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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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)
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825 Battery Street
San Francisco, California 94111
(Address of Principal Executive Offices)
(415) 733-0500
(Registrant's Telephone Number, Including Area Code)
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 May 1, 2000 was 14,116,383.
MarketWatch.com, Inc.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Interim Condensed Consolidated Financial Statements: |
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Unaudited Condensed Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 |
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Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 |
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Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 |
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| Notes to Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| PART II. OTHER INFORMATION |
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| Item 1. Legal Proceedings |
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| Item 2. Changes in Securities and Use of Proceeds |
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| Item 3. Defaults Upon Senior Securities |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MARKETWATCH.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
2000 1999
------------ ------------
Assets
Current assets:
Cash and cash equivalents .......................... $10,845 $9,500
Short term investments ............................. -- 4,979
Accounts receivable, net ........................... 9,304 8,073
Prepaid expenses ................................... 2,990 3,699
------------ ------------
Total current assets ....................... 23,139 26,251
Property and equipment, net .......................... 6,546 5,035
Investment in joint venture .......................... 577 --
Intangible assets, net ............................... 2,290 2,683
Goodwill, net ........................................ 110,132 122,840
Other assets ......................................... 83 46
------------ ------------
Total assets ............................... $142,767 $156,855
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................... $6,550 $3,948
Accrued expenses ................................... 3,593 3,415
Deferred revenue ................................... 422 344
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Total current liabilities .................. 10,565 7,707
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Stockholders' equity
Preferred stock ..................................... -- --
Common stock ....................................... 142 139
Additional paid-in capital ......................... 232,952 231,746
Deferred compensation .............................. (289) (413)
Contribution receivable ............................ (4,525) (8,952)
Accumulated deficit ................................ (96,078) (73,372)
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Total stockholders' equity ................. 132,202 149,148
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Total liabilities and
stockholders' equity .................... $142,767 $156,855
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
MARKETWATCH.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Three Months Ended
March 31,
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2000 1999
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Net revenues:
Advertising...................... $8,727 $2,631
Licensing........................ 2,895 365
Other............................ 779 151
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Total net revenues.......... 12,401 3,147
Cost of revenues................... 4,439 1,201
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Gross profit................ 7,962 1,946
Operating expenses:
Product development.............. 2,300 627
General and administrative....... 3,116 1,550
Sales and marketing.............. 7,921 3,066
CBS advertising..................... 4,426 3,155
Amortization of goodwill
and intangibles................ 12,850 --
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Total operating expenses.... 30,613 8,398
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Loss from operations............... (22,651) (6,452)
Interest income, net............... 168 383
Loss in joint venture............... (223) --
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Net loss........................... ($22,706) ($6,069)
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Basic and diluted net loss per
share............................ ($1.62) ($0.52)
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Shares used in the calculation
of basic and diluted net loss
per share........................ 14,024 11,635
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
MARKETWATCH.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
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2000 1999
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Cash flows from operating activities:
Net loss.......................................... ($22,706) ($6,069)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in loss of joint venture................ 223
Provision for doubtful accounts................ 118 (32)
Depreciation and amortization.................. 13,856 222
Noncash charges from stockholders.............. 4,426 3,155
Changes in operating assets and liabilities:
Accounts receivable.......................... (1,349) (134)
Prepaid expenses and other assets............ 672 (416)
Accounts payable and accrued expenses........ 2,780 1,893
Deferred revenue............................. 78 2
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Net cash used in operating activities....... (1,902) (1,379)
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Cash flows from investing activities:
Sale of short term investments.................... 4,979 --
Purchase of property and equipment................ (2,141) (324)
Investment in joint venture....................... (800) --
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Net cash provided by investing activities... 2,038 (324)
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Cash flows from financing activities:
Issuance of common stock.......................... 1,209 47,832
Advances from DBC................................. -- (3,946)
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Net cash provided by financing activities... 1,209 43,886
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Net change in cash.................................. 1,345 42,183
Cash and cash equivalents at beginning of period.... 9,500 140
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Cash and cash equivalents at end of period.......... $10,845 $42,323
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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, 1999. 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 February 2000, DBC completed a merger with the specialist asset valuation business, or the FTAM, of the Financial Times Group, which is a part of Pearson, plc. Upon the closing of the merger, the Financial Times Group transferred the FTAM to DBC in exchange for approximately 60% of the outstanding common stock of DBC.
