-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H3cT/fYuLSCv/MxNsNuYpgQo4fOcaCtN+lDiFTNoZ4FWiIqgpw1q3PETB4CYxh1O E5ieybxM3bCFUgAQLWzE1A== 0000912057-99-005190.txt : 19991115 0000912057-99-005190.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYPERFEED TECHNOLOGIES INC CENTRAL INDEX KEY: 0000745774 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES [6200] IRS NUMBER: 363131704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11108 FILM NUMBER: 99748814 BUSINESS ADDRESS: STREET 1: 300 S WACKER DR STREET 2: STE 300 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129132848 MAIL ADDRESS: STREET 1: 300 SOUTH WACKER DR STREET 2: SUITE 300 CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: PC QUOTE INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q --------------------------------- [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 30, 1999 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from -------------to-------------- --------------------------------------- Commission file number 0-13093 I.R.S. Employer Identification Number 36-3131704 HYPERFEED TECHNOLOGIES, INC. (a Delaware Corporation) (FORMERLY PC QUOTE, INC.) 300 S. Wacker Chicago, Illinois 60606 Telephone (312) 913-2800 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months, (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 15,175,031 shares of the Company's common stock ($.001 par value) and 47,866 shares of preferred stock ($.001 par value) were outstanding as of October 28, 1999. HYPERFEED TECHNOLOGIES, INC. INDEX
PAGE PART I. Financial Information Item 1. Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the nine month periods ended September 30, 1999 and 1998 5 Consolidated Statements of Operations for the three month periods ended September 30, 1999 and 1998 6 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of: Results of Operations and Financial Condition 13 Liquidity and Capital Resources 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. Other Information Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 6. Exhibits and Reports on Form 8-K 23 Company's Signature Page 24
Page 2 HYPERFEED TECHNOLOGIES, INC. Consolidated Balance Sheets September 30, 1999 and December 31, 1998
September 30, December 31, 1999 1998 ASSETS (Unaudited) (Audited) -------------- ------------- Current Assets Cash and cash equivalents $ 2,061,185 $ 1,139,785 Accounts receivable, less allowance for doubtful accounts of: 1999: $622,758;1998: $443,037 2,267,021 1,490,139 Prepaid license fees, current 1,680,000 --- Prepaid expenses and other current assets 1,745,595 114,011 ----------- ----------- TOTAL CURRENT ASSETS 7,753,801 2,743,935 ----------- ----------- Property and equipment Satellite receiving equipment 436,759 525,730 Computer equipment 3,958,232 4,260,589 Communication equipment 1,079,032 1,254,010 Furniture and fixtures 261,808 252,050 Leasehold improvements 402,692 402,692 ----------- ----------- 6,138,523 6,695,071 Less: Accumulated depreciation and amortization 3,794,164 4,613,526 ----------- ----------- Net property and equipment 2,344,359 2,081,545 ----------- ----------- Prepaid license fees, net of accumulated amortization of $770,000 3,430,000 -- ----------- ----------- Software development costs, net of accumulated amortization of: 1999: $6,239,657; 1998: $4,442,673 4,120,511 5,012,971 ----------- ----------- Deposits and other assets 82,207 214,916 ----------- ----------- TOTAL ASSETS $ 17,730,878 $ 10,053,367 ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements. Page 3 HYPERFEED TECHNOLOGIES, INC. Consolidated Balance Sheets (continued) September 30, 1999 and December 31, 1998
September 30, December 31, 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) (Audited) ------------ ------------ Current Liabilities Notes payable, current $ 800,000 $ 300,000 Accounts payable 2,491,045 4,138,517 Accrued expenses 2,405,363 218,866 Accrued compensation 360,497 313,838 Accrued satellite termination expense, current 679,245 --- Accrued income taxes payable --- 3,161 Unearned revenue, current 1,988,409 1,241,933 ------------ ------------ TOTAL CURRENT LIABILITIES 8,724,559 6,216,315 ------------ ------------ Notes payable, noncurrent 1,774,634 499,634 Unearned revenue, noncurrent 79,773 261,027 Accrued expenses, noncurrent 141,300 161,120 Accrued satellite termination expense, noncurrent 732,000 --- Minority interests 43,425 --- ------------ ------------ TOTAL NONCURRENT LIABILITIES 2,771,132 921,781 ------------ ------------ TOTAL LIABILITIES 11,495,691 7,138,096 ------------ ------------ Stockholders' Equity Preferred Stock, $.001 par value; authorized 5,000,000 shares; issued and outstanding: Series A 5% convertible: 19,075 shares at September 30, 1999 and December 31, 1998 19 19 Series B 5% convertible: 28,791 shares at September 30, 1999 and December 31, 1998 29 29 Common stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding 15,160,123 shares at September 30,1999 and 14,183,183 shares at December 31, 1998 15,160 14,183 Additional paid-in capital - Series A 5% convertible preferred stock 3,086,013 3,086,013 Additional paid-in capital - Series B 5% convertible preferred stock 4,664,891 4,664,891 Additional paid-in capital - common stock 23,432,738 19,950,981 Additional paid-in capital - convertible subordinated debenture and warrants 8,630,491 2,750,491 Accumulated deficit (33,594,154) (27,551,336) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 6,235,187 2,915,271 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,730,878 $ 10,053,367 ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements. Page 4 HYPERFEED TECHNOLOGIES, INC. Consolidated Statements of Operations
FOR THE NINE MONTHS ENDED - --------------------------------------------------------------------------------------------------- September 30, September 30, 1999 1998 (Unaudited) (Unaudited) - --------------------------------------------------------------------------------------------------- REVENUE HyperFeed Services $ 13,089,419 $ 9,819,798 Internet Services 10,955,571 7,154,217 ------------- -------------- TOTAL REVENUE 24,044,990 16,974,015 ------------- -------------- DIRECT COST OF SERVICES HyperFeed Services 9,685,148 7,573,430 Internet Services 9,124,242 4,949,049 ------------- -------------- TOTAL DIRECT COST OF SERVICES 18,809,390 12,522,479 ------------- -------------- GROSS MARGIN 5,235,600 4,451,536 ------------- -------------- OPERATING EXPENSES Sales 2,669,883 2,990,670 General and administrative 3,771,312 2,430,265 Product and market development 2,496,573 1,700,278 Depreciation and amortization 855,446 907,325 Satellite termination expense 1,411,245 --- ------------- -------------- TOTAL OPERATING EXPENSES 11,204,459 8,028,538 ------------- -------------- LOSS FROM OPERATIONS (5,968,859) (3,577,002) ------------- -------------- OTHER INCOME (EXPENSE) Interest income 36,967 14,904 Interest expense (67,501) (1,596,187) Loss on sale of minority interest in PCQuote.com, Inc. (88,386) --- ------------- -------------- NET OTHER EXPENSE (118,920) (1,581,283) ------------ ------------ LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (6,087,779) (5,158,285) INCOME TAXES --- --- ------------- -------------- LOSS BEFORE MINORITY INTEREST (6,087,779) (5,158,285) Minority interest in loss 44,961 --- ------------- -------------- NET LOSS ($ 6,042,818) ($ 5,185,285) ------------- -------------- ------------- -------------- Basic net loss per share ($0.41) ($0.40) Diluted net loss per share ($0.41) ($0.40) Weighted-average common shares outstanding 14,735,037 12,841,886 - --------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
Page 5 HYPERFEED TECHNOLOGIES, INC. Consolidated Statements of Operations
