<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 JUNE 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 000-25113
MARKETWATCH.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3315360
--------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 June 30,
1999 was 13,753,054.
<PAGE> 2
MarketWatch.com, Inc.
Quarterly Report on Form 10-Q for the Period Ended June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Interim Condensed Consolidated Financial Statements
(unaudited):
Condensed Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998............................................ 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998.................. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998.......................... 5
Notes to Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and qualitative disclosures About Market Risk....... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 15
Item 2. Changes in Securities and Use of Proceeds........................ 15
Item 3. Defaults Upon Senior Securities.................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Item 5. Other Information................................................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 15
Signatures
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MARKETWATCH.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 18,922,000 $ 140,000
Investments ....................................... 9,862,000 --
Accounts receivable, net .......................... 3,679,000 1,586,000
Prepaid expenses .................................. 570,000 2,000
------------- -------------
Total current assets ...................... 33,033,000 1,728,000
Other assets ........................................ 23,000 11,000
Property and equipment, net ......................... 2,893,000 932,000
Deferred offering costs ............................. -- 1,816,000
Intangible assets, net .............................. 3,469,000 --
Goodwill, net ....................................... 148,255,000 --
------------- -------------
Total assets .............................. $ 187,673,000 $ 4,487,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .................................. $ 3,049,000 $ 1,969,000
Accrued expenses .................................. 1,784,000 1,688,000
Deferred revenue .................................. 246,000 14,000
Advances from DBC ................................. -- 3,946,000
------------- -------------
Total current liabilities ................. 5,079,000 7,617,000
------------- -------------
Stockholders' equity (deficit):
Preferred stock ................................... -- --
Common stock ...................................... 141,000 90,000
Additional paid-in capital ........................ 230,772,000 53,366,000
Deferred compensation ............................. (912,000) (1,144,000)
Contribution receivable ........................... (16,090,000) (42,948,000)
Other accumulated comprehensive income ............ 59,000 --
Accumulated deficit ............................... (31,376,000) (12,494,000)
------------- -------------
Total stockholders' equity (deficit) ...... 182,594,000 (3,130,000)
------------- -------------
Total liabilities and
stockholders' equity (deficit) ......... $ 187,673,000 $ 4,487,000
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
MARKETWATCH.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Advertising (including $125,000 and $0
from DBC for the three months
ended 1999 and 1998 and $250,000 and $0 for the
six months ended 1999 and 1998) .................... $ 3,611,000 $ 1,032,000 $ 5,998,000 $ 1,728,000
License ............................................... 306,000 -- 306,000 --
News (including $398,000 and $316,000 from DBC
for the three months ended 1999 and 1998 and
$763,000 and $627,000 for the six months
ended 1999 and 1998) ............................... 738,000 316,000 1,347,000 627,000
Subscription .......................................... 163,000 171,000 314,000 340,000
------------ ------------ ------------ ------------
Total net revenues ............................ 4,818,000 1,519,000 7,965,000 2,695,000
Cost of revenues:
Advertising and news .................................. 2,025,000 577,000 3,086,000 763,000
License ............................................... 24,000 -- 24,000 --
Subscription .......................................... 150,000 95,000 290,000 189,000
------------ ------------ ------------ ------------
Total cost of revenues ........................ 2,199,000 672,000 3,400,000 952,000
------------ ------------ ------------ ------------
Gross profit ............................................ 2,619,000 847,000 4,565,000 1,743,000
------------ ------------ ------------ ------------
Operating expenses:
Product development ................................... 842,000 371,000 1,469,000 607,000
General and administrative ............................ 2,224,000 724,000 3,774,000 1,256,000
Sales and marketing ................................... 8,227,000 2,560,000 14,448,000 4,437,000
Purchased in-process research and development ......... 200,000 -- 200,000 --
Amortization of goodwill and intangibles .............. 4,284,000 -- 4,284,000 --
------------ ------------ ------------ ------------
Total operating expenses ...................... 15,777,000 3,655,000 24,175,000 6,300,000
------------ ------------ ------------ ------------
Loss from operations .................................... (13,158,000) (2,808,000) (19,610,000) (4,557,000)
Interest income (expense) ............................... 345,000 (14,000) 728,000 (21,000)
