. Our netcapital expenditures were approximately $500,000 and $2.7 million, for the ninemonths ended September 30, 2002 and 2001, respectively, consisting principallyof computers, hardware, software and professional services to design our newfinancial systems, networking equipment and the build-out of our offices.

 

As of September 30, 2002,our principal commitments consisted of obligations outstanding under a seriesof capital leases of computer and networking equipment and our facilitiesleases. Additionally, we entered into other capital leases for the design andimplementation of our financial systems. A leasing company is the beneficiaryof a $2.6 million standby letter of credit with a bank securing our leasearrangement with them.  At the end ofeach lease term, we have the option to purchase the equipment, typically at thelesser of fair market value or 10% of gross asset value. We presently intend toexercise the purchase option for the majority of the leases. In connection withthe acquisition of Stockpoint Inc., a financial institution acting as a trusteefor debenture holders is the beneficiary of an irrevocable standby letter ofcredit for $6.3 million.  Our obligationregarding the $6.3 million letter of credit has been 99% satisfied as ofSeptember 30, 2002.  Our landlord is thebeneficiary of a $175,000 irrevocable standby letter of credit with a financialinstitution securing our San Francisco office lease arrangement with them.

 

For the nine months ended September 30, 2002 and 2001, the net cash used in operating activities was approximately $4.1 million and $11.3 million, respectively. The net cash used in operating activities for the nine months ended September 30, 2002 resulted primarily from net losses of $4.8 million, a decrease in deferred revenue of $3.7 million, a decrease in accrued restructuring expenses of $3.5 million and a decrease in accounts payable and accrued expenses of  $1.1 million. This was offset by $6.3 million in net non-cash charges, a decrease in trade accounts receivable of $2.2 million, and a decrease in prepaid expenses and other assets of approximately $658,000. The net cash used in operating activities for the nine  months ended September 30, 2001 resulted primarily from net losses of $27.2 million, a $330,000 increase in prepaid expenses and other assets, a decrease in accounts payable and accrued expenses and deferred revenue of $1.6 million and $940,000 respectively, offset by $11.8 million in non-cash charges, a decrease in accounts receivable of $1.7 million and an increase in accrued restructuring expenses of $5.3 million.

 

For the ninemonths ended September 30, 2002 and 2001, net cash provided by (used in)investing activities was $8.9 million and $(15.3) million, respectively. Thenet cash provided by investing activities for the nine months ended September30, 2002 was principally from the sale of marketable securities reclassifiedinto cash and cash equivalents of $9.8 million, offset by approximately$500,000 for the purchase of property and equipment and approximately $340,000for the payment of severance and exit costs related to the Stockpointacquisition and $106,000 for the payment of the withheld portion of the Stockpointpurchase price. The net cash used in investing activities for the nine monthsended September 30, 2001 was $6.4 million for the purchase of Stockpoint,approximately $710,000 for the payment of exit costs related to the acquisitionand $2.7 million and $5.5 million, respectively, for the purchase of equipmentand marketable securities.

 

For the ninemonths ended September 30, 2002 and 2001 net cash used in financing activitieswas $4.4 million and $1.6 million, respectively. Net cash used in financingactivities for the nine months ended September 30, 2002 was primarily fromrepayments of our capital lease obligations of $1.9 million and $3.1 millionused for the repurchase of treasury stock offset by proceeds of $548,000 fromthe exercise of stock options. Net cash used by financing activities for thenine months ended September 30, 2001, was $2.2 million for repayments of our capital lease obligations net of cashprovided by the exercise of warrants and stock options of approximately$530,000.

 

We believe that the netproceeds from our initial public offering, together with the net proceeds froma previous 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 OUR BUSINESS.**

 

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 (excluding  non-recurringreversals of prior restructuring charges in the third quarter) in every quartersince we began our current line of business in 1998. We expect to incuradditional losses in 2002. Our ability to achieve profitability will depend onour ability to generate and sustain higher net sales while maintainingreasonable expense levels. We cannot be certain that if we were to achieveprofitability, we would be able to sustain or increase that profitability.

 

**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 ourresults. It is possible that in some future periods our revenues or earningsmay fall below the expectations of investors and result in the market price ofour common stock declining. The factors that may cause our financial results tovary from quarter to quarter include:

 

•   thedemand for our services;

 

•   thevalue, timing and renewal of contracts with customers;

 

•   theamount and timing of operating costs and capital expenditures;

 

•   theperformance of our technology;

 

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

 

•   adversechanges 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 that 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.

 

 

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**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 frequent new product introductions and enhancements. To besuccessful, we will have to continually improve the performance, features andreliability of our products and services. We cannot assure you that ourtechnological development will advance at the pace necessary to sustain ourgrowth.