FOR THE THREE MONTHS ENDED - ----------------------------------------------------------------------------------------- September 30, September 30, 1999 1998 (Unaudited) (Unaudited) - ----------------------------------------------------------------------------------------- REVENUE HyperFeed Services $ 4,560,911 $ 3,459,645 Internet Services 4,011,770 2,778,065 --------------- -------------- TOTAL REVENUE 8,572,681 6,237,710 --------------- -------------- DIRECT COST OF SERVICES HyperFeed Services 3,093,519 2,539,195 Internet Services 3,335,118 1,812,479 --------------- -------------- TOTAL DIRECT COST OF SERVICES 6,428,637 4,351,674 --------------- -------------- GROSS MARGIN 2,144,044 1,886,036 --------------- -------------- OPERATING EXPENSES Sales 877,794 954,462 General and administrative 1,381,085 794,920 Product and market development 1,345,896 561,726 Depreciation and amortization 329,811 312,307 Satellite termination expense 1,411,245 --- --------------- -------------- TOTAL OPERATING EXPENSES 5,345,831 2,623,415 --------------- -------------- LOSS FROM OPERATIONS (3,201,787) (737,379) --------------- -------------- OTHER INCOME (EXPENSE) Interest income 14,383 2,948 Interest expense (38,604) (176,624) --------------- -------------- NET OTHER EXPENSE (24,221) (173,676) --------------- -------------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (3,226,008) (911,055) INCOME TAXES --- --- --------------- -------------- LOSS BEFORE MINORITY INTEREST (3,226,008) (911,055) Minority interest in loss 23,139 --- --------------- -------------- NET LOSS ($ 3,202,869) ($ 911,055) --------------- -------------- --------------- -------------- Basic net loss per share ($0.22) ($0.07) Diluted net loss per share ($0.22) ($0.07) Weighted-average common shares outstanding 15,022,593 13,284,274 - -----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Page 6 HYPERFEED TECHNOLOGIES, INC. Consolidated Statements of Cash Flows
For The Nine Months Ended ------------------------------- September 30, September 30, 1999 1998 (Unaudited) (Unaudited) ------------ ------------ Cash Flows From Operating Activities: Net loss ($6,042,818) ($5,158,285) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 855,446 907,325 Provision for doubtful accounts 509,394 292,873 Amortization of software development costs 1,796,985 1,502,000 Amortization of deferred discount on convertible subordinated debenture --- 1,096,402 Amortization of value assigned to common stock warrant issued in lieu of cash license fees 770,000 --- Common stock issued in lieu of cash compensation 70,204 74,009 Minority interest in loss (44,961) --- Loss on sale of minority interest in PCQuote.com, Inc. 88,386 --- Changes in assets and liabilities: Accounts receivable (1,286,276) (1,453,904) Prepaid expenses and other current assets (1,631,584) (18,743) Deposits and other assets 132,709 52,736 Accounts payable (1,647,472) 1,756,772 Accrued expenses 2,213,336 (108,300) Accrued income taxes payable (3,161) (5,192) Accrued satellite termination expense 1,411,245 --- Unearned revenue 565,222 312,692 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (2,243,345) (749,615) ------------ ------------ Cash Flows From Investing Activities: Purchase of property and equipment (1,118,260) (676,258) Software development costs capitalized (904,525) (1,485,082) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (2,022,785) (2,161,340) ------------ ------------ Cash Flows From Financing Activities: Proceeds from issuance of common stock, net 3,412,530 4,182,686 Purchase and retirement of common stock --- (2,988,949) Proceeds from issuance of notes payable, net 3,500,000 --- Net borrowings under credit facility --- 1,000,000 Principal payments on notes payable (1,725,000) (225,000) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 5,187,530 1,968,737 ------------ ------------ Net increase (decrease) in cash and cash equivalents 921,400 (942,218) Cash and cash equivalents: Beginning of the period 1,139,785 1,113,130 ------------ ------------ End of the period $ 2,061,185 $ 170,912 ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements. Page 7 HYPERFEED TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION: The accompanying interim consolidated financial statements include the accounts of HyperFeed Technologies, Inc. (the "Company", formerly PC Quote, Inc.) and its subsidiary, PCQuote.com, Inc., and have been prepared in accordance with generally accepted accounting principles for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The interim consolidated financial statements include all adjustments, including the elimination of all significant intercompany transactions in consolidation, which, in the opinion of management, are necessary in order to make the financial statements not misleading. The amounts indicated as "audited" have been extracted from the Company's December 31, 1998 annual report. For further information, refer to the financial statements and footnotes included in PC Quote's annual report on Form 10-K for the year ended December 31, 1998. SOFTWARE DEVELOPMENT COSTS: The Company's continuing investment in software development consists primarily of enhancements to its existing Windows-based private network and Internet services, development of new data analysis software and programmer tools designed to afford easy access to its data-feed for data retrieval and analysis purposes, and application of new technology to increase the data volume and delivery speed of its distribution system and network. Costs associated with the planning and design phase of software development, including coding and testing activities necessary to establish technological feasibility of computer software products to be licensed or otherwise marketed, are charged to research and development as incurred. Once technological feasibility has been determined, costs incurred in the construction phase of software development including coding, testing, and product quality assurance are capitalized. Amortization commences at the time of capitalization or, in the case of a new service offering, at the time the service becomes available for use. Unamortized capitalized costs determined to be in excess of the net realizable value of the product are expensed at the date of such determination. The accumulated amortization and related software development costs are removed from the respective accounts in the year following full amortization. HyperFeed Technologies, Inc.'s policy is to amortize capitalized software costs by the greater of (a) the ratio that current gross revenue for a product bear to the total of current and anticipated future gross revenue for that product or (b) the straight line method over the remaining estimated economic life of the product including the period being reported on, principally three to five years. The Company assesses the recoverability of its software development costs against estimated future undiscounted cash flows. Given the highly competitive environment and technological changes, it is reasonably possible that those estimates of anticipated future gross revenue, the remaining estimated economic life of the product, or both may be reduced significantly. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use and provides guidance for determining whether computer software is for internal use. The Company adopted the provisions of SOP 98-1 effective January 1, 1999. FINANCIAL INSTRUMENTS: The Company has no financial instruments for which the carrying value materially differs from fair value. Page 8 HYPERFEED TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. REVENUE RECOGNITION: The Company principally derives its revenue from service contracts for the provision of market data only ("HyperFeed license fees"), service contracts for the provision of market data together with analytical software ("PC Quote 6.0 license fees"), and the sale of advertising on its web-site www.pcquote.com. Revenue from service contracts is recognized using the percentage-of-completion method, ratably over the contract term as the contracted services are rendered. Revenue from the sale of advertising is recognized as the advertising is displayed on the web-site. HyperFeed license fees and PC Quote 6.0 license fees for satellite and landline services are generally billed one month in advance with 30-day payment terms. License fees for PC Quote 6.0 on the Internet are generally paid by credit card within five days prior to the month of service. These and other payments received prior to services being rendered are classified as unearned revenue on the balance sheet. Revenue and the related receivable for advance billings are not reflected in the financial statements. Customers' deposits on service contracts are classified as either current unearned revenue, if the contract expires in one year or less, or non-current unearned revenue, if the contract expiration date is greater than one year. The Company adopted the provisions of Statement of Position 97-2, "Software Revenue Recognition," on January 1, 1998. SOP 97-2 specifies the following four criteria that must be met prior to recognizing revenue: (1) persuasive evidence of the existence of an arrangement, (2) delivery, (3) fixed or determinable fee, and (4) probable collection. In addition, revenue earned on software arrangements involving multiple elements is allocated to each element based on the relative fair value of the elements. When applicable, revenue allocated to the Company's software products (including specified upgrades/enhancements) is recognized upon delivery of the products. Revenue allocated to post contract customer support is recognized ratably over the term of the support and revenue allocated to service elements (such as training and installation) is recognized as the services are performed. (2) RECLASSIFICATIONS The statement of operations has been modified to enhance information to the stockholder. The 1998 statements of operations and cash flows have been reclassified to conform to the 1999 presentation. (3) INCOME TAXES At December 31, 1998, the Company had federal income tax net operating loss carryforwards of approximately $26,005,000 for federal income tax purposes and approximately $24,843,000 for the alternative minimum tax. Approximately $1,058,000 of these net operating losses relate to the exercise of incentive employee stock options and will be credited directly to stockholders' equity when realized. The Company also had research and development credits of $106,000 which will expire in years 2010 to 2011 if not previously utilized. The future utilization of these net operating losses and research and development credits will be limited due to changes in Company ownership. The net operating loss carryforwards will expire, if not previously utilized, as follows: 1999: $546,000; 2000: $1,370,000; 2001: $1,539,000; 2002: $560,000; 2003: $79,000; 2004: $576,000; 2005: $1,557,000 and thereafter $19,778,000. Page 9 HYPERFEED TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) TRANSACTIONS WITH AFFILIATES On January 23, 1998, the Company completed a rights offering that entitled stockholders of record as of November 21, 1997 to purchase one additional share of common stock for each right at a price of $1.00 per share. The Company received approximately $3.0 million in gross proceeds from the sale of shares underlying exercised rights. Pursuant to the Stock and Warrant Purchase Agreement dated October 15, 1997 (the "Purchase Agreement"), between PC Quote and Imprimis Investors LLC and Wexford Spectrum Investors LLC (collectively, the "Wexford Affiliates"), the entire proceeds were used to fulfill the Company's obligation to repurchase shares from the Wexford Affiliates. During the second quarter of 1998, the Wexford Affiliates exercised 143,300 warrants, previously acquired pursuant to the Purchase Agreement, and purchased 143,300 shares of Common Stock of the Company for $286,600. In February 1999, the Wexford Affiliates exercised 267,200 warrants, previously acquired pursuant to the Purchase Agreement, and purchased 267,200 shares of Common Stock for $534,400. On May 19, 1998, PICO Holdings, Inc. ("PICO") exercised a portion of its warrant, acquired in connection with a May 1997 financing transaction with the Company, and purchased 320,000 shares of Common Stock of the Company for $500,000. On July 31, 1998, the Company and PICO increased the amount of the secured loan from PICO to the Company from $2.25 million to $3.25 million. (5) FINANCING AND EQUITY TRANSACTIONS On April 19, 1999, a third-party investor exercised its warrant, acquired in connection with a December 1998 private placement, and acquired 80,000 shares of the Company's common stock in exchange for $150,000. On April 22, 1999, the Company entered into Stock Purchase Agreements with four third-party investors. On April 23, 1999, the investors purchased 190,476 shares of common stock in exchange for $1,999,998. The investors acquired the common stock for investment purposes. On June 11, 1999, a third-party investor exercised its warrant, acquired in connection with a December 1998 private placement, and acquired 120,000 shares of the Company's common stock in exchange for $225,000. On August 31, 1999, the Company borrowed $1.5 million, on an unsecured basis, and subsequently repaid the loan on September 30, 1999. The loan had an interest rate of 3% over the prime rate as quoted in the Wall Street Journal. On September 15, 1999, a third-party investor exercised its warrant, acquired in connection with a December 1998 private placement, and acquired 120,000 shares of the Company's common stock in exchange for $225,000. Page 10 HYPERFEED TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On June 16, 1999, the stockholders of the Company approved the 1999 Combined Incentive and Non-statutory Stock Option Plan, previously approved by the Company's Board of Directors in March 1999. There are 4,000,000 shares reserved for issuance under this plan. The plan terminates in March 2009, unless terminated sooner by the Company's Board of Directors. The plan authorizes the award of options and restricted stock purchase rights. The plan will be administered by the Company's Board of Directors or a committee appointed by the Company's Board of Directors. The administrator has the authority to interpret the plan, grant awards and make all other determinations necessary to administer the plan. Stock options are exercisable for a period not to exceed ten years from the date of the grant and, to the extent determined at the time of grant, may be paid for in cash or by a reduction in the number of shares issuable upon exercise of the option. In December 1998, the Company segregated its Internet related services into a separate business unit within the Company. The Company is transferring its Internet-related services to PCQuote.com, Inc., which was incorporated in March 1999 as a wholly-owned subsidiary. On April 12, 1999, PCQuote.com, Inc. entered into a 3 1/2 year agreement with CNNfn. Under the limited exclusive licensing agreement, CNNfn granted PCQuote.com a license to display on PCQuote.com's web sites certain headlines from CNNfn original stories published on the CNNfn Web site at cnnfn.com. In connection with the agreement, PCQuote.com issued to CNNfn a warrant to acquire 515,790 shares (after giving effect to the 9,800-for-one stock split approved by PCQuote.com's Board of Directors) of common stock, representing a five percent interest in the common stock of PCQuote.com outstanding prior to its planned initial public offering. On June 9, 1999, PCQuote.com filed a registration statement with the Securities and Exchange Commission relating to a planned initial public offering. The Company estimated that the warrant had a fair value of $5.88 million. The fair value was recorded as additional paid in capital and current and non-current prepaid license fees, which will be amortized over the term of the agreement. The warrant vests 25% upon execution of the agreement with an additional 25% vested on each of the three succeeding anniversary dates after execution, and has an aggregate exercise price of $.52. On April 29, 1999, CNNFN exercised the vested portion of its warrant and acquired 128,948 shares of common stock. The minority interest owned by CNNFN as of and for the nine months ended September 30, 1999 has been included in the accompanying