------------ ------------ ------------ ------------
Net loss ................................................ $(12,813,000) $ (2,822,000) $(18,882,000) $ (4,578,000)
============ ============ ============ ============
Basic and diluted net loss per share .................... $ (1.02) $ (0.31) $ (1.56) $ (0.51)
============ ============ ============ ============
Shares used in the calculation of basic and
diluted net loss per share ............................ 12,548,000 9,000,000 12,094,000 9,000,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
MARKETWATCH.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows used in operating activities:
Net loss ............................................ $(18,882,000) $ (4,578,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt expense .................. 7,000 110,000
Depreciation and amortization ................... 4,972,000 53,000
Non-cash charges from stockholders .............. 6,858,000 3,473,000
Write-off of in-process research and
development .................................. 200,000 --
Changes in operating assets and liabilities:
Accounts receivable .......................... (1,396,000) (683,000)
Prepaid expenses and other
current assets ............................. (489,000) (20,000)
Deferred offering costs ...................... -- (172,000)
Accounts payable and accrued expenses ........ 1,993,000 766,000
Deferred revenue ............................. 116,000 3,000
------------ ------------
Net cash used in operating
activities ............................... (6,621,000) (1,048,000)
------------ ------------
Cash flows used in investing activities:
Purchase of short-term investments .................. (9,803,000) --
Purchase of property and equipment .................. (1,205,000) (645,000)
Acquisition of business, net of cash acquired ....... (7,475,000) --
------------ ------------
Net cash used in investing activities ....... (18,483,000) (645,000)
------------ ------------
Cash flows provided by financing activities:
Proceeds from issuance of common stock, net ......... 47,832,000 --
Contributions from DBC .............................. -- 782,000
Advances from DBC (Note 6) .......................... (3,946,000) 1,539,000
------------ ------------
Net cash provided by financing
activities ............................... 43,886,000 2,321,000
------------ ------------
Net change in cash .................................... 18,782,000 628,000
------------ ------------
Cash at beginning of period ........................... 140,000 --
------------ ------------
Cash at end of period ................................. $ 18,922,000 $ 628,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
MARKETWATCH.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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. Additionally, certain items previously
reported in specific financial statement captions have been reclassified to
conform with the current presentation.
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
member 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. Under the terms of the Stockholders' Agreement, the $50.0
million rate card amount was revised to $30.0 million upon completion of our
initial public offering (see Note 2).
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.
Effective June 9, 1999, the Company completed its acquisition of
substantially all of the assets of BigCharts.com, Inc. ("BigCharts"), a
Minnesota corporation, for $6.0 million in cash, $110.9 million worth of
MarketWatch Common Stock, and $38.6 million worth of options to purchase
MarketWatch.com common stock which are issuable upon exercise of options to
purchase BigCharts common stock assumed in the merger. BigCharts, based in
Minneapolis, is a leading provider of licensed online financial charting content
to electronic brokers, financial publishers and portals.
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 $30.0 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
6
<PAGE> 7
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.
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 Web site 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 June 30, 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.
Comprehensive net income
NOTE 3. COMPREHENSIVE NET INCOME
Comprehensive income is comprised of net loss and other comprehensive
earnings such as unrealized gains or losses on available-for-sale marketable
securities. The Company's total comprehensive losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(12,813,000) $(2,822,000) $(18,882,000) $ (4,578,000)
Other comprehensive income
Unrealized gains on available for sale marketable
securities 59,000 -- 59,000 --
------------- ----------- ------------ ------------
Comprehensive net loss $(12,754,000) $(2,822,000) $(18,823,000) $ (4,578,000)
------------- ----------- ------------ ------------
</TABLE>
NOTE 4
Basic net loss per share is computed using the weighted average number
of shares of common stock. Diluted net loss per share is computed using the
weighted average number of shares of common stock and common equivalent shares
outstanding during the period. Common equivalent shares consist of stock
options (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is antidilutive.
Options to purchase 1,787,524 and 722,000 shares of common stock were
outstanding at June 30, 1999 and 1998, respectively, but were not included in
the computation of diluted EPS because either the options exercise price was
greater than the average market price of the common shares during the period or
inclusion of such options would have been anti-dilutive.
