<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 000-25113
MARKETWATCH.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3315360
- --------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
825 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 733-0500
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days: Yes[X] No[ ]
The number of shares of the Registrants' Common Stock outstanding as of April
30, 1999 was 12,162,500.
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MarketWatch.com, Inc.
Quarterly Report on Form 10-Q for the Period Ended March 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Interim Condensed Financial Statements:
Condensed Balance Sheets at March 31, 1999 and
December 31, 1998 ............................................ 3
Statements of Operations for the three months ended
March 31, 1999 and 1998 ...................................... 4
Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 .................................... 5
Notes to Financial Statements .................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 9
Item 3. Quantative and Qualitative disclosures About Market Risk ......... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 23
Item 2. Changes in Securities and Use of Proceeds ........................ 23
Item 3. Defaults Upon Senior Securities .................................. 24
Item 4. Submission of Matters to a Vote of Security Holders .............. 24
Item 5. Other Information ................................................ 24
Item 6. Exhibits and Reports on Form 8-K ................................. 24
Signatures 25
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MARKETWATCH.COM, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................... $42,323,000 $ 140,000
Accounts receivable, net...................... 1,752,000 1,586,000
Prepaid expenses.............................. 410,000 2,000
----------- -----------
Total current assets.................. 44,485,000 1,728,000
Other assets ................................... 19,000 11,000
Property and equipment, net..................... 1,150,000 932,000
Deferred offering costs......................... -- 1,816,000
----------- -----------
Total assets.......................... $45,654,000 $ 4,487,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 2,885,000 $ 1,969,000
Accrued expenses.............................. 849,000 1,688,000
Deferred revenue.............................. 16,000 14,000
Advances from DBC............................. -- 3,946,000
----------- -----------
Total current liabilities............. 3,750,000 7,617,000
----------- -----------
Stockholders' equity (deficit):
Preferred stock............................... -- --
Common stock.................................. 122,000 90,000
Additional paid-in capital.................... 81,166,000 53,366,000
Deferred compensation......................... (1,028,000) (1,144,000)
Contribution receivable....................... (19,793,000) (42,948,000)
Accumulated deficit........................... (18,563,000) (12,494,000)
----------- -----------
Total stockholders' equity (deficit).. 41,904,000 (3,130,000)
----------- -----------
Total liabilities and
stockholders' equity (deficit)..... $45,654,000 $ 4,487,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MARKETWATCH.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Net revenues:
Advertising (including $125,000 and $0 from
DBC for the three months ended March 31,
1999 and 1998, respectively)............... $ 2,631,000 $ 696,000
News to DBC................................... 365,000 311,000
Subscription.................................. 151,000 169,000
----------- -----------
Total net revenues.................... 3,147,000 1,176,000
Cost of revenues:
Advertising and news.......................... 1,061,000 186,000
Subscription.................................. 140,000 94,000
----------- -----------
Total cost of revenues................ 1,201,000 280,000
----------- -----------
Gross profit.................................... 1,946,000 896,000
----------- -----------
Operating expenses:
Product development........................... 627,000 236,000
General and administrative.................... 1,550,000 532,000
Sales and marketing .......................... 6,221,000 1,877,000
----------- -----------
Total operating expenses.............. 8,398,000 2,645,000
----------- -----------
Loss from operations............................ (6,452,000) (1,749,000)
Interest income (expense)....................... 383,000 (7,000)
----------- -----------
Net loss........................................ $(6,069,000) $(1,756,000)
=========== ===========
Basic and diluted net loss per share............ $ (.52) $ (0.20)
=========== ===========
Shares used in the calculation of basic and
diluted net loss per share.................... 11,635,000 9,000,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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MARKETWATCH.COM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss...................................... $(6,069,000) $(1,756,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt expense............ (32,000) 40,000
Depreciation and amortization............. 222,000 3,000
Noncash charges from stockholders......... 3,155,000 1,534,000
Changes in operating assets and liabilities:
Accounts receivable.................... (134,000) (445,000)
Prepaid expenses and other
current assets....................... (416,000) --
Accounts payable and accrued expenses.. 1,893,000 (100,000)
Deferred revenue....................... 2,000 1,000
----------- -----------
Net cash used in operating
activities......................... (1,379,000) (723,000)
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment............ (324,000) (89,000)
----------- -----------
Cash flows provided by financing activities:
Proceeds from issuance of common stock, net... 47,832,000 --
Contributions from DBC........................ -- 1,000,000
Advances from DBC (note 3).................... (3,946,000) 120,000
----------- -----------
Net cash provided by financing
Activities......................... 43,886,000 1,120,000
Net change in cash.............................. 42,183,000 308,000
----------- -----------
Cash at beginning of period..................... 140,000 --
----------- -----------
Cash at end of period........................... $42,323,000 $ 308,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements reflect all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the periods shown. The results of operations for
such periods are not necessarily indicative of the results expected for a full
year or for any future period. These financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 as
amended by Form 10-K/A.
THE COMPANY
MarketWatch.com, Inc. (the "Company"), a leading Web-based provider of
comprehensive, real-time, business news, financial programming and analytic
tools, was formed on October 29, 1997 in the state of Delaware as a limited
liability company and was jointly owned by Data Broadcasting Corporation
("DBC") and CBS Broadcasting Inc. ("CBS") (collectively, the "Members"), with
each of them owning a 50% interest in the Company.
In connection with the formation of the limited liability company, the
Company, CBS and DBC entered into a contribution agreement on October 29, 1997
(the "Contribution Agreement"), under which DBC contributed to the Company $1.0
million in cash upon consummation of the Contribution Agreement, $1.0 million in
cash on October 29, 1998 and DBC's existing "Online/News" business which
primarily consisted of customer contracts and intellectual property in return
for its ownership interest. CBS agreed to provide $50 million of rate card
amount advertising and promotions over a period of five years in return for its
ownership interest.
In addition, CBS and the Company entered into a license agreement dated
October 29, 1997 (the "License Agreement") where CBS, in exchange for 30% of net
advertising revenue, as defined, granted to the Company the non-exclusive right
and license to use certain CBS news content and registered trademarks, including
the CBS "Eye" design, for five years ending October 29, 2002, subject to
termination on the occurrence of certain events. In addition to the agreements
above, the Company entered into a services agreement with DBC (the "Services
Agreement"). Under the terms of the Services Agreement, DBC charges the Company
for certain general services, the Company receives payment from DBC for
supplying news and the Company receives a fee for licensing MarketWatch RT and
MarketWatch Live.