 

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 multiple data centers and haveimplemented internal redundancy measures, we presently do not have allfunctionality of all data centers available in multiple sites.  We presently have a computer center at ourIowa facilities, and in addition, some of our computer operations are locatedin facilities owned by third parties (known as "co-locationfacilities").  Any failure of thecomputer equipment we use or the third-party telecommunications networks anddata centers on which we rely for distribution could interrupt or delay ourservice.  This could lead to customerscanceling contracts and could damage our reputation, which could limit ourability to attract additional customers, decrease our revenue and lead to adrop 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 and informationaggregators, who aggregate information and either host private-labelapplications that use that data or deliver that data in the form of feeds tocustomers;

 

•   financial 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 of ourclients, who develop technology solutions often in conjunction with consultingand 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.

 

 

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**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 operating histories,operate at a loss and have limited cash reserves and limited access toadditional capital. With some of these customers, we have experienceddifficulties collecting accounts receivable. As a result, our allowance fordoubtful accounts as of September 30, 2002 was approximately $735,000. We maycontinue to encounter these difficulties in the future. If any significant partof our customer base is unable or unwilling to pay our fees for any reason, ourbusiness 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 number of our customerscontinue to comprise smaller Internet companies similar to those that we lostin 2001. We cannot assure you that we will be able to continue to attract newcustomers at the same rate as we have done in the past, or that we will be ableto 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 othermisappropriation of our trademarks or other intellectual property coulddiminish the value of our proprietary rights or reputation. In addition, thelaws of some foreign countries do not protect proprietary rights to the sameextent as do U.S. laws. Moreover, potential competitors might be able todevelop technologies or services similar to ours without infringing ourpatents. In addition, if our agreements with employees, consultants and otherswho participate in product and service development activities are breached, wemay not have adequate remedies, and our trade secrets may become known orindependently developed by competitors. If this were to occur, our businesscould be materially and adversely affected.

 

We rely upon a 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,WHICH COULD DIVERT MANAGEMENT’S ATTENTION AND RESULT IN EXPENSE TO DEFEND ORSETTLE CLAIMS.**

 

Third parties may bringclaims of copyright or trademark infringement, patent violation ormisappropriation of creative ideas or formats against us with respect toinformation that we distribute or our technology or marketing techniques andterminology. These claims, with or without merit, could be time consuming todefend, result in costly litigation, divert management attention, require us toenter into costly royalty or licensing arrangements or limit our ability todistribute information or prevent us from utilizing important technologies,ideas or formats.

 

**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 the

 

 

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information. As adistributor of this information, we may be directly or indirectly liable toclaims or charges of this nature. In addition, we could be exposed to liabilityarising from the activities of our customers or their users with respect to theunauthorized duplication of, or insertion of inappropriate material into, theinformation we supply. Although we carry general liability insurance, ourinsurance may not cover claims of these types or may be inadequate to indemnifyus for all liability that may be imposed on us.

 

**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 isnot authorized to receive it, which could subject us to a claim for damages fromthe information provider or 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 difficulties ofintegrating the acquired company’s operations, technologies and personnel into ourexisting operations, organization and culture;

 

•   we may issue new equity or debt securities topay for acquisitions, which would dilute the holdings of existing stockholders;

 

•   the timing of an acquisition or our failure tomeet operating expectations for acquired businesses may impact adversely on ourfinancial 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.

 

 

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**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 of technological innovations byus or our competitors;

 

•   introduction of new products or services by usor our competitors;

 

•   conditions or trends in the technology orInternet industry;

 

•   changes in the market valuations of other technologyor Internet companies;

 

•   announcements by us or our competitors ofsignificant acquisitions; and

 

•   our entry into strategic partnerships or jointventures.

 

**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 THE INTERESTSOF THESE STOCKHOLDERS COULD CONFLICT WITH YOUR INTERESTS.**

 

Our executive officers anddirectors, in the aggregate, beneficially own approximately 38% 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 of Pinnacor andcould adversely affect the price that investors might be willing to pay in thefuture 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 of theCompany 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 the submissionby stockholders of nominations for election to the board of directors and forproposing matters that can be acted upon by stockholders at a meeting.

 

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.

 

 

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**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 12 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, 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 established. This issue should be applied no laterthan in annual or interim financial statements for periods beginning afterDecember 15, 2001. The Company has applied EITF Issue 01-09 as of January 1,2002 and this EITF did not have a material effect on the Company’s consolidatedfinancial 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 criteria of 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 its 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 disposal plan.SFAS No. 146 is to be applied prospectively to exit or disposal activitiesinitiated after December 31, 2002. The Company is in the process of determiningthe future impact that the adoption of SFAS No. 146 may have on our earningsand financial position.