NOTE 5 - BUSINESS ACQUISITIONS
Effective June 9, 1999, MarketWatch completed its acquisition of
BigCharts, Inc. ("BigCharts"), a Minnesota corporation, for $6.0 million in
cash, $110.9 million worth of MarketWatch Common Stock, and $38.6 million worth
of MarketWatch stock options. The transaction was accounted for using the
purchase method; accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their fair market values at the date
of acquisition. BigCharts, based in Minneapolis, is a leading provider of
licensed online financial charting content to electronic brokers, financial
publishers and portals. It is one of the most heavily trafficked financial sites
and an industry-leading provider of objective, data-driven online financial
content for self-directed investors. The Company recorded acquisition expenses
of $1.8 million in connection with the acquisition in the second quarter of
1999. The $1.8 million primarily consisted of accounting and legal fees and
other related transactions costs. The following are unaudited pro forma
condensed consolidated results of operations for the Company and BigCharts on
the basis that the acquisition had taken place and the related charges, noted
above, were recorded at the beginning of each of the periods presented. These
results are not indicative of the actual results that would have occurred had
the action taken place at the beginning of the period:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
Pro forma net revenue $ 7,965,000 $ 9,806,000
Pro forma net loss $(40,748,000) $(65,225,000)
</TABLE>
The total purchase price of $157.5 million was allocated to the fair
value of the assets acquired and liabilities assumed, identified intangible
assets and goodwill as follows:
<TABLE>
<CAPTION>
Expected
Allocation Life
---------- --------
<S> <C> <C>
Tangible assets 1,914,000
Liabilities assumed (656,000)
Intangible assets:
Existing technology 2,000,000 2 years
In-process technology 200,000 --
Trademark 500,000 3.5 years
Customer contacts 300,000 1.5 years
Workforce 800,000 3.5 years
Goodwill 152,491,000 3 years
-----------
Total Purchase Price 157,549,000
</TABLE>
NOTE 6 -- RELATED PARTY TRANSACTIONS
Analyses of the advances from DBC to the Company are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance as of the beginning
of the period $ -- $ -- $ 3,946,000 $ 1,523,000
Expenses paid by DBC on
behalf of the Company 1,094,000 385,000 1,997,000 3,062,000
Expenses allocated by DBC
to the Company 356,000 175,000 652,000 340,000
Royalty fees to DBC 68,000 40,000 113,000 77,000
News revenue from DBC (398,000) (316,000) (763,000) (627,000)
Web advertising revenue
from DBC (140,000) -- (280,000) --
Receivables collected by DBC
on behalf of the Company (49,000) (458,000) (148,000) (860,000)
Interest payable on advances
from DBC 7,000 14,000 24,000 21,000
Cash advances (payments)
from DBC, net -- 308,000 (4,603,000) 308,000
Cash contributions (938,000) (148,000) (938,000) (782,000)
----------- ----------- ----------- -----------
Balance as of the
end of the period $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
7
<PAGE> 8
A majority of the expenditures and liabilities of the Company were
incurred by DBC and directly charged to the Company. These net direct charges
totaled $1,094,000 and $385,000 for the three month period ended June 30, 1999
and 1998 and $1,997,000 and $1,523,000 for the six-month periods ended June 30,
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 $356,000 and $175,000 for
the three month periods ended June 30, 1999 and 1998 and $652,000 and $340,000
for the six-month periods ended June 30, 1999 and 1998, respectively. Under the
terms of the Amended Service Agreement, DBC will provide the Company with
certain general services that 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 $68,000 and $40,000 for the three month periods ended June
30, 1999 and 1998 and $113,000 and $77,000 for the six-month periods ended June
30, 1999 and 1998, respectively. News revenues are based on the number of DBC
subscribers and were $398,000 and $316,000 for the three month periods ended
June 30, 1999 and 1998 and $763,000 and $627,000 for the six-month periods ended
June 30, 1999 and 1998, respectively. Included in accounts receivable at June
30, 1999 is $367,000 owed to MarketWatch.
The Company has recorded advertising expenses of $6,859,000 and
$3,423,000 at rate card value for the six months ended June 30, 1999 and 1998,
respectively, for advertising and promotion provided by CBS.
NOTE 7 -- INCOME TAXES:
The taxable loss of DBC Online/News for the year ended December 31, 1996
and period ended from January 1, 1997 through October 28, 1997 was included in
the DBC consolidated tax returns. Separate income tax returns were not prepared
or filed for DBC Online/News. For all periods presented, deferred income taxes
and related tax expenses have been recorded by applying the asset and liability
approach to each component of DBC Online/New as if it were a separate taxpayer.