consolidated financial statements. PCQuote.com adopted its 1999 Combined Incentive and Non-statutory Stock Option Plan in May 1999. There are 1,538,600 shares of common stock reserved for issuance under this plan. The plan terminates in September 2009, unless terminated sooner by PCQuote.com's Board of Directors. The plan authorizes the award of options and restricted stock purchase rights. The plan will be administered by PCQuote.com's Board of Directors or a committee appointed by PCQuote.com's Board of Directors. The administrator has the authority to interpret the plan, grant awards and make all other determinations necessary to administer the plan. Stock options are exercisable for a period not to exceed ten years from the date of the grant and, to the extent determined at the time of grant, may be paid for in cash or by a reduction in the number of shares issuable upon exercise of the option. On June 8, 1999, the Board of Directors approved a 9,800-for-one stock split of PCQuote.com's outstanding common stock. On August 30, 1999, PCQuote.com amended its articles of incorporation to increase its authorized common stock to 74,000,000 shares and authorized 1,000,000 shares of $.01 par value preferred stock for future issuance. Page 11 HYPERFEED TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On September 7, 1999, PCQuote.com borrowed $2.0 million from Motorola, Inc. evidenced by a promissory note. The note bears interest at the prime rate from time to time as announced in the Wall Street Journal. Payments are due on a quarterly basis commencing June 30, 2000 through March 31, 2002, subject to early repayment upon the closing of PCQuote.com's planned offering. The promissory note provides that PCQuote.com is required to pay Motorola a prepayment fee of $140,000 if it prepays the note on or before June 30, 2000, including as a result of the closing of its planned offering. (6) COMMITMENTS AND CONTINGENCIES In connection with the formation and transfer of its Internet business to its subsidiary, PCQuote.com, on May 28, 1999, the Company and Townsend Analytics, Ltd. ("Townsend") entered into an agreement to terminate their Software Distributor Agreement dated December 4, 1995. Pursuant to the terms of the termination agreement, the Company was obligated to pay Townsend $1.0 million within ninety days after execution of the agreement. The Company paid the $1.0 million to Townsend in the third quarter of 1999. The Company and PCQuote.com subsequently entered into separate new license agreements with Townsend Analytics for the right to use the LAN and Internet versions, respectively, of the software application which is marketed as PCQuote 6.0 RealTick. The new agreements replaced the prior agreement between Townsend Analytics and the Company. The initial term of the agreements ends December 4, 2000. Pursuant to the terms of the new agreements, the Company and PCQuote.com are each required to pay a minimum royalty to Townsend of $220,000 per month and a cumulative minimum royalty of $5,000,000 each over the initial term of the agreements. Under the terms of its new agreement with Townsend, the Company guarantees the obligation of its subsidiary, PCQuote.com, and receives a credit towards its minimum commitment obligations to the extent that PCQuote.com's actual royalty payments exceed its minimum commitments. The Company is a party to various legal proceedings incidental to its business operations, none of which is expected to have a material effect on the financial condition or results of operations of the Company. (7) Subsequent Events On October 18, 1999, PCQuote.com announced that it has postponed its initial public offering of common stock due to market conditions. PCQuote.com has incurred approximately $1.6 million of expenses related to the planned offering, which it has included within prepaid expenses and other current assets at September 30, 1999 until such time as they can properly be netted against the proceeds from the offering. If the offering does not occur within 90 days of the postponement, these expenses will be charged against current results of operations. The Company and Spacecom Systems, Inc. ("Spacecom") entered into a settlement agreement as of November 1, 1999 related to the lease of satellite transmission space by the Company from Spacecom. The lease was for 112 kilobits ("kb") of transmission capacity for payment of approximately $56,000 per month until, under certain circumstances, either August 1, 2002 or January 1, 2006. The Company and Spacecom agreed to terminate the lease, and any and all claims or obligations thereunder, in exchange for the Company's agreement to pay Spacecom an aggregate of $1,411,245 as follows: $179,245 on November 1, 1999, and ten equal monthly installments of $50,000 each from December 1, 1999 through September 1, 2000, and twelve equal monthly installments of $36,000 each from October 1, 2000 through September 1, 2001, and twelve equal monthly installments of $25,000 each from October 1, 2001 and ending on September 1, 2002. The Company ceased utilizing the Spacecom satellite transmission services in the third quarter of 1999, and accordingly recorded the entire settlement amount as a charge against operations and the related payment liability as current and non-current accrued satellite termination expense. Page 12 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition INTRODUCTION - SAFE HARBOR DISCLOSURE The following discussion and analysis contains historical information. It also contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, particularly in reference to statements regarding our expectations, plans and objectives. You can generally identify forward-looking statements by the use of the words "may," "will," "expect," "intend," "estimate," "anticipate," "believe," or "continue," or similar language. Forward-looking statements involve substantial risks and uncertainties. You should give careful consideration to cautionary statements made in this discussion and analysis. We base our statements on our current expectations. Forward-looking statements may be impacted by a number of factors, risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Our filings with the Securities and Exchange Commission identify factors that could cause material differences. Among these factors are our ability to: (i) fund our current and future business strategies as a going-concern either through continuing operations or external financing; (ii) attract and retain key employees; (iii) compete successfully against competitive products and services; (iv) maintain relationships with key suppliers and providers of market data; and (v) respond to the effect of economic and business conditions generally. RECENT BUSINESS DEVELOPMENTS HYPERFEED'S PCQUOTE.COM SUBSIDIARY POSTPONES OFFERING On October 18, 1999, PCQuote.com, Inc. announced that it has postponed its initial public offering of common stock due to market conditions. HYPERFEED APPROVED FOR LISTING ON THE NASDAQ NATIONAL MARKET On September 16, 1999, we publicly announced that we have received approval for listing on the Nasdaq National Market. We commenced trading of our common stock on the Nasdaq National Market on September 23, 1999 under the symbol HYPR. Concurrent with the listing on the Nasdaq National Market, trading in our common stock on the American Stock Exchange under the symbol PQT was suspended. PC QUOTE CHANGES NAME TO HYPERFEED TECHNOLOGIES On June 16, 1999, at their annual meeting, shareholders of PC Quote, Inc. considered, voted on, and approved the proposal to change the corporate name to HyperFeed Technologies, Inc. As previously reported, the reason for the name change was to further differentiate HyperFeed and its subsidiary, PCQuote.com, Inc., and eliminate potential confusion in the marketplace. Page 13 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) HYPERFEED INCORPORATES SUBSIDIARY PCQUOTE.COM, INC. In December 1998, the Company segregated its Internet related services into a separate business unit