In January 1999, the Company completed an initial public offering ("IPO")
of 3,162,500 shares of common stock at $17 per share. Total proceeds to the
Company were approximately $48 million, net of offering costs. Immediately prior
to the completion of the IPO, the Company was reorganized from a limited
liability corporation to a corporation. All share and per share data have been
retroactively adjusted to reflect the reorganization.
6
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NOTE 2 -- AGREEMENTS WITH CBS AND DBC
In January 1999, the Company entered into a Stockholders' Agreement
("Stockholders' Agreement"). Under the terms of the Stockholders' Agreement, CBS
reduced the advertising commitment from the Contribution Agreement to an
aggregate rate card amount of $30 million in return for a change in the royalty
rate payable under the License Agreement, extension of the License Agreement to
2005 and modification to certain non competition provisions. Additionally, both
CBS and DBC will have a right of first refusal in the event either party desires
to sell any securities of the Company to a third party or if the Company issues
new securities.
In January 1999, the Company and CBS entered into an Amended and Restated
License Agreement (the "Amended and Restated License") which superseded and
replaced the License Agreement. The Amended and Restated License became
effective immediately prior to the IPO. Under the Amended and Restated License,
in return for the right to use the CBS name and logo as well as the CBS
Television Network news content, the Company will be obligated to pay a royalty
to CBS of: (i) during 1999, (A) 8% of Gross Revenues in excess of $500,000 and
up to and including $50.5 million and (B) 6% of Gross Revenues in excess of
$50.5 million, and (ii) in subsequent years through the termination of the
License Agreement on October 29, 2005, (A) 8% of Gross Revenues up to and
including $50.0 million and (B) 6% of Gross Revenues in excess of $50.0 million.
CBS will have the right to terminate the agreement in certain circumstances,
including breach of a material term or condition of the agreement, insolvency,
bankruptcy or other similar proceeding, discontinuance of use of the MarketWatch
logo without providing an acceptable substitute, or acquisition or issuance of
certain percentages of the Company's Common Stock or voting power by or to a CBS
competitor. In addition, CBS will retain significant editorial control over the
use and presentation of the CBS news content and the CBS logo and has the
ability to prevent the Company from displaying certain types of content which
are unacceptable to CBS. The Amended and Restated License will expire on October
29, 2005.
Gross Revenues means gross operating revenues that are derived from an
Internet service or Web site that:
- provides information or services of a financial nature; or
- uses the CBS trademarks licensed to MarketWatch.com.
Gross Revenues excludes revenues from DBC, an amount equal to certain
commissions paid to sales representatives and an amount equal to certain
revenues attributable to an acquired company's results of operations for the 12
months prior to the acquisition.
The terms of the Amended and Restated License will not prohibit CBS from
licensing its name and logo to another Web site or Internet service that does
not have as its primary function and its principal theme and format the
delivering of comprehensive real-time or delayed stock market quotations and
financial news in the English language to consumers. CBS is also not prohibited
from licensing its news content to, or investing in, another Web site or
Internet service.
7
<PAGE> 8
In January 1999, the Company and DBC entered into an Amended and Restated
Services Agreement (the "Amended Services Agreement") which supersedes and
replaces the Services Agreement. Under the Amended Services Agreement, DBC will
provide the Company with hosting services, software programming assistance, data
feeds, communications lines, office space and related facilities, network
operations and Web site management services as well as certain administrative
and engineering services if requested by the Company. The Amended Services
Agreement provides for DBC to grant the Company certain nonexclusive licenses to
its data and information feeds and provides for certain network Website hosting
performance standards. DBC will also pay the Company a monthly per subscriber
fee ranging from $2.50 to $5.00, subject to a monthly minimum of $100,000
through October 2002, for delivery of the Company's news to all DBC subscribers,
as defined. The Company is also required to pay DBC 25% and 75% of subscription
revenues for MarketWatch RT and MarketWatch Live, respectively. The term of the
Amended Services Agreement will expire on October 29, 2005.
In January 1999, the Company and DBC entered into a Revolving Credit
Agreement (the "Credit Agreement") whereby DBC will be obligated to loan the
Company up to $5.0 million through October 2000. Borrowings under the Credit
Agreement will be unsecured and bear interest at a variable rate per annum equal
to The Chase Manhattan Bank's prime rate plus 2%. All previous advances from DBC
under the Limited Liability Company Agreement of the LLC between CBS and DBC
(the "LLC Agreement") from DBC, were included against the borrowings under the
Credit Agreement. As of March 31, 1999 the Company had no outstanding borrowings
under the Agreement.
In January 1999, the Company, CBS and DBC entered into a Registration
Rights Agreement ("Registration Agreement"). CBS and DBC, and their affiliates
and permitted transferees will have certain registration rights for the
securities of the Company held by them under the Registration Agreement.
NOTE 3 -- RELATED PARTY TRANSACTIONS
An analysis of the advances from DBC to the Company are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
Balance as of the beginning
of the period $ 3,946,000 $ --
Expenses paid by DBC on
behalf of the Company 903,000 1,138,000
Expenses allocated by DBC
to the Company 296,000 165,000
Royalty fees to DBC 45,000 37,000
News revenue from DBC (365,000) (311,000)
Web advertising revenue
from DBC (140,000) --
Receivables collected by DBC
on behalf of the Company (99,000) (402,000)
Interest payable on advances
from DBC 17,000 7,000
Cash advances (payments)
from DBC, net (4,603,000) --
Cash contributions -- (634,000)
----------- ----------
Balance as of the
end of the period $ -- $ --
=========== ==========
</TABLE>
8
<PAGE> 9
A majority of the expenditures and liabilities of the Company were incurred
by DBC and directly charged to the Company. These direct charges totaled
$903,000 and $1,138,000 for the three month periods ended March 31, 1999 and
1998, respectively. Direct charges primarily consist of payroll and related
costs, consulting, commissions and access fees for information from various
exchange markets. Allocated charges totaled $296,000 and $165,000 for the three
month periods ended March 31, 1999 and 1998, respectively. Under the terms of
the Amended Service Agreement, DBC will provide the Company with certain general
services which include cash management, accounting, network operations and
hosting of the Company's web pages and data feeds. Charges for these services
and equipment usage are allocated based upon DBC's estimate of costs
attributable to the operations of MarketWatch.com.