Under this approach, deferred tax assets and liabilities represent the expected
future tax consequences of carryforwards and temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
The current tax benefit has been determined as if DBC Online/News was a
separate taxpayer and is deemed to be receivable from DBC in the period it
arose.
The operating results of DBC Online/News were included in the consolidated
tax returns of DBC. The methodology for allocating tax expense to DBC
Online/News is set forth in Note 2. For all periods presented, tax losses
generated by DBC Online/News were used to reduce DBC's taxable income, and
therefore, have been reflected as a current tax benefit.
The benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997
THROUGH YEAR ENDED
OCTOBER 28, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Current benefit:
Federal...................................... $426,000 $564,000
State........................................ 122,000 184,000
-------- --------
548,000 748,000
Deferred benefit:
Federal...................................... 57,000 28,000
State........................................ 16,000 9,000
-------- --------
73,000 37,000
-------- --------
$621,000 $785,000
======== ========
</TABLE>
No benefit for federal and state income taxes is reported in the financial
statements as the Company has elected to be taxed as a partnership prior to the
reorganization of the limited liability company into a Corporation, which took
effect immediately prior to the closing of the IPO (Note 8). Therefore, the
federal and state tax effects of the Company's results of operations are
recorded by the Members in their respective income tax returns.
Subsequently, the Company will account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Had the Company applied the provision of SFAS No. 109
for the period from inception (October 1997) through December 31, 1998, the
Company would have recorded a deferred tax asset, primarily from net operating
loss carryforwards, and a full valuation allowance. Net operating loss
carryforwards generated during the period would have been approximately $5.1
million.
NOTE 8 -- SUBSEQUENT EVENT
In August 1999, the terms of the Yahoo! agreement were amended. Under
the terms of the amended agreement, we have extended the terms to include
additional advertising and slotting fees of $1.6 million over a twelve month
period beginning on January 1, 2000.
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
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 and others.
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.
Effective June 9, 1999, MarketWatch completed its acquisition of the
assets of BigCharts, a Minnesota corporation, for $6.0 million in cash, $110.9
million worth of MarketWatch Common Stock, and $38.6 million worth of
MarketWatch stock options. BigCharts, based in Minneapolis, is a
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leading provider of licensed online financial charting content to electronic
brokers, financial publishers and portals. It is one of the most heavily
trafficked financial sites and an industry-leading provider of objective,
data-driven online financial content for self-directed investors.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues are primarily derived from the sale of advertising on our
web site, license of BigCharts charting content, subscription sales from
MarketWatch RT and MarketWatch Live, and the sale of news to DBC and other
clients. Net revenues increased by 217% to $4.8 million for the three months
ended June 30, 1999 from $1.5 million for the three months ended June 30, 1998,
and increased 196% to $8.0 million for the six months ended June 30, 1999 from
$2.7 million for the six months ended June 30, 1998. The increases are due
primarily to the increases in the number of banner and sponsorship ads placed on
our web sites and the license revenue associated with the purchase of BigCharts.
The increases in advertising revenues 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.
COST OF REVENUES
Cost of revenues 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, costs related to license revenue include communication
lines, and costs related to subscriptions including exchange fees, communication
lines and royalties payable to DBC. Cost of revenues increased by 227% to $2.2
million for the three months ended June 30, 1999 from $672,000 for the three
months ended June 30, 1998, and increased 257% to $3.4 million for the six
months ended June 30, 1999 from $952,000 for the six months ended June 30, 1998.
Cost of revenues increased due to the addition of news reporters and editors,
additional network communications lines to accommodate increased traffic on our
web sites, DoubleClick costs to serve advertisements on the site, and royalties
paid to CBS. Royalties to CBS were $170,000 and $0 for the three months ended
June 30, 1999 and 1998, respectively and $440,000 and $0 for the six months
ended June 30, 1999 and 1998, respectively. As a percentage of net revenues,
cost of revenues were 46% and 44% for the three months ended June 30, 1999 and
1998, respectively and 43% and 35% for the six months ended June 30, 1999 and
1998, respectively. The increase as a percentage of net revenue is due to the
increase in compensation for additional editorial staff over the past year. 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
in our license agreement with 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 license fees for
content, compensation for software developers and expenses for contract
programmers and developers. Product development expenses increased by 127% to
$842,000 for the three months ended June 30, 1999 from $371,000 for the three
months ended June 30, 1998, and increased 142% to $1.5 million for the six
months ended June 30, 1999 from $607,000 for the six months ended June 30, 1998.