within the Company. HyperFeed is transferring its Internet-related services to PCQuote.com, Inc., which was incorporated in March 1999 as a wholly-owned subsidiary. Management believes that formally separating the two entities will permit the parent and subsidiary to focus on their relative strengths. In management's opinion, the separation will permit each entity to better (i) attract and retain key employees by relating compensation to relevant business performance, (ii) enter into strategic relationships with business partners, and (iii) permit each entity to pursue its own financing avenues. PCQUOTE.COM FILES FOR INITIAL PUBLIC OFFERING On June 9, 1999, PCQuote.com filed a registration statement with the Securities and Exchange Commission relating to a planned initial public offering of 7,750,000 shares of its common stock. The planned common stock offering consisted of 5,800,000 shares to be issued by PCQuote.com and 1,950,000 shares to be sold by HyperFeed. The initial filing range of the public offering price for the common stock was between $12.00 and $14.00 per share. We and our subsidiary, PCQuote.com, entered into agreements, effective March 31, 1999, governing interim and ongoing relationships, including a Contribution and Separation Agreement, Maintenance Agreement, DataFeed License Agreement, Services Agreement, Non-Competition Agreement, Registration Rights Agreement and Tax Indemnification and Allocation Agreement. Under the Contribution and Separation Agreement, HyperFeed transferred assets related to its Internet operations to PCQuote.com and PCQuote.com assumed the liabilities related to those Internet operations. Under the Services Agreement, HyperFeed will perform transitional services for, and provide office space to PCQuote.com for $213,500 per month through September 1999, $163,500 per month thereafter through December 1999, $138,500 per month thereafter through March 2000 and $113,500 per month thereafter through June 30, 2000. Under the Maintenance Agreement, PCQuote.com will receive software features, upgrades and enhancements to PCQuote Orbit and will pay HyperFeed 3% of gross revenues obtained from use or sublicensing of PCQuote Orbit. Under the Data Feed Agreement, PCQuote.com will be entitled to use HyperFeed 2000 for a monthly fee based on the number of users and quotes accessed. HYPERFEED 2000 NOW AVAILABLE FOR OMEGA RESEARCH PRODUCTS On March 22, 1999, we announced the culmination of our previously announced agreement with Omega Research, Inc. (NASDAQ: OMGA). Omega Research's new 2000i series of software products is now fully compatible with HyperFeed 2000, our recently released premier datafeed. The products are available for delivery via broadcast and Internet. Our datafeed is now available for some of the most popular high-end trading software on the market. Omega Research software users can subscribe to HyperFeed 2000 online at www.pcquote.com. HYPERFEED 2000 Page 14 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) In March 1999, we released HyperFeed 2000, the next generation in market data technology. Combining advanced IP Multicast technologies with a new proprietary compression technique, HyperFeed 2000 boasts the flexibility and expandability to consistently deliver massive volumes of market data in true real-time. Our proprietary compression technology actually reduces bandwidth consumption allowing HyperFeed 2000 recipients to enjoy the benefits of the full T-1 HyperFeed with over 350,000 equity, option and commodity issues, including full option chains, at a fraction of the current communications cost. Our product introduction came at a time when an increasing number of data vendors were faced with imminent threats to their capacity and bandwidth capabilities. We are committed to delivering execution-quality, complete, real-time market data faster, more reliably, and cost-effectively than our competition. RESULTS OF OPERATIONS: FOR THE NINE MONTHS AND QUARTER ENDED SEPTEMBER 30, 1999 Total revenue increased $7.1 million, or 41.7%, to $24.0 million for the nine months ended September 30, 1999, and $2.3 million, or 37.4%, to $8.6 million for the quarter ended September 30, 1999 versus the comparable prior year periods. Our HyperFeed services and Internet services both posted increases for the first nine months of 1999 over 1998 and for the quarter ended September 30, 1999 over 1998. For the first nine months of 1999, HyperFeed service revenue increased $3.3 million, or 33.3%, from $9.8 million in same period in 1998 to $13.1 million in 1999. For the quarter ended September 30, 1999, HyperFeed service revenue increased $1.1 million, or 31.8%, from $3.5 million in 1998 to $4.6 million in 1999. Revenue growth was experienced through increases in PC Quote 6.0 subscriptions and datafeed sales. Revenue from our Internet services increased $3.8 million, or 53.1%, to $11.0 million for the first nine months of 1999 from $7.2 million for the same period in 1998. For the third quarter in 1999, revenue from Internet services increased $1.2 million, or 44.4%, from $2.8 million in 1998 to $4.0 million in 1999. The increase is directly attributable to the growth in the number of subscribers to our PC Quote 6.0 Internet service offering. Direct costs of services increased $6.3 million, or 50.2%, to $18.8 million for the nine months ended September 30, 1999 from $12.5 million for the comparable 1998 period, and increased $2.1 million, or 47.7%, to $6.4 million for the quarter ended September 30, 1999 as compared to $4.4 million for the comparable 1998 period. Principal components of the increase were royalties and payments to providers of market data, directly attributable to the growth in subscribers to both of our PC Quote 6.0 services, Internet and HyperFeed, in addition to a one-time $1.0 million second quarter charge incurred in connection with the termination of our software distributor agreement with Townsend Analytics and entering into two separate new agreements between Townsend and ourselves and our subsidiary, PCQuote.com. Amortization of software development costs increased for the nine months from $1.5 million in 1998 to $1.8 million in 1999. Also included in direct costs for the quarter and nine months ended September 30, 1999 is a non-cash charge of $420,000 for the quarter and $770,000 for the nine months for amortization of prepaid license fees as a result of the value assigned to the warrant issued to CNNFN in exchange for the 3 1/2 year license agreement with PCQuote.com. For the first nine months of 1999, resulting gross margin increased 17.6% to $5.2 million in 1999 from $4.5 million in 1998. For the quarter ended September 30, 1999, the resulting gross margin was $2.1 million, an increase of 13.7% from $1.9 million in the third quarter of 1998. Excluding the one-time $1.0 million charge and the $770,000 non-cash amortization of prepaid license fees, the gross margin increased $2.6 million, or 57.4%, to an adjusted $7.0 million for the nine months ended September 30, 1999 as compared to the same period in 1998. Page 15 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Direct costs associated with HyperFeed services increased from $7.6 million for the nine months ended September 30, 1998 to $9.7 million for the first nine months of 1999, a 27.9% increase. For the quarter ended September 30, 1999, direct costs associated with HyperFeed services were $3.1 million, a 21.8% increase from $2.5 million in the same period of 1998. Volume increases in license and exchange fees, including $500,000 of the $1.0 million second quarter termination payment, were offset to a degree by cost-savings related to leased equipment and personnel costs effected in customer service and support, in addition to distribution systems efficiencies effected in data-feed operations. Amortization of software development costs increased 9.2% to $983,000 for the first nine months of 1999 from $900,000 for the same period in 1998. For the quarter ended September 30, 1999, amortization of software development costs increased 