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 $48.2 million, net of offering costs. Immediately prior to the completion of the IPO, the Company was reorganized from a limited liability company to a corporation. All share and per share data have been retroactively adjusted to reflect the reorganization.
BigCharts.com, Inc. Acquisition
Effective June 9, 1999, the Company completed its acquisition of BigCharts.com, Inc. ("BigCharts"), a Minnesota corporation, in a merger transaction for $6.0 million in cash, $110.9 million worth of MarketWatch.com 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.
Joint Venture Agreement
On January 6, 2000, the Company entered into a joint venture agreement with the Financial Times Group to establish Financial Times Marketwatch.com (Europe) Limited, an internet provider of real time business news, financial programming and analytical tools. Under the agreement, the Company licenses its trademark and technology to the joint venture, contributes certain domain names and 500,000 pounds sterling in exchange for 500,000 shares of the joint venture. The Financial Times contributes trademarks for a royalty fee, provides 15.0 million pounds sterling worth of rate card advertising over five years and 500,000 pounds sterling in cash for 500,000 shares in the joint venture. Each company owns a 50% interest in the joint venture. The joint venture is accounted for using the equity method of accounting.
Note 2 - Net Loss Per Share
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 anti-dilutive.
Options to purchase 2,359,075 and 1,111,916 shares of common stock were outstanding at March 31, 2000 and 1999, respectively, but were not included in the computation of diluted net loss per share 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 3 - Related Party Transactions
Under certain agreements with CBS, the Company expensed $656,000 and $170,000 for the three months ended March 31, 2000 and 1999, respectively, related to licensing of CBS news content and trademarks. In addition, the Company has recorded advertising expenses of $4.4 million and $3.2 million at rate card value for the three months ended March 31, 2000 and 1999, respectively, for advertising and promotion provided by CBS. Rental payments to CBS for leasing of certain facilities were $153,000 and $79,000 for the three months ended March 31, 2000 and March 31, 1999, respectively.
Licensing revenues from DBC were $469,000 and $365,000 for the three months ended March 31, 2000 and 1999, respectively. In addition, the Company recognized revenue of $501,000 for the three months ended March 31, 2000 from television programming on CBS stations, and costs of $575,000 for the three months ended March 31, 2000 for production of the television programming.
For the three months ended March 31, 2000 and 1999, DBC purchased $60,000 and $140,000, respectively, of advertising under an insertion order. Included in accounts receivable at March 31, 2000 is $64,000 owed to the Company by DBC.
Direct charges for subscription revenues for certain DBC data feeds were $100,000 and $45,000 for the three month periods ended March 31, 2000 and 1999, respectively. Under the terms of the Amended and Restated Licensing Agreement, DBC will provide the Company with certain general services including accounting, network operations, hosting of the Company's Web pages and data feeds. Allocated charges for these services totaled $193,000 and $296,000 for the three months ended March 31, 2000 and 1999, respectively.
An executive of the Company is also a member of the Board of Directors of a customer. For the three months ended March 31, 2000, $80,000 of advertising revenues were attributable to this customer.
Note 4 - Subsequent Event: Stock Purchase Agreement
On May 5, 2000, the Company issued 1,136,814 shares of the Company's common stock to each of DBC for $43.0 million in cash and to CBS for $13.0 million in cash and $30.0 million in rate card advertising and promotion over the next two years.
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 our 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 us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our 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. We caution investors that its business and financial performance are subject to substantial risks and uncertainties.
Overview
We completed our initial public offering in January 1999. Prior to the offering, we were a joint venture owned 50% each by DBC and CBS, and were formed as a limited liability company orLLC, 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, we were re-organized from a limited liability company into a corporation.