Product development expenses increased due to increased headcount from the
hiring of additional employees and the purchase of BigCharts and associated
expenses as well as costs associated with the amortization of deferred
compensation in the first quarter of 1999. Product development expenses were 17%
and 24% of net revenues for the three months ended June 30, 1999 and 1998,
respectively and 18% and 23% for the six months ended June 30, 1999 and 1998
respectively. The decrease as a percent of revenue occurred as revenue grew more
quickly than personnel costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses primarily consist of compensation
for finance, business development and administrative personnel, allocations from
DBC for administrative services, occupancy costs, professional fees,
depreciation charges and charges for bad debt. General and administrative
expenses increased by 207% to $2.2 million for the three months ended June 30,
1999 from $724,000 for the three months ended June 30, 1998, and increased 200%
to $3.8 million for the six months ended June 30, 1999 from $1.3 million for the
six months ended June 30, 1998. As a percentage of net revenues, general and
administrative costs were 46% and 48% for the three months ended June 30, 1999
and 1998, respectively and 47% for the six months ended June 30, 1999 and 1998.
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 and second quarters of 1999.
We also hired additional personnel and incurred additional costs related to
being a public company as well as the purchase of BigCharts, 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.
SALES AND MARKETING
Sales and marketing expenses primarily consist of promotion and
advertising provided by CBS, online and offline advertisements in print and
radio, advertising commissions, promotional materials, compensation and sales
commissions to our direct sales force. Sales and marketing expenses increased by
221% to $8.2 million for the three months ended June 30, 1999 from $2.6 million
for the three months ended June 30, 1998, and increased 226% to $14.5 million
for the six months ended June 30, 1999 from $4.4 million for the six months
ended June 30, 1998. As a percentage of net revenues, sales and marketing
expenses were 171% and 169% for the three months ended June 30, 1999 and 1998
and 181% and 165% for the six months ended June 30, 1999 and 1998, respectively;
an increase of 16%. Sales and marketing expenses increased in absolute dollars
and as a percentage of revenues due to a number of factors including:
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- an increase in amortization of promotions and advertising contributed
by CBS in the first and second quarters of 1999;
- growth of our direct sales force in the first and second quarters 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 advertising 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 $3.7
million and $1.9 million at the rate card value for the three months ended June
30, 1999 and 1998, and $6.9 million and $3.4 million for the six months ended
June 30, 1999 and 1998, related to services provided by CBS. We have recorded
aggregate non cash advertising expense of $13.9 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 $345,000 for the three months ended June 30, 1999 and
$728,000 for the six months ended June 30, 1999 resulted from interest income on
the proceeds from our IPO. Interest expense of $14,000 and $21,000 for the three
and six months ended June 30, 1998 resulted from borrowings from DBC.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $28.8
million at June 30, 1999 representing 15% of total assets. We have invested our
cash in excess of current operating requirements in investment grade securities.
The investments have variable and fixed interest rates and primarily short-term
maturities. In accordance with Statements of Financial Accounting Standards 115,
"Accounting for Certain Investments in Debt and Equity Securities" these
investments are classified as "available for sale".
Cash used in operating activities of $6.6 million for the six months
ended June 30, 1999 was primarily due to a net loss of $18.9 million, offset by
non cash charges of $6.9 million for advertising provided by CBS, $4.4 million
in amortization of goodwill and intangibles, and a write-off of in-process
research and development related to the acquisition of BigCharts of $200,000.
Significant uses of cash in operations for the six months ended June 30, 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.
Cash used in investing activities of $18.5 million for the six months
ended June 30, 1999 consisted primarily of the purchase of short-term
investments, the purchase of BigCharts, and capital expenditures. The BigCharts
purchase included a cash payment of $6.0 million to stockholders and financial
advisors of BigCharts, and $1.5 million in acquisition costs. 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 $43.9 million for the six
months ended June 30, 1999 resulting from 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 $1.6 million
of which we have $707,000 remaining. In addition, we are obligated to pay Yahoo!
a fee based on the amount of traffic directed to our Web site. In August 1999,
the terms of the Yahoo! agreement were amended. Under the terms of the amended
agreement, we have extended the terms to include additional advertising and
slotting fees of $1.6 million over a twelve month period beginning on January 1,
2000.
