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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 000-25113
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MARKETWATCH.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3315360
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
825 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 733-0500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed 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), Yes [X] No [ ]
and (2) has been subject to such filing requirements for the past 90 days. Yes
[ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 19, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $209,120,313.
The number of shares of the Registrant's Common Stock outstanding as of
March 19, 1999 was 12,162,500.
Documents incorporated by reference: portions of the registrant's proxy
statements for its 1999 annual meeting of stockholders are incorporated by
reference.
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MARKETWATCH.COM, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART 1
ITEM 1: Business.................................................... 1
ITEM 2: Properties.................................................. 18
ITEM 3: Legal Proceedings........................................... 18
ITEM 4: Submission of Matters to a Vote of Security Holders......... 18
ITEM 4A: Executive Officers.......................................... 18
PART II
ITEM 5: Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 19
ITEM 6: Selected Financial Data..................................... 20
ITEM 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
ITEM 8: Financial Statements and Supplementary Data................. 29
ITEM 9: Changes In and Disagreements with Accountants and Accounting
and Financial Disclosure.................................. 47
PART III
ITEM 10: Directors and Executive Officers of the Registrant.......... 47
ITEM 11: Executive Compensation...................................... 47
ITEM 12: Security Ownership of Certain Beneficial Owners and
Management................................................ 47
ITEM 13: Certain Relationships and Related Transactions.............. 47
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports of Form
8-K....................................................... 47
Signatures............................................................ 48
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PART I
ITEM 1. BUSINESS
EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DESCRIPTION OF THE
COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE OUTCOME OF THE EVENTS DESCRIBED IN THESE FORWARD-LOOKING
STATEMENTS IS SUBJECT TO RISKS AND ACTUAL RESULTS COULD DIFFER MATERIALLY. THE
SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT CONTAIN A DISCUSSION OF SOME OF THE
FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES. OWNERSHIP OF OUR SECURITIES
BY CBS OR DBC SHOULD NOT BE VIEWED AS A RECOMMENDATION BY EITHER COMPANY TO
ACQUIRE OR HOLD THE COMMON STOCK.
We are a leading Web-based provider of comprehensive, real-time business
news, financial programming and analytic tools. Our CBS.MarketWatch.com Web site
also offers several tiers of paid subscription products, personal finance
commentary and data, community features and other services designed to provide a
"one-stop-shop" for our audience's financial information needs. We carefully
design and regularly update our Web site to provide well-organized, relevant and
clear content. Our staff of approximately 50 professional journalists, including
freelance journalists, creates in-depth, up-to-the-minute business and financial
commentary and analysis throughout the trading day and our correspondents
regularly appear on CBS Television and CBS Radio News. We have important
strategic relationships with our principal stockholders Data Broadcasting
Corporation, or DBC, and CBS Broadcasting Inc., or CBS. Our goal is to create
the preeminent brand for real-time business news and financial information on
the Web. We believe our consistent focus on original and authoritative content
and our access to a national media audience through our CBS relationship will
help us achieve this goal. In the fourth quarter of 1998, our Web site attracted
an average of 2.3 million unique visitors per month, who generated approximately
160 million page views, as compared with approximately 1.7 million unique
visitors per month, who generated approximately 124 million page views in the
third quarter of 1998. Our visitor information was based on information provided
to us by DoubleClick, Inc., the company which delivers ads on our Web site and
measures and tracks our users.
THE CBS.MARKETWATCH.COM SITE
The CBS.MarketWatch.com Web site is a comprehensive business and financial
Web site providing up-to-the-minute business news, financial programming and
analytic tools. Our staff of approximately 50 professional journalists,
including freelance journalists, offers real-time coverage of business and
financial news and in-depth commentary on market moving trends and events. We
also offer a wide range of other financial information and subscription services
as well as community features to provide a "one-stop-shop" for our audience.