Since our formation as an LLC, we have 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. We sell advertising banners and sponsorships on our Web sites and subscriptions to certain DBC products and news to DBC and others. In addition, with the acquisition of BigCharts in June 1999, we are the leading provider of licensed online financial charting content to electronic brokers, financial publishers and portals.
We have several agreements with CBS and DBC that include the following:
On January 6, 2000, we entered into a joint venture agreement with the Financial Times Group to establish Financial Times Marketwatch.com (Europe) Limited, an Internet-based provider of real time business news, financial programming and analytical tools. Our joint venture, FT.MarketWatch.com, will provide free, real-time financial and market news to Europe's rapidly growing communities of individual investors. Under the agreement, we license our trademark and technology to the joint venture, contribute certain domain names and 500,000 pounds sterling in exchange for 500,000 shares of the joint venture. The Financial Times contributes trademarks for a royalty fee, provides 15.0 million pounds sterling worth of rate card advertising over five years and 500,000 pounds sterling in cash for 500,000 shares in the joint venture.
Our revenue has grown recently and our ability to generate significant revenue in the future 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. Because of non-cash charges in connection with our acquisition of BigCharts, we also expect to incur net losses. 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.
Results of Operations
Net Revenues
Net revenues are derived from the sale of advertising on our Web site, licensing of our content, distribution of television and radio broadcasts, subscription sales from MarketWatch RT and MarketWatch Live, and the sale of news to DBC, CBS and other clients. Net revenues increased by 300% to $12.4 million for the three months ended March 31, 2000 from $3.1 million for the three months ended March 31, 1999. The increase is due primarily to the increase in the number of ads placed on our Web sites, and growth of our license revenue related to the acquisition of BigCharts, an increase in new customers as well as expansion of services to current customers.
The increase in advertising revenues was caused by several interrelated factors, including the following:
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 our future 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 CPM's (cost per thousand page views) across our Web sites or lower 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, bandwidth costs associated with serving pages on our Web properties, fees paid for data, amortization of intangibles associated with the purchase of BigCharts, Web site infrastructure costs allocated from DBC, costs of serving ads, costs related to license revenue including bandwidth and data fees, and costs related to subscriptions including exchange fees and communication lines.
Cost of revenues increased by 267% to $4.4 million for the three months ended March 31, 2000 from $1.2 million for the three months ended March 31, 1999. Cost of revenues increased due to the addition of news reporters and editors, costs associated with the production of our television and radio programs, additional bandwidth costs to accommodate increased traffic on our Web sites and license services, costs to serve advertisements on the site, amortization of intangibles, and royalties paid to CBS.
As a percentage of net revenues, cost of revenues were 35% and 39% for the three months ended March 31, 2000 and March 31, 1999, respectively. The decrease as a percentage of net revenues is due to economies of scale for costs of news and network expenses. We expect cost of revenues in absolute dollars to increase in the future as a result of our intention to increase the number of our news and editorial staff, initial costs in excess of revenues related to broadcast and broadband products and the addition of equipment and bandwidth costs to support our Web sites' traffic in the future.
Product Development
Product development expenses primarily consist of data source fees, compensation and benefits for Web site developers, designers and engineers to maintain the site and software engineers, and expenses for contract programmers and developers. Product development expenses increased by 267% to $2.3 million for the three months ended March 31, 2000 from $627,000 for the three months ended March 31, 1999. Product development expenses increased due to the hiring of additional employees, the purchase of BigCharts and associated expenses and an increase in depreciation expense related to capital expenditures for technology as we develop our Web sites' infrastructure with the intention of discontinuing DBC services.
Product development expenses were 18% and 20% of net revenues for the three months ended March 31, 2000 and March 31, 1999, respectively. The decrease as a percentage of net revenues occurred as net revenues grew more quickly than personnel costs. In absolute dollars, we expect to continue to increase product development expenditures to maintain and enhance our Web sites and product offerings.