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 million on a revolving basis through
October 29, 2000. Borrowings will 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 June 30, 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 cash from operations, 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 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 web site
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 may not be
able to track or measure the advertising to the same extent as DoubleClick.
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 that 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. Also, 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 $30.0 million of advertising and on-air promotions
during the period from October 29, 1997 through October 29, 2002 and we have
recognized $13.9 million of this rate card amount through June 30, 1999.
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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.
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.
General Services. DBC provides us with certain general services,
including cash management, accounting services and human resources services. We
reimburse DBC for its actual costs of providing these services.
Payments for News. Under the Amended and Restated Services Agreement,
DBC pays 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
As of June 30, 1999, CBS and DBC each owned approximately 33% 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 that they hold. Currently, they each have three
representatives. As a result of their share ownership and other rights, CBS and
DBC collectively are 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.
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 that 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;
- Demand for BigCharts content services;
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- 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 and, to a lesser extent, content licensing 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.
RISKS RELATED TO RECENT BIGCHARTS ACQUISITION
Our acquisition of BigCharts closed on June 9, 1999, and involves a
number of risks. These include (i) risks to the merger, such as, 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 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 merger; and (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 has been and will continue to be a complex, time
consuming and expensive process and may disrupt MarketWatch's business if not
completed in a timely and efficient manner. 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 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.
WE MUST DEVELOP AND IMPLEMENT OUR OWN INTERNAL SYSTEMS TO MANAGE OUR BUSINESS
AND OUR GROWTH
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 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.
WE WILL NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO ATTRACT USERS, ADVERTISERS, AND CONTENT
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 June 1999, approximately 11% of our traffic came from
Yahoo!. There is intense competition for placements on these sites, and
13
<PAGE> 14
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 and maintain 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.
WE DEPEND ON A THIRD PARTY TO TRACK AND MEASURE THE DELIVERY OF ADVERTISEMENTS
FOR US AND IT COULD BE DIFFICULT TO REPLACE THESE SERVICES
It is important to our advertisers that we accurately measure the
delivery of advertisements on our web site. We depend on third parties to
provide this measurement service. If they were unable to provide this service in
the future, we would be required to perform it ourselves or obtain it from
another provider. This could cause us to incur additional costs or cause
interruptions in our business during the time we are replacing this service. We
are implementing additional systems designed to record behavioral patterns of
our users. If we do not develop these systems successfully, we may not be able
to accurately evaluate the behavioral patterns 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.
WE DEPEND ON OUR DIRECT SALES FORCE TO SELL ADVERTISING ON OUR WEB SITE
Until early 1998, we relied upon third parties to sell advertisements on
our web site. Since that time, we created our own internal sales force. As of
June 30, 1999, our sales group had 17 members. We depend on our sales force to
sell advertising on our web sites. This involves a number of risks:
- our sales personnel have only worked for us for a short period of
time;
- our need to further increase the size of our sales force;
- our ability to hire, retain, integrate and motivate additional sales
and sales support personnel;
- the length of time it takes new sales personnel to become
productive; and
- the competition we face form other companies in hiring and retaining
sales personnel.
Our business would be adversely affected if we do not develop and
maintain an effective sales force.
WE NEED TO EXPAND OUR BUSINESS AND BE ABLE TO DO SO SUCCESSFULLY
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
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.
IF WE DO NOT DEVELOP NEW AND ENHANCED SERVICES AND FEATURES FOR OUR WEB SITE, WE
MAY NOT BE ABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER OF USERS
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.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE OF THE WEB, PARTICULARLY FOR
FINANCIAL NEWS AND INFORMATION
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.
WE DEPEND ON THE SALE OF ADVERTISEMENTS ON OUR WEB SITE AND IF WEB ADVERTISING
DOES NOT BECOME ACCEPTED, OUR BUSINESS WOULD BE HARMED
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.
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.
14
<PAGE> 15
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 in money
market funds and short-term investments classified as "available for sale". In
general, money market funds and short-term investments are not subject to market
risk because the interest paid on such funds fluctuates with the prevailing
interest rate. As of June 30, 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 June 30, 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)
$28.8 million in temporary investments, (iii) $22.0 million for working capital
and (iv) $7.5 million for the purchase of BigCharts.