Recent additions to the CBS.MarketWatch.com Web site include columns by
well-known commentators, enhanced personal portfolio tracking features, hosted
chat rooms, bulletin boards and messaging. We believe that offering
comprehensive business news, financial programming and analytic tools is
critical to its success as it enables us to increase audience loyalty and sense
of community, average usage time and repeat visits.
News and Editorial Content
The CBS.MarketWatch.com front page is carefully designed and regularly
updated throughout the trading day by our journalists and editors to inform our
audience of the important stories of the moment. Unlike many of our Web-based
competitors, we do not rely exclusively on automatic editing and display
systems; instead we leverage our journalistic expertise to add a strong
editorial framework to our content. From the CBS.MarketWatch.com Web site's
"front page," users can access news stories, columns and headlines written by
its reporters and third parties, such as Reuters, Associated Press, and PR
Newswire, as well as stock quotes and other business and financial data and
analytic tools. The CBS.MarketWatch.com
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Web site also offers limited audio and video clips of news reports that were
recently broadcast on the CBS Television Network and CBS Radio by our
correspondents. Users can also search a historical database of news stories by
company name and ticker symbol.
We create and publish on the CBS.MarketWatch.com Web site real-time
commentary and analysis of business and financial news and a number of regular
columns by our experienced editorial staff. News features include real-time
headlines, stock market news and updates and coverage of technology stocks, bond
markets, initial public offerings and other areas of interest to our audience.
These features include:
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UPDATED THROUGHOUT UPDATED SEVERAL UPDATED WEEKLY
EACH TRADING DAY UPDATED DAILY TIMES PER WEEK OR BI-WEEKLY
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Analysts' Changes Daily Calendar The Big Cap Bazdarich on Bonds
Bond Report Analysts' Ratings Clueless Investor Beyond Stocks
Earnings Headlines Earnings Calendar Capitol Reports Cappiello's Take
Earnings Surprises eGgads! Erdman's World Cedd Moses
Futures Movers IPO Daily Report Getting Personal CyberPitch
Hardware Stocks Mutual Fund Center I.P.Onder Deep Pockets
Headlines Press Briefing Irwin Kellner Elaine Garzarelli
Internet Daily Stock Buybacks London Calling Kellner's Forecast
Market Snapshot Stock Splits Mortgages Legal Options
Media Report Thom Calandra's Moscow Report Marder on Markets
Movers & Shakers Stock Watch Options Watch NouveauGeek
Mutual Understanding Weekly Calendar Screamers Roy Blumberg
Net Stocks SoapBox SportsBiz
NewsWatch Telecom Report Stupid Stock Tricks
Silicon Stocks Taxing Times
Software Report Wall Street
Stocks to Watch Eavesdropper
Tech Report Zapman
The Net Economy
Washington Schedule
World Markets
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To broaden its audience appeal, the CBS.MarketWatch.com Web site has other
specialized content areas targeting novice as well as sophisticated investors.
These additional areas include:
Mutual Fund Center. A mutual fund expert provides "Superstar Fund" listings
and edits the CBS.MarketWatch.com Web site's mutual fund section. The Mutual
Fund Center section offers Lipper Mutual Fund Profiles and provides links to
other mutual fund listings, news headlines, quotes and charts. The
CBS.MarketWatch.com Web site also offers a "Fund University" section, which
provides various mutual fund educational information and links to other mutual
fund investing sites.
Personal Finance. The CBS.MarketWatch.com Web site has a Getting Personal
section which features regularly updated columns that provide its audience with
information on a range of investment alternatives and other personal
finance-related topics and creates educational programming on topics such as
finance terminology and investing options.
Tax Guide. The CBS.MarketWatch.com Web site has a seasonal online Tax Guide
giving its audience a resource tool for planning tax strategies and estimating
tax bills. This area provides timely special features that highlight the latest
changes in tax laws and reviews and compares various tax preparation software
packages.
Third-Party Products. We also distribute products and services from some of
the leading names in research and news, such as Baseline, Hoover's, Inc.,
INVESTools, Inc., Investor Communications Business Inc. and Zacks Inc. We
receive a portion of any revenue generated from the sale of these products or
services,
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however, to date, we have not received material revenue from these sources. Our
reporters and editors also use information provided by these services in our
daily news coverage.