General and Administrative
General and administrative expenses primarily consist of compensation and benefits 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 94% to $3.1 million for the three months ended March 31, 2000 from $1.6 million for the three months ended March 31, 1999. As a percentage of net revenues, general and administrative costs were 25% and 52% for the three months ended March 31, 2000 and March 31, 1999, respectively. General and administrative expenses in absolute dollars increased due primarily to increased headcount, occupancy, legal and consulting expenses. In addition, the increase related to costs of being a public company, as well as those related to the acquisition of BigCharts, including among others, travel expenses and professional service fees. The absolute dollar level of general and administrative expense is expected to increase in future periods as a result of an increase in personnel and costs to support our intention to implement independent financial and management systems.
Sales and Marketing
Sales and marketing expenses primarily consist of promotion and advertising provided by CBS, online and offline advertisements, promotional materials, compensation, benefits and sales commissions to our direct sales force. Sales and marketing expenses increased by 98% to $12.3 million for the three months ended March 31, 2000 from $6.2 million for the three months ended March 31, 1999. As a percentage of net revenues, sales and marketing expenses were 99% and 200% for the three months ended March 31, 2000 and March 31, 1999, respectively. Sales and marketing expenses increased in absolute dollars during the quarter due to a number of factors, including:
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 and as we incur additional expenses relating to CBS' advertising contribution.
Amortization of Intangibles
Of the $157.5 million purchase price for BigCharts, $152.5 million was allocated to goodwill, which is being amortized over 3 years, and $3.6 million was allocated to intangible assets, which are being amortized over periods ranging from 1.5 to 3.5 years.
Interest Income
Interest income of $168,000 for the three months ended March 31, 2000 and $383,000 for the three months ended March 31, 1999, resulted from interest earned on the proceeds from our initial public offering. Interest income decreased for the three months ended March 31, 2000 compared to the same period of 1999 due to use of cash in excess of income.
Liquidity and Capital Resources
Since inception on October 29, 1997, we have funded our operations primarily from cash contributed and advanced by DBC and CBS, revenues from advertising and licensing sales and the proceeds from our initial public offering. Our cash, cash equivalents and short term investments totaled $10.8 million at March 31, 2000, compared to $14.5 million at December 31, 1999.
Cash used in operating activities was $1.9 million for the quarter ended March 31, 2000. The cash used in the first quarter was primarily due to a net loss of $22.7 million, offset by non-cash charges of $4.4 million for advertising provided by CBS and $13.9 million in depreciation of property and equipment and amortization of goodwill and intangibles. Significant uses of cash in operations for the quarter ended March 31, 2000 include costs associated with increased sales and marketing activities to establish and promote our products and services and increased headcount and related expenses, offset by an increase in accounts payable.
Cash used in operating activities of $1.4 million for the three months ended March 31, 1999 was primarily due to a net loss of $6.1 million, offset by non cash charges of $3.2 million for advertising provided by 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.
Cash provided by investing activities was $2.0 million for the quarter ended March 31, 2000 and consisted primarily of the sale of short term investments, offset by capital expenditures and the investment in our joint venture with the Financial Times Group. 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. We also anticipate additional cash contributions to support the growth of our joint venture with the Financial Times Group.
Cash used in investing activities of $324,000 for the three months ended March 31, 1999 consisted primarily of capital expenditures.
Cash provided by financing activities was $1.2 million for the quarter ended March 31, 2000 and primarily reflected proceeds from the sale of common stock.
Cash provided by financing activities was $43.9 million for the three months ended March 31, 1999 due to the initial public offering, completed in January 1999, of 3,162,500 shares of common stock at $17 per share, net of underwriting and offering expenses and the repayment of amounts owed to DBC.
As of March 31, 2000, commitments under noncancellable operating leases totaled $2.7 million through December 31, 2004. We have entered into certain agreements with Yahoo!, Inc., or Yahoo!, and America Online, Inc., or AOL, to make payments for advertising and slotting over the next three years. In addition, we are obligated to pay Yahoo! a fee based on the amount of traffic directed to our Web site each month through the expiration of the agreement in December 2000. As of March 31, 2000, we are committed to pay $7.0 million to AOL over the next three years and a minimum of $1.6 million to Yahoo! in 2000.