On June 9, 1999, the Company acquired all of the issued and outstanding
capital stock of BigCharts, Inc. pursuant to a merger of a newly formed,
wholly-owned subsidiary of the Company with and into BigCharts, in exchange for
1,589,138 shares of the Company's common stock. In addition, the Company assumed
options to purchase capital stock of BigCharts, which options are exercisable
for an aggregate of 585,824 shares of the Company's common stock. The issuance
of shares of the Company's common stock and the assumption of options were made
in reliance on Section 4(2) and/or Regulation D promulgated under the Securities
Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1999, at the Company's Annual Meeting of Shareholders, the
Company's shareholders approved the following proposals. Proxies were solicited
by the Company pursuant to Regulation 14A under the Securities and Exchange Act
of 1934, as amended. As of April 12, 1999, the record date for the Annual
Meeting, there were approximately 12,162,500 shares of common stock outstanding
and entitled to vote, of which 11,643,202 shares of common stock were present
in person or by proxy and voted at the meeting.
1. Proposal to elect nine directors of the Company, each to survive
until the next Annual Meeting of Shareholders and until his successor is duly
elected and qualified or until his earlier resignation or removal.
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Larry Kramer 11,637,671 5,531
Jim DePalma 11,637,746 5,456
Alan Hirschfield 11,637,636 5,566
Alan Tessler 11,637,686 5,516
Mark Imperiale 11,637,746 5,456
Daniel Mason 11,637,746 5,456
Andrew Hayward 11,637,746 5,456
Michael Jordan 11,637,596 5,606
Robert Lessin 11,637,696 5,506
</TABLE>
2. Proposal to ratify the selection of PricewaterhouseCoopers as
independent auditors for the Company for the fiscal year ending December 31,
1999.
<TABLE>
<S> <C>
For ................... 11,640,596
Against ............... 1,887
Abstain ............... 719
Not Voted ............. 519,298
</TABLE>
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:
On May 12, 1999, the Company filed a form 8K under item 2 announcing
that the company entered into a definitive agreement to acquire BigCharts, Inc.
15
<PAGE> 16
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: August 16, 1999 By: /s/ J. PETER BARDWICK
J. Peter Bardwick
Chief Financial Officer
(Principal Financial Officer)
Dated: August 16, 1999 By: /s/ JOE BRICHLER
Joe Brichler
Controller
(Principal Accounting Officer)
16
<PAGE> 17
MarketWatch.com, Inc.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
TITLE NO.
- ----- -------
<S> <C>
Agreement and Plan of Reorganization, dated as of April 28,
1999, by and among the Company, Big Dog Acquisition Corp., BigCharts
Inc., Philip D. Hotchkiss, Verticality BigCharts Investment, LLC,
Wyncrest Capital, Inc., David C. Malmberg, Jamie Thingelstad, Scott
Kinney, Ronny Apfel, Sholem Greenbaum and Hadar Pedhazur
(incorporated by reference to exhibit 2.1 of the Form 8-K filed with
Commission on May 12, 1999).......................................... 2.1
Employment agreement dated June 9,1999, by and between BigCharts, Inc.
and Phillip Hotchkiss (incorporated by reference to exhibit 10.16
of Form S-1 filed with the Commission on August 9, 1999)............. 10.1
Employment agreement dated as of June 9, 1999, by and between
BigCharts, Inc. and Jamie J. Thingelstad (incorporated by reference
to exhibit 10.17 of Form S-1 filed with the Commission on
August 9, 1999)...................................................... 10.2
Financial Data Schedule*............................................... 27.1
</TABLE>
* THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARKETWATCH.COM, INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
17
<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> JUN-30-1999
<CASH> 18,992,000
<SECURITIES> 9,862,000
<RECEIVABLES> 3,697,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,033,000
<PP&E> 2,893,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 187,673,000
<CURRENT-LIABILITIES> 5,079,000
<BONDS> 0
0
0
<COMMON> 141,000
<OTHER-SE> 230,772,000
<TOTAL-LIABILITY-AND-EQUITY> 187,673,000
<SALES> 4,818,000
<TOTAL-REVENUES> 4,818,000
<CGS> 2,199,000
<TOTAL-COSTS> 2,199,000
<OTHER-EXPENSES> 15,777,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,813,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,813,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,813,000)
<EPS-BASIC> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