12.1% to $353,000, from $315,000 in the third quarter of 1998. For the first nine months of 1999, resulting gross margin increased 51.5% to $3.4 million in 1999 from $2.2 million in 1998. For the quarter ended September 30, 1999, the resulting gross margin for HyperFeed services was $1.5 million, an increase of 59.4% from $920,000 in the third quarter of 1998. Direct costs associated with Internet services increased to $9.1 million for the first nine months of 1999 from $4.9 million in the comparable 1998 period, an 84.4% increase. For the quarter ended September 30, 1999, direct costs associated with Internet services were $3.3 million, an 84.0% increase from $1.8 million in the same period of 1998. The significant growth we experienced caused us to incur increases in license and exchange fees and data acquisition and distribution costs. Also contributing to the nine-month increase was $500,000 of the $1.0 million second quarter termination charge. Software amortization increased 35.2% for the first nine months to $814,000 in 1999 from $602,000 in 1998, as a result of the increase in development resources directed to this portion of our business. Software amortization increased for the third quarter from $210,000 in 1998 to $273,000 in 1999. The gross margin on Internet services decreased 17.0% from $2.2 million for the first nine months of 1998 to $1.8 million for the same period of 1999. Internet services gross margin decreased from $966,000 in the third quarter of 1998 to $677,000 for the same period in 1999. Gross margins actually increased slightly for the quarter to $1.1 million after discounting the effects of the non-cash amortization of prepaid license fees and for the nine months increased $900,000, or 40.6%, to $3.1 million when adjusting for both the license fee amortization and one-time termination charge. Total operating expense, including a $1.4 million charge related to terminating a satellite services agreement, increased $3.2 million, or 39.6%, to $11.2 million for the nine months ended September 30, 1999 from $8.0 million for the comparable 1998 period, and increased $2.7 million to $5.3 million for the quarter ended September 30, 1999 as compared to $2.6 million for the comparable 1998 period. Excluding the one-time satellite termination charge, total operating expense increased $1.8 million, or 22.1%, for the nine-month period and $1.3 million for the quarter as compared to the prior year periods. Sales costs decreased 10.7% to $2.7 million for the first nine months of 1999 as compared to $3.0 million for the same 1998 period. For the third quarter of 1999, sales costs were $878,000, an 8.0% decrease from the prior year period of $954,000. The decrease was the result of a change in our previous sales incentive compensation structure, in addition to lower sales support costs. General and administrative expenses increased 55.2% to $3.8 million in the first nine months of 1999 from $2.4 million for the first nine months of 1998. For the quarter ended September 30, 1999, general and administrative expenses increased 73.7% to $1.4 million from $795,000 in the same period in 1998. The increase was principally due to additional personnel and related costs required in support of the increase in business, an increase in the provision for bad debts, reflective of the higher sales level, increases in professional and additional management personnel and related costs associated with the staffing of PCQuote.com as a separate entity. Page 16 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) Product and market development costs increased $796,000, or 46.8%, to $2.5 million for the nine months ended September 30, 1999 from $1.7 million for the comparable 1998 period, and increased $784,000 to $1.3 million for the quarter ended September 30, 1999 as compared to the same 1998 period. The increases were due to an increase in the number of development personnel and related costs, in addition to a significant increase in advertising and promotional activities in the third quarter, as compared to the prior year. Depreciation and amortization decreased 5.7% to $855,000 for the first nine months of 1999 from $907,000 for the comparable 1998 period, and increased 5.6% to $330,000 in the third quarter of 1999 from $312,000 for the comparable 1998 period. The decrease for the nine months is a result of a combination of lower overall equipment purchases in recent years and lower prices for equipment additions. The increase in the quarter is the result of communications and equipment purchases for increased growth and new service offerings. Interest expense was $68,000 for the first nine months of 1999 or $1.5 million less than the first nine months of 1998. For the third quarter of 1999, interest expense was $39,000 compared to $177,000 in the same period of 1998. The decrease is the result of the conversion of the convertible subordinated debenture and borrowings on the credit facility into equity in December 1998. LIQUIDITY AND CAPITAL RESOURCES: FOR THE NINE MONTHS AND QUARTER ENDED SEPTEMBER 30, 1999 Net cash and cash equivalents increased $921,000 from year-end 1998 to $2,061,000 at the end of the third quarter of 1999. Prepaid expenses and other current assets increased $1.6 million for the nine months ended September 30, 1999 compared to $19,000 for the same period of 1998. The principal reason for this increase was expenditures relating to our planned stock offering of our subsidiary, PCQuote.com, Inc. Expenditures for new equipment were $1.1 million, an increase of $442,000, or 65.4%, from $676,000 for the same period in 1998. The increase in expenditures was to support the growth in our business, as well as to improve our communications and ticker processing infrastructure. Capitalized software costs of $905,000 were $581,000, or 39.1%, lower for the nine months ended September 30, 1999, compared to the same period for 1998, principally as a result of lower development costs associated with capitalized projects. We borrowed and repaid $1.5 million during the quarter, and also for the nine months repaid $225,000 of the principal balance on the bank term loan. Additionally, our subsidiary, PCQuote.com, Inc., borrowed $2.0 million from Motorola, Inc., evidenced by a demand note. The note bears interest at the prime rate from time to time as announced in the Wall Street Journal. Payments are due on a quarterly basis commencing June 30, 2000 through March 31, 2002, subject to early repayment upon the closing of PCQuote.com's offering. We received approximately $3.4 million in net proceeds from (i) the sale of common stock to four third-party investors in a private placement, (ii) the purchase of common stock by two third-party investors through exercise of previously issued warrants, (iii) the sale of shares of common stock to employees pursuant to the Company's Employee Stock Purchase Plan and (iv) the sale of shares of common stock to employees who exercised options previously granted to them under the Company's Employee Incentive Stock Option Plan. Total revenue for the first nine months of 1999 increased 41.7% to $24.0 million versus $17.0 million for the 1998 period, while direct costs of services increased 50.2% to $18.8 million versus $12.5 million in 1998. The resulting gross margin increased 17.6% from $4.5 million for the first nine months of 1998 to $5.2 million for the first nine months of 1999. The increase in revenue was due to the growth in Page 17 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) subscriptions to our PC Quote 6.0 services, both HyperFeed and Internet, as well as an increase in datafeed sales. This together with operating cost containment contributed to our gross margin improvement. Although cash flows have improved, they are still negative and insufficient to fund operations and future growth. Consequently, we have explored, and continue to explore multiple alternatives that may be available for the purpose of enhancing stockholder value. These alternatives include a merger, a spin-off or sale of