 

 

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**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. Accordingly, we may be subject to exposure from adversemovements in foreign currency exchange rates in relation to these revenues andexpenses. We do not currently use derivative financial instruments. As ofSeptember 30, 2002 the effect of foreign exchange rate fluctuations was notmaterial.

 

### **ITEM 4.  CONTROLS AND PROCEDURES**

 

                (a) Evaluation ofDisclosure Controls and Procedures. 

The Company's Chief Executive Officer and Chief Financial Officer haveevaluated the effectiveness of the Company's disclosure controls and procedures(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the SecuritiesExchange Act of 1934, as amended (the "Exchange Act")) as of a datewithin 90 days prior to the filing date of this quarterly report (the "EvaluationDate").  Based on such evaluation,such officers have concluded that, as of the Evaluation Date, the

Company's disclosure controls and procedures are effective in alertingthem on a timely basis to material information relating to the Company(including its wholly owned subsidiaries) required to be included in theCompany's reports filed or submitted under the Exchange Act.

 

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

 

 

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

There are no 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 September 30, 2002, the netproceeds of the offering have been used to support our domestic sales andmarketing activities, our international operations, product development and forgeneral corporate purposes. We also may use a portion of the net proceeds toinvest in complementary businesses or technologies. None of the net proceedsfrom the offering was paid directly or indirectly to any director, officer,general partner or their associates, or to any persons owning 10% or more ofany class of equity securities. Pending application of the net proceeds towardsone of the above uses, the net proceeds have been invested in interest-bearing,investment-grade securities.

 

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

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

None. 

 

 

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**ITEM 5. OTHER INFORMATION**

 

In October 2002, the Company’s board of directors authorized a stock buyback program to repurchase up to 2 million shares of the Company's common stock and approved the Company's decision to change its name to Pinnacor Inc.

As a result, the Company's Nasdaq National Market symbol has changed to "PCOR," effective November 1, 2002.

In addition,the Company entered into an agreement to acquire the operating assets ofInlumen, a provider of information and technology to the financial servicesindustry. The acquisition is subject to customary closing conditions.

 

**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.

 

 

**PINNACOR, INC.**

(Registrant)

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

 

 

#### **CERTIFICATIONS**

 

I,Kirk Loevner, certify that:

1.         I have reviewed this quarterly report on Form 10-Q ofPinnacor Inc. (formerly ScreamingMedia Inc.);

2.         Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report; 

3.         Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the Registrant as of, and for, the periods presented in this quarterlyreport; 

4.         The Registrant's other certifying officer and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and wehave:

 

 

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a)         designed such disclosure controls and procedures to ensurethat material information relating to the Registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b)         evaluated the effectiveness of the Registrant's disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the "Evaluation Date"); and

c)         presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

5.         The Registrant's other certifying officer and I havedisclosed, based on our most recent evaluation, to the Registrant's auditorsand the audit committee of Registrant's board of directors:

a)         all significant deficiencies in the design or operation ofinternal controls which could adversely affect the Registrant's ability torecord, process, summarize and report financial data and have identified forthe Registrant's auditors any material weaknesses in internal controls; and

b)         any fraud, whether or not material, that involves managementor other employees who have a significant role in the Registrant's internalcontrols; and

6.         The Registrant's other certifying officer and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:  November 14, 2002
|   | /s/ Kirk Loevner                         |
|--------|------------------------------------------|
|   | Kirk Loevner                             |
|   | Chief Executive Officer  & President |

#### ** **

 

I,David Obstler, certify that:

1.         I have reviewed this quarterly report on Form 10-Q ofPinnacor Inc. (formerly ScreamingMedia Inc.);

2.         Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report; 

3.         Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the Registrant as of, and for, the periods presented in this quarterlyreport; 

4.         The Registrant's other certifying officer and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and wehave:

a)         designed such disclosure controls and procedures to ensurethat material information relating to the Registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b)         evaluated the effectiveness of the Registrant's disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the "Evaluation Date"); and

 

 

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c)         presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

5.         The Registrant's other certifying officer and I havedisclosed, based on our most recent evaluation, to the Registrant's auditorsand the audit committee of Registrant's board of directors:

a)         all significant deficiencies in the design or operation ofinternal controls which could adversely affect the Registrant's ability torecord, process, summarize and report financial data and have identified forthe Registrant's auditors any material weaknesses in internal controls; and

b)         any fraud, whether or not material, that involves managementor other employees who have a significant role in the Registrant's internalcontrols; and

6.         The Registrant's other certifying officer and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

Date:  November 14, 2002
|   | /s/ David Obstler                        |
|--------|------------------------------------------|
|   | David Obstler                            |
|   | Chief Financial Officer  & Treasurer |

 

 

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