Direct charges for subscription revenues for MarketWatch Live and
MarketWatch RT were $45,000 and $37,000 for the three month periods ended March
31, 1999 and 1998, respectively. News revenues are based on the number of DBC
subscribers and were $365,000 and $311,000 for the three month periods ended
March 31, 1999 and 1998, respectively. Included in accounts payable at March
31, 1999 is $350,000 owed to DBC outside the Credit Agreement.
The Company has recorded advertising expenses of $3,155,000 and $1,534,000
at rate card value for the three months ended March 31, 1999 and 1998,
respectively, for advertising and promotion provided by CBS.
NOTE 4 -- SUBSEQUENT EVENT
On April 28, 1999, the Company agreed to acquire BigCharts Inc. ("Big
Charts"), a privately-held provider of objective, data-driven online financial
content for self-directed investors. Under the terms of the acquisition, which
will be accounted for as a purchase, the Company will acquire BigCharts for
2,175,000 shares (including shares issuable upon exercise of assumed BigCharts
options) of the Company's Common Stock and pay an aggregate of $6 million in
cash for all of Big Charts' outstanding shares, options, and warrants. The
Company expects to close the transaction in May 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933 and Section 21e of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
Company's expectations, beliefs, intentions or future strategies that are
signified by the words "expects", "anticipates", "intends", "believes", or
similar language. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements. In evaluating the Company's business, prospective
investors should carefully consider the information set forth below under the
caption "Factors That May Affect Future Operating Results" in addition to the
other information set forth herein. The Company cautions investors that its
business and financial performance are subject to substantial risks and
uncertainties.
OVERVIEW
9
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MarketWatch.com is a leading Web-based provider of comprehensive, real-time
business news, financial programming and analytic tools. In addition to
real-time coverage of business and financial news and in-depth commentary on
market moving trends and events, we offer stock quotes, portfolios, charts and
fundamental data. We completed our initial public offering on January 15, 1999.
Prior to the offering, MarketWatch.com was a joint venture owned 50% each by DBC
and CBS, and was formed as a limited liability company (the "LLC") in October
1997. We were formed as the successor to DBC's Online/News Business, which
commenced operations in October 1995. When this joint venture was formed, CBS
and DBC agreed that their contributions would be treated as having equal value.
Immediately prior to the closing of our initial public offering on January 15,
1999, we were re-organized from a limited liability company into a corporation.
Since we were formed as an LLC, MarketWatch.com has operated as a provider
of business news, financial programming and analytic tools, with services
including news articles, feature columns and analytic tools, such as stock
quotes and charting. These services are available free of charge.
MarketWatch.com has continued selling advertising banners and sponsorships and
subscriptions to MarketWatch RT, MarketWatch Live and news to DBC.
Although MarketWatch.com sells MarketWatch RT and MarketWatch Live on a
non-exclusive basis, DBC may provide these services itself or through other
third parties. However, DBC is not permitted to sell advertising on a Web site
that has as its primary function and principal theme and format the delivery of
comprehensive stock quotes and financial news in the English language to
consumers. However, DBC could compete with us in the future.
We have yet to achieve significant revenue and our ability to generate
significant revenue is uncertain. Further, in view of the rapidly evolving
nature of our business and our very limited operating history, we have little
experience forecasting our revenues. Therefore, we believe that
period-to-period comparisons of our financial results are not necessarily
meaningful and you should not rely upon them as an indication of our future
performance. To date, we have incurred substantial costs to create, introduce
and enhance our services, to develop content, to build brand awareness and to
grow our business. As a result, we have incurred operating losses in each
fiscal quarter since we were formed. We expect operating losses and negative
cash flows to continue for the foreseeable future as we intend to significantly
increase our operating expenses to grow our business. We may also incur
additional costs and expenses related to content creation, technology,
marketing or acquisitions of businesses and technologies to respond to changes
in our rapidly changing industry. These costs could have an adverse effect on
our future financial condition or operating results.
Immediately prior to the closing of our initial public offering in
January 1999, our agreements with CBS and DBC were amended so that:
- CBS will contribute $30 million in rate card advertising through
October 2002 instead of $50 million,
- our license agreement with CBS was extended for three years to October
29, 2005,
- the royalties payable to CBS were modified from 30% of advertising
revenue to approximately 8% of all of our revenue other than revenue
attributable to DBC and certain other revenue, and
- DBC's service obligation was extended three years to October 29, 2005.
However, the Subscriber Payments obligation will expire in October
2002. In addition, we will not receive any Subscriber Payments with
respect to certain commercial subscribers.
10
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On April 28, 1999 we agreed to acquire Big Charts, Inc. ("BigCharts").
BigCharts, based in Minneapolis, is a leading provider of licensed online
financial charting content to electronic brokers, financial publishers and
portals. In addition, the company designs, produces and markets interactive
financial charting products to institutional clients in the online brokerage,
online publishing, Internet portal, and online Finance industries.
Under the terms of the agreement, we will exchange 2,175,000 shares of our
common stock (including shares issuable upon exercise of assumed BigCharts
options), and pay an aggregate of $6 million in cash for all outstanding
BigCharts Inc. securities. The acquisition, which has been approved by both
companies' Boards of Directors, is subject to customary conditions including
approval by BigCharts' stockholders. We expect to close the transaction by the
end of the second quarter. We will account for this transaction under the
purchase method of accounting. Philip Hotchkiss, BigCharts President and CEO,
will join MarketWatch.com's Board of Directors.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues are primarily derived from the sale of advertising on our web
site, subscription sales from MarketWatch RT and MarketWatch Live, and the sale
of news to DBC. Net revenues were $3,147,000 and $1,176,000 for the three month
periods ended March 31, 1999 and 1998, respectively, an increase of $1,971,000
or 168%. The increases are due primarily to increases in the number of banner
and sponsorship ads placed on our web sites. The increases were caused by
several interrelated factors, including the following:
- increased number of advertisers;
- increased users on our Web site and resultant page views with
advertisements contained on those pages;
- increased size and productivity of our direct sales force; and
- increased flexibility and sophistication of advertising packages offered
to advertisers.