part of our business, a strategic relationship or joint venture with another technology or financial services firm and future equity financing to further fund our business. In December 1998, we segregated our Internet related services into a separate internal business unit. We incorporated the business as a wholly-owned subsidiary, PCQuote.com, Inc., on March 19, 1999 and transferred our Internet-related services to the subsidiary on August 30, 1999. On June 9, 1999, PCQuote.com filed a registration statement with the Securities and Exchange Commission relating to a planned initial public offering of 7,750,000 shares of its common stock. The planned common stock offering consists of 5,800,000 shares to be issued by PCQuote.com and 1,950,000 shares to be sold by us. The initial filing range of the public offering price for the common stock was between $12.00 and $14.00 per share. Due to market conditions, we subsequently reduced the size and price of the offering, and on October 18, 1999 announced that we were postponing the offering. We currently plan to proceed with the offering once market conditions are more favorable. We believe net proceeds from the offering will be sufficient for working capital purposes of both PCQuote.com and Hyperfeed Technologies. There can be no assurances, however, that the offering will occur. If the offering does not occur, we would recognize a charge against operations of approximately $1.6 million, and we would pursue other alternatives to raise capital. We raised a substantial amount of capital in 1998 and 1999 through the debt conversion, exercise of warrants and other sales of common stock. These transactions have significantly improved our financial condition. In order to minimize dilution to existing stockholders, our objective is to raise the minimal amount of capital for operations, if and when necessary. We believe we have the ability to raise external capital. However, any capital raised could be costly to us and/or dilutive to stockholders. There can be no assurances, however, that we will be successful in concluding a transaction. YEAR 2000 ISSUES 1. Overview The Company does not have or use mainframe computers in its internal operations. Consequently, we do not have the extent of Y2K issues other companies have that depend on what is commonly known as "legacy" systems. We use PC's and "server class" computers in our operations. Our end-user applications also run on the same type of hardware. These systems still may have Y2K issues. We have implemented a plan to attempt to assess, remediate, and correct any year 2000 critical issues. A "Year 2000" problem will occur where date-sensitive software uses two digit year date fields, sorting the year 2000 ("00") before the year 1999 ("99"). The Year 2000 problem may result in data corruption and processing errors occurring where software, technology equipment, or any other equipment or process uses date-dependent software. Our plan has been structured to address the following areas: A. Processing Plant and Communications Network B. Hyperfeed Retail Applications C. Operational Infrastructure Page 18 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) 2. State of Readiness We have approached each of the above areas in four phases: assessment, remediation, testing, and contingency planning. "Assessment" summarizes the process of issue identification. "Remediation" refers to the process of taking corrective action to best mitigate identified Year 2000 risks. "Testing" is the process of validating a specific Company remediation effort or confirming a third party capability or certification of Year 2000 compliance. "Contingency planning" means the process by which we identify an alternate course of action and/or procedure in the event we cannot or fail to remediate or mitigate a known Year 2000 risk. We may or may not engage in contingency planning for individual subproject components where successful Year 2000 remediation has been validated through the testing process or other methods. The following is a status report on our state of readiness. A. Processing Plant and Communications Network Assessment phase has been completed. A full inventory has been taken of the processing plant, our data-feed input, consolidation and output process, and communications areas. We are in the final stages of the remediation and testing phases. This includes verifying Y2K compliance of outside vendors and suppliers and testing all mission critical items. Testing also includes all PC's, routers, modems, phone lines, Internet service providers (ISP's), and production computers, known as servers, used internally in the communications room. We are also checking our outbound satellite, phone companies and ISP's distribution network, in addition to some ISP's that our customers may use. The compliant numbers as of October 25, 1999 are as follows:
--------------------------------- ---------------- -------------------- Areas Equipment/ Compliant Systems --------------------------------- ---------------- -------------------- Processing Plant 301 301 --------------------------------- ---------------- -------------------- Communications Network 35 34 --------------------------------- ---------------- --------------------
On May 1, 1999, the Company participated in the SIA/FIF Year 2000 Market Data Test which tested our production Processing Plant and Communications Network with quotes dated in the future to January 3, 2000. This data was transmitted to us from all of the major exchanges. The Company has passed this Y2K test on this "mission critical" software and hardware. We have finished the upgrades of all other hardware and software to match the tested components. We have one remaining internal communications upgrade in process and expect to be completed by November 30, 1999. B. Hyperfeed Retail Applications Our retail applications include proprietary and 3rd party software applications, licensed to our customers for use only with our data-feed. These applications include Internet web-site and browser-based applications, local area network (LAN) based applications, and Windows NT client/server applications. One OS/2 based application will become obsolete in 2000. Customers using this application will be converted to a compliant application. Page 19 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) We have participated in the full "end-to-end" Year 2000 scenario test sponsored by the Financial Information Forum in conjunction with the Securities Industry Association. This industry-wide test provided securities, options and futures exchanges and market data providers with the ability to test their systems under simulated Year 2000 conditions. Time was essentially moved forward to January 3, 2000 for that test day. During this test we had a large Y2K team in-house monitoring all of our major products. This testing was performed on several different operating systems, data servers, and methods of transmission. We compared all final data and reported our results to the SIA/FIF, which informed us that we had passed the test. We have release the Y2K simulated data to our customers so they may do their own internal testing. All of our retail applications are Y2K compliant:
--------------------------- ---------------------- --------------------- Applications Tested Compliant --------------------------- ---------------------- --------------------- Hyperfeed Customer 14 14 Apps --------------------------- ---------------------- --------------------- 3rd Party Customer 5 5 Apps --------------------------- ---------------------- ---------------------