To date, we continue to be partially dependent on DBC for our financial and operational services and related support functions. We believe the implementation of an independent accounting system; financial, operational and management systems and 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 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 $5.0 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 March 31, 2000, there were no advances from DBC under this credit agreement.
We believe our recent receipt of $56.0 million in cash and $30.0 million in non cash rate card advertising from the sale of our common stock to CBS and DBC and our credit agreement with DBC will be sufficient to meet our anticipated 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 were 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 its percentage interest pursuant to the exercise of the purchase right under its stockholders' agreements, then CBS or DBC would not necessarily suffer a reduction in its ownership. Furthermore, such equity securities might have rights, preferences, or privileges senior to those of our common stock.
Year 2000
To date, we have not experienced any significant year 2000 related problems with our internally developed software or our third-party supplied software and computer systems, and we are not aware of any failure of our systems or of our third-party suppliers to be year 2000 compliant that could significantly impact our business or operations.
Factors That May Affect Future Operating Results
We Rely on Our Relationships with CBS and DBC
CBS: We would need to change the name of our Web sites and devote substantial resources towards building a new brand name if our license 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 sites 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 sites. 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:
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 $25.5 million of this rate card amount through March 31, 2000. On May 5, 2000, upon the issuance of our common stock, CBS has agreed to provide an additional $30.0 million in rate card advertising to be delivered between March 1, 2000 and May 5, 2002. 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 sites without the CBS name and logo or promotion from CBS.
DBC: 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. DBC provides us with certain general services, including accounting services and human resources services. We reimburse DBC for its actual costs of providing these services. 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.
Although the stockholders' agreement among CBS, DBC and us contains certain non-competition provisions, these provisions have certain exceptions and do not provide for an exclusive relationship with DBC.
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 May 5, 2000, CBS and DBC each owned approximately 34.4% 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 four 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:
DBC would forfeit its board representation in either event. We cannot predict which option, if any, CBS would elect in such an event.
We May Experience Potential Fluctuations in our Quarterly Operating Results, Face Unpredictability of Future Revenue, Continue to Incur Losses in the Future and Experience Seasonality in Our Operating Results
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:
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, broadcasting 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 the 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 have and will continue 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 sites typically fluctuate with the occurrence of significant events in the business and financial news, such as fluctuations in the stock markets, which could cause changes in our audience size.
We Need to 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. Furthermore, we acquired BigCharts in June 1999.
We have been substantially dependent and continue to be partially dependent on DBC to host our CBS.MarketWatch.com Web site and for many of our financial, administrative and operational services and related support functions. We are gradually moving our Web servers to third party data centers and will continue to do so through 2000. We are also in process of implementing our own financial reporting system, which we expect will be fully implemented by the end of 2000. If we are not able to successfully transition our systems and servers away from DBC we may not be able to perform these financial, administrative, operational and support functions. 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 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 2000, approximately 9% of our traffic came from Yahoo! and AOL. 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 themselves may not attract significant numbers of users. Therefore, our sites 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 sites.
We Depend on Third Parties to Track and Measure the Delivery of Advertisements and It Could Be Difficult to Replace These Services
It is important to our advertisers that we accurately measure the demographics of our user base and the delivery of advertisements on our Web sites. 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 sites or may pay less for advertising if they do not perceive our measurements or measurements made by third parties to be reliable.
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 support our growing business. This growth is likely to continue to place a significant strain on our resources. As we grow, we will implement new operational and financial systems, procedures and controls. If we are unable to accomplish any of these, our business could be adversely affected.
We Must Develop New and Enhanced Services and Features for Our Web Sites
We believe that our Web sites 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. 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 Use of the Web, Particularly for Financial News and Information
Our business depends on businesses and consumers continuing to increase their use of the Web for obtaining news and financial information as well as for conducting commercial transactions. 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:
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 sites, could grow more slowly or decline.