Substantially all of our advertising customers purchase advertising under
short-term contracts. Customers can cease advertising on short notice without
penalty. Advertising revenues would be adversely affected if we were unable to
renew advertising contracts with existing customers or obtain new customers. We
expect to continue to derive a majority of net revenues from selling
advertisements. The market for Web advertising is intensely competitive, and
advertising rates could be subject to pricing pressure in the future. If we are
forced to reduce our advertising rates or we experience lower CPMs across our
Web site or click-through advertising rates as a result of such competition or
otherwise, future revenues could be adversely affected.
11
<PAGE> 12
COST OF REVENUES
Cost of revenue primarily consists of costs related to advertising and news
including compensation, royalties payable to CBS and content providers, web site
infrastructure costs allocated from DBC, exchange fees, costs of serving ads by
DoubleClick and costs related to subscriptions including exchange fees,
communication lines and royalties payable to DBC. Cost of revenue was $1,201,000
and $280,000 for the three months ended March 31, 1999 and 1998, respectively,
an increase of $921,000 or 329%. Cost of revenues increased due to the addition
of news reporters and editors, additional network communications lines to
accommodate increased traffic on our sites, and fees payable to DoubleClick to
serve ads and royalties paid to CBS. Royalties to CBS were $170,000 and $0 for
the three months ended March 31, 1999 and 1998, respectively. As a percent of
net revenues, cost of revenue was 38% and 24% for the three months ended March
31, 1999 and 1998 respectively, an increase of 14% primarily due to the addition
of news reporters and editors, royalties to CBS, and additional network lines to
accommodate increased traffic on the site. We expect cost of revenues to
increase in the future as a result of royalties payable to CBS as we have
exceeded the royalty exempt revenue level of $500,000 to CBS. In addition, we
intend to increase the number of editorial staff in the future, which will lead
to an increase in cost of revenues.
PRODUCT DEVELOPMENT
Product development expenses primarily consist of compensation for software
developers and expenses for contract programmers and developers. Product
development expenses were $627,000 and $236,000 for the three months ended March
31, 1999 and 1998, respectively, an increase of $391,000 or 166%. Product
development expenses increased due to increased headcount and associated
expenses as well as costs associated with the amortization of deferred
compensation in the first quarter of 1999. Product development expenses were 20%
of revenues for each of the three months ended March 31, 1999 and 1998. We also
intend to increase the absolute dollar level of product development expenditures
in future periods in order to further enhance the programming on our web site.
We also expect to increase product development expenditures in connection with
the proposed acquisition of BigCharts.
GENERAL AND ADMINISTRATIVE
General and administrative expenses primarily consist of compensation for
finance and administrative personnel, allocations from DBC for administrative
services, occupancy costs, professional fees, depreciation charges and charges
for bad debt. General and administrative costs were $1,550,000 and $532,000 for
the three months ended March 31, 1999 and 1998 respectively, an increase of
$1,018,000 or 191%. As a percentage of revenues, general and administrative
costs were 50% and 45% for the three months ended March 31, 1999 and 1998,
respectively. General and administrative expenses increased due to increased
headcount, occupancy, legal, and consulting expenses as well as costs associated
with the amortization of deferred compensation in the first quarter of 1999. We
also hired additional personnel and incurred additional costs related to our IPO
and being a public company, including, among others, travel expenses, directors
and officers liability insurance expense, and professional service fees. We
believe that the absolute dollar level of general and administrative expense
will increase in future periods as a result of an increase in personnel to
support the Company's higher level of anticipated revenues and increased fees
for professional services.
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<PAGE> 13
SALES AND MARKETING
Sales and marketing expenses primarily consist of promotion and advertising
provided by CBS, internet banner advertisements, advertising commissions,
promotional materials, compensation and sales commissions to our direct sales
force. Sales and marketing costs were $6,221,000, and $1,877,000 for the three
months ended March 31, 1999 and 1998, respectively, an increase of $4,344,000 or
231%. As a percent of net revenues, sales and marketing expenses were 198% and
160% for the three months ended March 31, 1999 and 1998 respectively, an
increase of 38%. Sales and marketing expenses increased due to a number of
factors including:
- an increase in amortization of promotions and advertising contributed by
CBS in the first quarter of 1999;
- growth of our direct sales force in the first quarter of 1999 and
increased sales commissions from higher advertising sales;
- increased purchases of Web banner ads to promote our products and
services;
- increased purchases of traditional print and broadcast ads in 1999 to
promote our products and services; and
- increased payments to distribution partners in 1999.
We record an expense at the time the advertising and promotion is provided
by CBS under the Amended and Restated License Agreement based on the rate card
value of the advertising. We recorded advertising expense of $3,155,000 and
$1,534,000 at the rate card value for the three months ended March 31, 1999 and
1998, respectively, related to services provided by CBS. We have recorded
aggregate advertising expense of $10.3 million of the $30 million CBS has agreed
to provide.
We anticipate that sales and marketing expenses in absolute dollars will
increase in future periods as we continue to pursue an aggressive brand-building
strategy through advertising and distribution and continue to build our direct
sales organization.
INTEREST INCOME (EXPENSE)
Interest income of $383,000 for the three months ended March 31, 1999
resulted from interest income on the proceeds from our IPO. Interest expense of
$7,000 for the three months ended March 31, 1998 resulted from borrowings from
DBC.
LIQUIDITY AND CAPITAL RESOURCES
We currently invest in money market funds that are highly liquid, of
high-quality investment grade, and have maturities of less than three months
with the intent to make such funds readily available for operating purposes. At
March 31, 1999, the Company had cash and cash equivalents totaling $42,323,000
compared to $140,000 at December 31, 1998.
Cash used in operating activities of $1,379,000 for the three months ended
March 31, 1999 was primarily due to a net loss of $6,069,000, offset by non cash
charges of $3,155,000 from CBS. Significant uses of cash in operations for the
three months ended March 31, 1999 include costs associated with increased sales
and marketing activities to establish and promote our products and services and
costs of directors and officers' insurance premiums incurred as a result of
becoming a public company.
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<PAGE> 14
Cash used in investing activities of $324,000 for the three months ended
March 31, 1999 consisted primarily of capital expenditures. Capital expenditures
have generally consisted of purchases of computer hardware and leasehold
improvements related to leased facilities and are expected to increase in future
periods. We have experienced a substantial increase in capital expenditures and
operating lease arrangements since inception, which is consistent with increased
staffing, and we anticipate that this will continue in the future.