C. Operational Infrastructure We have assessed our main facility and field offices for compliance in the security systems, HVAC systems, pagers, phone system, utility providers and other mission critical systems. We have upgraded, at minimal cost, non-compliant equipment. Based on our current assessment, we believe we will be able to meet our Y2K compliance goals. 3. Costs As part of the ordinary course of our business, we continually develop major enhancements to our operating systems and applications. For instance, we spent three years developing the first 100% Windows NT based processing plant that was put into production in 1998. In addition to many other benefits, it is fully Y2K compliant. We have not in the past separately tracked the cost of Y2K remediation, as these efforts were incorporated into our on-going maintenance and equipment replacement program. We have started to track costs in 1999 and, as of October 25, 1999, have spent approximately $124,000 on the cost of Year 2000. This includes internal personnel resources, hardware, software and equipment replacement and upgrades necessary to be Y2K compliant. We will be upgrading various administrative systems that use commercial third party software for accounting, billing and customer management. The total remaining cost of software, replacement equipment, and internal resources for remediation and testing to become Y2K compliant is not expected to exceed $500,000. Based upon currently available information, we do not believe that the cost of Y2K compliance will have a material impact on our financial condition, results of operations or liquidity. Page 20 PART I. ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial Condition (continued) 4. Risks Achieving Y2K compliance depends on many factors. Some factors may be beyond our control, because we use services of others. Should our internal systems or the internal system of one of our critical vendors fail to achieve Y2K compliance and fail in the year 2000, our business and results of operations could be adversely affected. For example: A piece of communications equipment has an internal clock that is not Y2K compliant. Although end-to-end testing is done, for some reason, we or a vendor of ours fail to detect the non-compliance. Y2K comes and the clock shuts down, causing an inability to transmit over that channel. Our customers on that channel do not receive our service. We or our vendor have the cost of finding and fixing the problem. Our customer could make a claim against us for the lost service. Many of our customers have back-up systems in place with us which could mitigate any damage caused by the disruption. In the event that there are claims for damages, our contracts with our customers limit our liability in such instances. However, if there were a large number of customers affected for a prolonged period of time, we could be put in a position of either granting credits or risk losing the customers and our reputation could be adversely effected. We have customers that use our Quote Tools to access our data-feed for software applications. Quote Tools is a set of programmer tools known as application programming interfaces or APIs for short. Our Quote Tools are written and tested to be Y2K compliant. If for some reason Y2K came and our Quote Tools did not function properly because of the date change, we would have to spend money and resources to fix the bug. If the bug could not be fixed, and we had no alternative solution for our customers using the service, we could lose the customers and related revenue. Our contracts with our customers generally limit our liability to total fees paid over the preceding year, which in 1998 was under $200,000 for Quote Tools' customers. 5. Contingency Plans We have completed approximately 99% of the testing related to the Processing Plant/Communications Network, and Retail Applications. All testing, including internal infrastructure, is scheduled to be completed by November 30, 1999. We have started contingency planning and, as a first step, have scheduled additional personnel for the Y2K weekend. EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS We will implement the provisions of Statement of Financial Accounting Standards No. 133, ("Statement 133") "Accounting for Derivative Instruments and Hedging Activities" which is required to be adopted for financial statements issued for the fiscal year ending December 31, 2001. Statement 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring us to recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. We believe that adoption of Statement 133 will not have a material impact on our financial statements. Page 21 PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the disclosures as reported in Item 7A. of our Form 10-K for the year ended December 31, 1998. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS RICHARD F. CHAPPETTO VS. PC QUOTE INCORPORATED (HYPERFEED) As previously reported, Richard F. Chappetto filed a complaint against us seeking monetary damages of approximately $680,000. We filed a Motion to Dismiss a major portion of the complaint which was granted in 1998. The remaining portion of the complaint was settled for $25,000 in August 1999. ITEM 2. CHANGES IN SECURITIES On February 4, 1999, Imprimis Investors LLC and Wexford Spectrum Investors LLC exercised the remaining portion of their common stock purchase warrants, previously acquired pursuant to the Stock and Warrant Purchase Agreement dated October 15, 1997, and purchased 267,200 shares of common stock for $534,400. During the first, second and third quarters of 1999, we issued 32,922, 14,004 and 13,956 shares of our common stock, respectively, to employees, who purchased the shares under our Employee Stock Purchase Plan. During the first, second and third quarters of 1999, 61,225, 34,132 and 31,599 shares of our common stock, respectively, were purchased by employees who exercised stock options granted to them under our Employee Incentive Stock Option Plan. During the first, second and third quarters of 1999, we issued 4,746, 2,289 and 4,408 shares of our common stock, respectively, to our Chairman and Chief Executive Officer, in lieu of cash salary payments, under an agreement approved by our Board Of Directors in which the Chairman would receive the shares at market price. On April 19, 1999, a third-party investor exercised its warrant, acquired in connection with a December 1998 private placement, and acquired 80,000 shares of our common stock in exchange for $150,000. On April 22, 1999, we entered into Stock Purchase Agreements with four third-party investors. On April 23, 1999, the investors purchased 190,476 shares of our common stock in exchange for $1,999,998. The investors acquired the common stock for investment purposes. On June 11, 1999, a third-party investor exercised its warrant, acquired in connection with a December 1998 private placement, and acquired 120,000 shares of our common stock in exchange for $225,000. On September 15, 1999, a third-party investor exercised its warrant, acquired in connection with a December 1998 private placement, and acquired 120,000 shares of our common stock in exchange for $225,000. Page 22 Part II. OTHER INFORMATION ITEM 6. EXHIBITS and REPORTS on FORM 8-K (a) FINANCIAL STATEMENTS The financial statements of the Company are filed herewith in Item 1 of this report. (b) REPORTS ON FORM 8-K In the third quarter of the period covered by this report, we filed a Report on Form 8-K dated September 22, 1999 reporting in Item 5. Other Events that our subsidiary, PC Quote.com, Inc., had borrowed $2.0 million from Motorola, Inc. (c) EXHIBITS 27. Financial Data Schedule Page 23 SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the Company caused this report to be signed on its behalf by the undersigned, there unto duly authorized. HYPERFEED TECHNOLOGIES, INC. Date: November 12, 1999 By: /s/ Jim R. Porter ----------------- Jim R. Porter Chairman and Chief Executive Officer By: /s/ John E. Juska ----------------- John E. Juska Chief Financial Officer and Principal Accounting Officer Page 24 EX-27 2 EXHIBIT 27
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 2,061,185 0 2,889,779 622,758 0 7,753,801 6,138,523 3,794,164 17,730,878 8,724,559 0 0 48 15,160 6,219,979 17,730,878 24,044,990 24,044,990 18,809,390 18,809,390 11,204,459 490,000 67,501 (6,042,818) 0 (6,042,818) 0 0 0 (6,042,818) (0.41) (0.41)
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