We Face Risks Associated with Bandwidth Constraints
Our business relies on our ability to serve Web pages in a consistent and timely manner. If the traffic on our Web sites grows at a rate that our current communication lines cannot support, our pages will be served at a slower rate or we will be unable to serve pages at all. We also rely on certain third party providers for a significant amount of our current bandwidth capacity. If these providers are unable to maintain their service level agreements or we are unable to obtain additional bandwidth as our traffic grows, our business would be adversely affected.
Unauthorized Break-Ins to Our Site Could Harm Our Business
Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. In addition, unauthorized persons may improperly access our data. A number of popular Web sites have recently experienced attacks from "hackers" and other intrusions. Any actions like these could harm us. Actions like these may be very expensive to remedy and could damage our reputation and discourage new and existing users from using our site.
We Depend on the Sale of Advertisements on Our Web Sites, 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. In addition, our advertising packages are sold in campaigns ranging from less than 2 weeks to a year or more. Advertisers have the right to cancel a campaign with two weeks notice without penalty. Therefore, advertising revenues would be adversely affected if we fail to maintain a desirable medium for on-line advertising.
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 sites 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.
We Could Face Liability Related to Our Storage of Personal Information About Our Users
We have a non-disclosure policy displayed on our Web sites. Our policy is not to willfully disclose any individually identifiable information about any user to a third party without the user's consent. This policy is accessible to users of our personalized services when they initially register. Despite this policy, however, if third persons were able to penetrate our network security or otherwise misappropriate our users' personal information or credit card information, we could be subject to liability. These could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation. In addition, the Federal Trade Commission and other states have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if they chose to investigate our privacy practices.
We Could Face Liability for the Information Displayed on Our Web Sites
We may be subjected to claims for defamation, negligence, copyright or trademark infringement or based on other theories relating to the information we publish on our Web sites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We could also be subjected to claims based upon the content that is accessible from our Web sites through links to other Web sites. Our insurance may not adequately protect us against these types of claims.
Our Common Stock Price is Volatile and Could Fluctuate Significantly
The trading price of our stock has been and may continue to be subject to wide fluctuations. From January 1, 2000 through March 31, 2000, the closing sale prices of our common stock (NASDAQ: MKTW) on the Nasdaq National Market ranged from $34.375 to $45.00. As of May 1, 2000, the closing sale price was $20.625. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable, and news reports relating to trends in our markets. In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity. The primary objective of our investment activities is to preserve principal while 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 March 31, 2000, all of our investments mature in 90 days or less.
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. We have not engaged in any hedging transactions to date.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our financial position or results of operations.
ITEM 2. CHANGE IN SECURITIES AND USED PROCEEDS
On January 14, 1999, our Registration Statement on Form S-1 (File No. 333-65569) was declared effective by the Securities and Exchange Commission which registration statement related to our 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 us. 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 $53.8 million. The amount of offering expenses were $5.9 million, including underwriting discount of $3.7 million and other offering expenses of $2.2 million for net proceeds of $47.8 million. As of March 31, 2000 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) $8.4 million in temporary investments, (iii) $27.3 million for working capital and (iv) $7.5 million relating to the purchase of BigCharts.
On May 5, 2000, we issued 1,136,814 to each of DBC for $43.0 million in cash and CBS for $13.0 million in cash and an additional $30.0 million in rate card advertising to be delivered between March 1, 2000 and May 5, 2002. The issuance of shares of our common stock was 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 SECURTIY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits filed as part of this Form 10Q are listed in the Index to Exhibits immediately preceding such exhibits, which Index to Exhibits is incorporated herein by reference.
No reports on the Form 8-K were filed in the quarter ended March 31, 2000.
MarketWatch.com, Inc.
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. |
| (Registrant) |
| By: | /s/ JOAN P. PLATT |
|
| |
| Joan P. Platt | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
MarketWatch.com, Inc.
INDEX TO EXHIBITS
| Exhibit Title | Exhibit Number |
| Stock Purchase Agreement dated March 28, 2000 by and among MarketWatch.com, Inc., CBS Broadcasting, Inc. and Data Broadcasting Corporation | 10.1 |
| Financial Data Schedule* | 27.1 |
* THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARKETWATCH.COM, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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