Cash provided by financing activities was $43,886,000 for the three months
ended March 31, 1999 due to the initial public offering completed in January of
1999 of 3,162,500 shares of common stock at $17 per share with proceeds of
$43,886,000 net of underwriting and offering expenses and the repayment of
amounts owed to DBC.
Under the terms of our agreements with Yahoo!, we are committed to make
payments for advertising and slotting over a twelve month period of $1,600,000
of which we have $936,000 remaining. In addition, we are obligated to pay Yahoo!
a fee based on the amount of traffic directed to our Web site.
To date, we continue to be substantially dependent on DBC for much of our
financial, administrative and operational services and related support
functions. We believe the implementation of an independent accounting system,
financial, operational and management controls, and reporting systems and
procedures will be necessary to support the continued expansion of our
operations. As a consequence, we intend to expend working capital to support the
development of the infrastructure.
Under the terms of the LLC Agreement between CBS and DBC and, subsequently,
the Credit Agreement between MarketWatch.com and DBC, DBC agreed to advance us
up to an aggregate of $5,000,000 on a revolving basis through October 29, 2000.
Borrowings bear interest at a variable rate per annum equal to The Chase
Manhattan Bank's prime rate plus 2% and are due on October 29, 2000. As of March
31, 1999, there were no advances from DBC under this Credit Agreement. We used a
portion of the net proceeds from the initial public offering to repay all
outstanding advances from DBC.
We expect to incur significantly higher costs related to the acquisition of
BigCharts, content creation costs, and sales and marketing costs in the future
to grow our business. We believe that the net proceeds from our initial public
offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. We may need to raise funds sooner
if we acquire any additional businesses, products or technologies. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our then-current stockholders would be reduced. However, if CBS or
DBC elects to maintain their percentage interest pursuant to the exercise of the
purchase right they have under the stockholders' agreement between them and us,
then CBS or DBC would not necessarily suffer a reduction in their ownership.
Furthermore, such equity securities might have rights, preferences, or
privileges senior to those of the Common Stock.
YEAR 2000 READINESS
DBC. We rely on DBC's computer and communications networks for the
operation of our Web site and on DBC's information systems for customer billing,
accounting and administration. DBC has advised us that it has substantially
completed a comprehensive review of its products, information systems and
critical suppliers for Year 2000 compliance, and has reported that its computer
and communications networks are Year 2000 compliant. DBC is currently installing
new billing, accounting and administrative systems which are scheduled to be
fully operational during 1999 and as represented to us will be fully Year 2000
compliant when fully operational.
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Third-Party Suppliers. DBC and MarketWatch.com utilize software and
computer equipment from third party suppliers. DBC and MarketWatch.com also rely
on information, provided electronically by a number of outside suppliers. Based
on representations received from suppliers and completed and ongoing compliance
testing, DBC has advised us that its critical suppliers are or will be Year 2000
compliant in all material respects before the Year 2000. Based on
representations from our other software and equipment suppliers, we believe that
our software and other computer hardware is Year 2000 compliant. We also rely on
solutions provided by DoubleClick for the delivery of our advertising and user
measurement. We have been informed by them that their solutions are, or will be,
Year 2000 compliant in all material respects. Failure of third-party equipment
or software to operate properly with regard to the Year 2000 and thereafter
could require us to incur unanticipated expenses to remedy any problems, which
could have a material adverse effect on our business, results of operations and
financial condition.
Internal Systems. We have not initiated an assessment of our
non-information technology systems, including our electrical, heating and
telephone systems. We do not expect any Year 2000 issues to arise with respect
to these systems, and if such issues arise, we do not expect that they would
have a material adverse effect on our business.
Costs. To date, our costs to address Year 2000 compliance have not been
significant. Based on our preliminary evaluations, we believe that the total
cost of our Year 2000 compliance efforts will not be material to our business.
However, significant uncertainty exists concerning the potential costs and
effects associated with Year 2000 compliance. If we encounter unexpected
problems with respect to the Year 2000 issue, we could incur additional costs,
including significant cash outlays, which could be material.
Year 2000 Risks. Despite our investigations of the Year 2000 issue, we have
not received certifications from all of our third party suppliers and vendors
and it is possible that those certifications as well as the other
representations we have obtained could be erroneous.
The purchasing patterns of our advertisers may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available for Web advertising, which could have a material adverse effect on
our business, results or operations and financial condition.
Failures of our or our customers' systems to operate properly with regard
to the Year 2000 could result in our web site being unavailable and our products
and services not functioning properly. Unavailability of our website due to a
lack of Year 2000 compliance could have a material adverse impact on our
revenues and operating expenses.
In addition, the Internet is a network of computer systems which depends
on the functioning of a number of parts such as communications connections,
Internet service providers and power supplies, all of which are beyond our
control. The failure of these companies to be Year 2000 compliant could result
in a variety of systems failures such as electrical outages, Internet outages or
slower response times or telecommunications failures. These events could
prevent users from accessing our products and services or prevent us from
updating or delivering our products and services for a period of time or from
selling advertising on our web site for a period of time.
Any of these events could have a material adverse effect on our business,
operating results and financial condition.
Contingency Plans. We have not yet developed a formal contingency plan for
handling Year 2000 problems that are not detected and corrected prior to their
occurrence. Any failure to address any Year 2000 issue could adversely affect
our business, financial condition and results of operations.
DBC has advised us that it has developed certain contingency options in the
event of a failure due to Year 2000 issues. If we are unable to utilize
DoubleClick as a result of Year 2000 issues, we believe we could either seek to
obtain another vendor or deliver advertising using our own systems as we did in
the past. However, we may not be able to replace DoubleClick with another vendor
on reasonable terms, or if we delivered advertising ourselves, we would not be
able to track or measure the advertising to the same extent as DoubleClick.
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<PAGE> 16
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
RELIANCE ON OUR RELATIONSHIPS WITH CBS AND DBC
CBS
We would need to change the name of our Web site and devote substantial
resources towards building a new brand name if our agreement with CBS were
terminated or not renewed. This agreement also has a number of risks associated
with it. CBS can require us to remove any content on our Web site which it
determines conflicts with, interferes with or is detrimental to its reputation
or business or for certain other reasons. We are also required to conform to
CBS's guidelines for the use of its trademarks. CBS has the right to approve all
materials, such as marketing materials, that include any CBS trademarks. CBS
also has control over the visual and editorial presentation of its television
news content on our Web site. Because of these restrictions, we may not be able
to perform our desired marketing activities.
Our license agreement with CBS will expire on October 29, 2005, and CBS
will have no obligation to renew it. CBS will also have the right to terminate
this agreement if:
- we breach a material term or condition of the agreement;
- we become insolvent or subject to bankruptcy or similar proceedings;
- a competitor of CBS acquires 15% or more of our voting power;
- we issue voting securities to, or actively participate in the acquisition
of our voting power by a CBS competitor which results in such competitor
directly or indirectly owning 9% or more of our voting power; or
- we discontinue using the MarketWatch trademark and do not establish a
substitute mark acceptable to CBS.
If our agreement with CBS is terminated prior to the end of its term, our
business could be adversely affected. We have no formal agreement with CBS with
respect to any of our correspondents who provide reports to CBS or any of its
affiliates. Therefore, there can be no assurance that these services will
continue in the future.
CBS has agreed, subject to certain limitations, to provide us an aggregate
rate card amount of $30 million of advertising and on-air promotions during the
period from October 29, 1997 through October 29, 2002 and we have recognized
$10,300,000 of such rate card amount to date. However, the timing and placement
of these advertisements and promotions are subject to CBS's discretion. CBS
could discontinue promoting us in the manner that it currently does. CBS also
makes no guarantees to us as to the demographic composition or size of the
audience that views these advertisements or promotions. This advertising and
on-air promotion, as well as our association with the CBS brand, are important
elements of our strategy to increase our brand awareness. This obligation will
terminate if our license agreement terminates.
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<PAGE> 17
We may not be able to continue to attract a sufficient amount of user
traffic and advertisers to our Web site without the CBS name and logo or
promotion from CBS.
DBC
Data and hosting. DBC currently provides delayed financial data to us at no
charge. It also provides real-time financial data to us for dissemination to
subscribers of certain of MarketWatch.com subscription services in exchange for
a percentage of the subscription fee. In addition, DBC hosts and manages the
CBS.MarketWatch.com Web site infrastructure and provides network support.
General Services. DBC will also provide us with certain general services,
including cash management, accounting services and human resources services. We
will reimburse DBC for its actual costs of providing these services.
Payments for News. Under the Amended and Restated Services Agreement, DBC
will also pay us through October 2002 a monthly per-subscriber fee for delivery
of our news to all DBC subscribers, other than certain commercial ones, with a
minimum payment of $100,000 per month.
Non-Competition Provisions. Through October 29, 2005, DBC will not be able
to:
- sell advertising on a Web site that primarily delivers financial news and
comprehensive stock quotes; or
- use the Internet to sell, or authorize another to sell, real-time snap
quotes to individual subscribers.
Although the Stockholders' Agreement contains certain non-competition
provisions, these provisions have certain exceptions and do not provide for an
exclusive relationship.
If DBC fails to provide these services satisfactorily, we would be required
to perform these services ourselves or obtain these services from another
provider. Replacing these services could cause us to incur additional costs. We
may not be able to replace these services on commercially reasonable terms or if
we choose to perform these services ourselves, we may not be able to perform
them adequately. During any such transition, our services could be disrupted for
an indefinite period of time and, as a result, we could lose a substantial
number of users and advertisers.
CONTROL BY CBS AND DBC
After our initial public offering on January 15, 1999, CBS and DBC each
owned approximately 38% of our outstanding common stock. CBS and DBC have
certain rights to have representatives on our board of directors generally based
upon the percentage of our voting securities which they hold. Currently, they
each have three representatives. As a result of their share ownership and other
rights, CBS and DBC collectively will be able to control our management and
affairs, elect a majority of our Board of Directors and approve significant
corporate transactions. This concentration of ownership and other rights could
also delay or prevent a change in control.
17
<PAGE> 18
If a competitor of CBS directly or indirectly acquires more than 30% of the
voting power of DBC or substantially all of DBC's assets at a time when DBC
beneficially owns at least 10% of our outstanding common stock, CBS may within
45 days either:
- purchase all of our securities held by DBC; or
- require DBC to place these securities in a trust which would then dispose
of the securities with a view to maximizing the sale price while
disposing of such shares as promptly as reasonably practicable.
DBC would forfeit its Board representation in either event. We cannot
predict which option, if any, CBS would elect in such an event.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS; UNPREDICTABILITY OF
FUTURE REVENUE; EXPECTED FUTURE LOSSES; SEASONALITY
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:
- the early stage of our development, particularly given that we did not
become a separate legal entity until October 1997 and we only became a
public company in January 1999;
- the level of Web usage;
- traffic levels on our Web site, which can fluctuate significantly as a
result of business and financial news events;
- the demand for advertising on our Web site as well as on the Web in
general;
- changes in rates paid for Web advertising resulting from competition or
other factors;
- our ability to enter into or renew key agreements;
- the amount and timing of our costs related to our marketing efforts or
other initiatives including the amortization of promotion and advertising
contributed by CBS;
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<PAGE> 19
- fees we may pay for distribution or content agreements or other costs we
incur as we expand our operations;
- new services introduced by us or our competitors;
- competitive factors;
- technical difficulties or system downtime affecting the Web generally or
the operation of our Web site; or
- economic conditions specific to the Web as well as general economic
conditions.
Therefore, our operating results for any particular quarter may not be
indicative of future operating results.
We expect that over time our revenues will come from a mix of advertising,
content licensing, e-commerce relationships and subscription service fees.
However, we expect to be substantially dependent on advertising revenues for the
foreseeable future. Therefore, our quarterly revenues and operating results are
likely to be particularly affected by the level of our advertising revenue in
each quarter. Our operating expenses are based on our expectations of our future
revenues and are relatively fixed in the short term. If we have lower revenues,
particularly advertising revenues, than we expect, we may not be able to quickly
reduce our spending in response. Our cost structure could also change
dramatically as we increasingly operate independently from DBC. If we continue
to rely on DBC for administrative, hosting and other services we will be
required to reimburse DBC for its costs in providing the services. We will have
little control over the amount of these costs, which could be substantial. In
addition, we intend to significantly increase our operating expenses to grow our
business. Any shortfall in our revenues would have a direct impact on our
operating results for a particular quarter and these fluctuations could affect
the market price of our Common Stock in a manner unrelated to our long-term
operating performance.
We have incurred operating losses in each fiscal quarter since we were
formed. We expect operating losses and negative cash flows to continue for the
foreseeable future as we intend to significantly increase our operating expenses
to grow our business.
We believe that advertising sales in traditional media, such as television
and radio, generally are lower in the first and third calendar quarters of each
year. If our market makes the transition from an emerging to a more developed
medium, seasonal and cyclical patterns in our industry may develop in the
future. Therefore, if our industry follows the same seasonal patterns as those
in the traditional media, we may experience lower advertising revenues in the
first and third calendar quarters of each year. Furthermore, traffic levels on
our Web site typically fluctuate with the occurrence of significant events in
the business and financial news, such as fluctuations in the stock markets, that
could cause changes in our audience size.
NEED TO DEVELOP AND IMPLEMENT OUR OWN INTERNAL SYSTEMS
Although our predecessor business has been operating since October 1995, we
did not become a separate legal entity until October 1997 when we were formed as
a limited liability company and we introduced our CBS.MarketWatch.com Web site.
We have been and continue to be substantially dependent on DBC to host our
Web site and for many of our financial, administrative and operational services
and related support functions. We may not be able to perform these financial,
administrative, operational and support functions effectively as an independent
company. In addition, we believe that we will need further improvements in these
systems, controls and procedures to manage our growth. Our future financial
performance could be adversely affected if we or DBC do not perform these
functions effectively or if we do not implement these systems, controls and
procedures successfully.
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NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB SITES
We depend on establishing and maintaining distribution relationships with
high-traffic Web sites for a significant portion of our traffic. For example,
for the month of March 1999, approximately 11% of our traffic came from Yahoo!.
There is intense competition for placements on these sites, and we may not be
able to enter into such relationships on commercially reasonable terms or at
all. Even if we enter into distribution relationships with these Web sites, they
may not attract significant numbers of users. Therefore, our site may not
receive additional users from these relationships. Moreover, we may have to pay
significant fees to establish these relationships.
Occasionally we enter into agreements with advertisers, content providers
or other high traffic Web sites that require us to exclusively feature these
parties in certain sections of our Web site. Existing and future exclusivity
arrangements may prevent us from entering into other content agreements,
advertising or sponsorship arrangements or other strategic relationships. Many
companies we may pursue for a strategic relationship also offer competing
services. As a result, these competitors may be reluctant to enter into
strategic relationships with us. Our business could be adversely affected if we
do not establish and maintain additional strategic relationships on commercially
reasonable terms or if any of our strategic relationships do not result in
increased use of our Web site.
RISKS RELATING TO OUR ABILITY TO TRACK AND MEASURE THE DELIVERY OF
ADVERTISEMENTS
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
site. We depend on third parties to provide these measurement services. If they
are unable to provide these services in the future, we would be required to
perform them ourselves or obtain them from another provider. This could cause us
to incur additional costs or cause interruptions in our business during the time
we are replacing these services. We are implementing additional systems designed
to record demographic data on our users. If we do not develop these systems
successfully, we may not be able to accurately evaluate the demographic
characteristics of our users. Companies may not advertise on our Web site or may
pay less for advertising if they do not perceive our measurements or
measurements made by third parties to be reliable.
NEED TO EXPAND OUR BUSINESS AND RELATED PROBLEMS
We believe that we will need to expand our business and operations both to
operate as an entity independent from DBC and in order to grow our business.
This growth, together with our expanded operations resulting from our proposed
acquisition of BigCharts is likely to continue to place a significant strain on
our resources. As we grow, we will also have to implement new operational and
financial systems, procedures and controls. If we are unable to accomplish any
of these, our business could be adversely affected.
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RISKS OF DEVELOPING NEW AND ENHANCED SERVICES AND FEATURES FOR OUR WEB SITE
We believe that our Web site will be more attractive to advertisers if we
develop a larger audience comprised of demographically-favorable users.
Accordingly, we intend to introduce additional or enhanced services in the
future in order to retain our current users and attract new users. We may also
seek to acquire businesses, products or technologies. If we introduce a service
that is not favorably received our current users may not continue using our
service as frequently. New users could also choose a competitive service over
ours.
We may also experience difficulties that could delay or prevent us from
introducing new services. Furthermore, these services may contain errors that
are discovered after the services are introduced. We may need to significantly
modify the design of these services on our Web site to correct these errors. Our
business could be adversely affected if we experience difficulties in
introducing new services or if these new services are not accepted by users.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE WEB
Our market is new and rapidly evolving. Our business would be adversely
affected if Web usage does not continue to grow. Web usage may be inhibited for
a number of reasons, such as:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- availability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth or its performance and reliability may
decline. In addition, Web sites have experienced interruptions in their service
as a result of outages and other delays occurring throughout the Internet
network infrastructure. If these outages or delays frequently occur in the
future, Web usage, as well as usage of our Web site, could grow more slowly or
decline.
RISKS ASSOCIATED WITH OUR BUSINESS MODEL WHICH DEPENDS ON WEB ADVERTISING
We expect to derive a substantial amount of our revenues from advertising
for the foreseeable future. No standards have been widely accepted to measure
the effectiveness of Web advertising. If such standards do not develop, existing
advertisers may not continue their current levels of Web advertising.
Furthermore, advertisers that have traditionally relied upon other advertising
media may be reluctant to advertise on the Web. Advertisers that already have
invested substantial resources in other advertising methods may be reluctant to
adopt a new strategy. Our business would be adversely affected if the market for
Web advertising fails to develop or develops more slowly than expected.
Different pricing models are used to sell advertising on the Web. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to project our future advertising rates and revenues. For
example, advertising rates based on the number of "click throughs," or user
requests for additional information made by clicking on the advertisement,
instead of rates based solely on the number of impressions, or times an
advertisement is displayed, could adversely affect our revenues because
impression-based advertising comprises a substantial majority of our current
advertising revenues. Our advertising revenues could be adversely affected if we
are unable to adapt to new forms of Web advertising. Moreover, "filter" software
programs that limit or prevent advertising from being delivered to a Web user's
computer are available. Widespread adoption of this software could adversely
affect the commercial viability of Web advertising.
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WEB SECURITY CONCERNS COULD HINDER INTERNET COMMERCE
The need to securely transmit confidential information over the Internet
has been a significant barrier to electronic commerce and communications over
the Web. Any well-publicized compromise of security could deter more people from
using the Web or from using it to conduct transactions that involve transmitting
confidential information, such as stock trades or purchases of goods or
services. Because many of our advertisers seek to advertise on our Web site to
encourage people to use the Web to purchase goods or services, our business
could be adversely affected.
We may also incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches.
RISKS RELATED TO PROPOSED BIGCHARTS ACQUISITION
Our proposed merger with Big Charts involves a number of risks. These
include (i) risks to the merger, such as, risks that the proposed merger may not
be consummated, risks involved in assimilating BigCharts, risks involved in
integrating, retaining and motivating key BigCharts personnel, risks related to
integrating and managing geographically-dispersed operations because BigCharts
is located in Minnesota and MarketWatch.com is located in San Francisco, risks
related to integrating the technologies and infrastructures of the companies,
and risks related to the acceptance by BigCharts' brokerage customers of the
proposed merger; (ii) risks inherent in BigCharts' business, such as its
dependence on short-term customer contracts, its dependence on a small number of
customers for a significant portion of its revenues, its business model which
depends on selling its services directly to customers as well as depending on
the sale of advertising on the Web, its dependence on maintaining relationships
with key customers, and the extremely limited operating history of BigCharts on
which to base any revenue projections; (iii) risks to MarketWatch.com of the
increased negative cash flow and increased operating expenses arising out of the
proposed merger; (iv) the risk that BigCharts customers and distribution
partners will not utilize any additional services of the combined company.
The integration of operations, technology and personnel of MarketWatch.com
and BigCharts will be complex, time consuming and expensive process and may
disrupt MarketWatch's business if not completed in a timely and efficient
manner. Following the merger, MarketWatch.com must operate as a combined
organization utilizing common information and communications systems, operating
procedures, financial controls and human resources practices. MarketWatch.com
and BigCharts may encounter substantial difficulties, costs and delays involved
in integrating their operations, including:
- potential incompatibility of business cultures
- perceived adverse changes in business focus
- potential conflicts in sponsor, advertising or content relationships
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns
The present and potential relationships of MarketWatch.com and BigCharts
with sponsors, content providers, advertisers, users and subscribers may be
harmed by the proposed Merger. Uncertainties regarding sponsorships and new
service development following the Merger may cause these parties to delay
decisions regarding these relationships. Any changes in these relationships
could harm MarketWatch.com's business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity. The primary objective of our investment
activities is to preserve principal while at the same time maximizing the
income we receive from our investments without significantly increasing risk.
Some of the securities that we have invested in may be subject to market risk.
This means that a change in prevailing interest rates may cause the principal
amount of the investment to fluctuate. For example, if we hold a security that
was issued with a fixed interest rate at the then-prevailing rate and the
prevailing interest rate later rises, the principal amount of our investment
will probably decline. To minimize this risk, we maintain our portfolio of cash
equivalents in money market funds. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of March 31, 1999, all of our investments
mature in less than one year.
Exchange rate sensitivity. We consider our exposure to foreign currency
exchange rate fluctuations to be minimal, as we do not have any sales
denominated in foreign currencies. Therefore, we also have not engaged in any
hedging transactions to date.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently aware of any legal proceedings or claims that
the Company believes will have, individually or in the aggregate, a material
adverse effect on the Company's financial position or results of operations.
ITEM 2. CHANGE IN SECURITIES AND USED PROCEEDS
On January 14, 1999, the Company's Registration Statement on Form S-1 (File
No. 333-65569) was declared effective by the Securities and Exchange Commission
which registration statement related to the Company's initial public offering of
common stock. The managing underwriters of this offering were BT Alex Brown
Incorporated and Donaldson Lufkin + Jenrette Securities Corporation, who acted
as Joint Book Running Managers, and Salomon Smith Barney Inc. and First Albany
Corporation. All of the 3,162,500 shares registered were sold by the Company.
All of the shares of common stock were sold at a public offering price of $17.00
per share, for an aggregate offering price of $53,763,000. The amount of
offering expenses were $5,931,000, including underwriting discount of $3,763,000
and other offering expenses of $2,168,000 for net proceeds to the Company of
$47,832,000. As of March 31, 1999, the net proceeds to the Company have been
applied as follows: (i) $4.6 million for repayment of outstanding indebtedness
to Data Broadcasting Corporation, an affiliate of the Company, (ii) $41.8
million in temporary investments in the form of marketable securities, and (iii)
$7.0 million for working capital.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Report on Form 10-Q.
b. Reports on Form 8-K:
There were no reports on Form 8-K during the quarter ended March 31,
1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MarketWatch.com, Inc.
Dated: May 17, 1999 By: /s/ J. PETER BARDWICK
-----------------------------
J. Peter Bardwick
Chief Financial Officer
(Principal Financial Officer)
Dated: May 17, 1999 By: /s/ JOE BRICHLER
-----------------------------
Joe Brichler
Controller
(Principal Accounting Officer)
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MarketWatch.com, Inc.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
TITLE NO.
- ----- -------
<S> <C>
Financial Data Schedule*....................................... 27.1
BigCharts merger agreement (incorporated by reference
to exhibit 2.1 of the Form 8-K filed with Commission
on May 12, 1999).............................................. 2.1
</TABLE>
* THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARKETWATCH.COM, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 AND IS
QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,323,000
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<PP&E> 1,480,000
<DEPRECIATION> 330,000
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0
0
<COMMON> 122,000
<OTHER-SE> 41,782,000
<TOTAL-LIABILITY-AND-EQUITY> 45,654,000
<SALES> 3,147,000
<TOTAL-REVENUES> 3,147,000
<CGS> 1,201,000
<TOTAL-COSTS> 1,201,000
<OTHER-EXPENSES> 8,398,000
<LOSS-PROVISION> 40,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,069,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,069,000)
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<CHANGES> 0
<NET-INCOME> (6,069,000)
<EPS-PRIMARY> 0.52
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</TABLE>