Data and Analytic Tools
We offer a variety of data and analytic tools which, together with its
other real time news and programming, are designed to provide a "one-stop-shop"
for the financial and business needs of its audience. These include the
following:
DATA TOOLS
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US Equities Historical Charts
International Equities Technical Charts
US Options Portfolio Management
Mutual Funds Volume Alerts
Futures/Commodities Price Alerts
Foreign Exchange Stock Screener
Fixed Income
Securities Price Quotes. Utilizing data gathered and packaged for online
use by DBC customers, the CBS.Marketwatch.com Web site provides stock quotes
from all major U.S. stock markets. These quotes are offered on a minimum delay
of 15 minutes in the United States in accordance with exchange rules, and of
varying periods from foreign markets. Users can also subscribe to real-time
quote services, MarketWatch RT and MarketWatch Live, through the Web site.
Through these stock quote pages, our audience can link to other valuable
information about a particular company, including related MarketWatch.com news
stories, stories from other news services, summaries of SEC filings and annual
reports, summaries of analysts' information and a variety of fundamental and
technical information about its stock. The CBS.MarketWatch.com Web site also
provides information as to various market and industry indices, commodity
contracts and currency exchange rates.
Portfolios. In an effort to offer the most complete and functional
portfolio tracking system on the Web, the CBS.MarketWatch.com Web site has a
sophisticated portfolio tracking service which offers a variety of features,
including the ability to:
- track up to 200 ticker symbols in multiple portfolios;
- access portfolios from any computer with Web access;
- track options, mutual funds and stocks on all major U.S. and
international exchanges;
- monitor portfolios over a secure connection;
- automatically update portfolio price views every five minutes; monitor
short and long positions;
- view transaction history and capital gains reports; and
- download portfolio reports for use in spreadsheets, thus providing a
wider set of choices for record-keeping.
We are also developing additional features, such as an email alert when one
of a user's portfolio securities trades out of its normal range and
end-of-the-day emails summarizing the portfolio's activity that day. This
service is offered free of charge and users can enroll by completing a simple
online registration form.
Data. The CBS.MarketWatch.com Web site offers a wide variety of data
including trading volume and dollar volume information, corporate share
repurchases, industry and customized local CBS affiliate indices, stock split
information and other data related to global and currency markets.
Analytics. We have developed real-time news products utilizing proprietary
analytical tools. These services typically generate thousands of daily,
real-time headlines based on individual stock activity. If, for
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example, a stock exhibits unusual volume or price activity, the software
generates a real-time headline that alerts investors to that activity. The
CBS.MarketWatch.com Web site also provides information relating to fixed-income
securities and commodities.
Community Features
We believe that providing a place for our audience, financial journalists
and experts in the financial world to meet and share ideas about investing will
help increase brand awareness, motivate users to return to the
CBS.MarketWatch.com Web site frequently and encourage our audience to spend more
time on its Web site. Additionally, because we intend to integrate related news,
market data and charts offered throughout our service, community members will be
able to gravitate towards others who share their specific interests, enabling
them to create niche user groups which can be targeted with relevant marketing
campaigns and transaction opportunities. In addition, because we plan to
integrate other content with these community features, community members will be
exposed to other areas of the site, increasing the awareness of the breadth of
our programming and other services. We believe that the personal and interactive
nature of communicating with other people who share similar interests will help
generate an affinity for the community and increased brand loyalty to
MarketWatch.com.
In the first quarter of 1999, we launched an array of communication tools
designed to facilitate the creation of a larger, dynamic community. This suite
of tools provides our audience with the means for communicating either
privately, using Web-based email and instant messaging, or in affinity group
message boards and chat rooms. In order to participate and to assist us in
targeting advertising, users must complete a registration form and provide
demographic information about themselves.
Our community building efforts are centered on strengthening audience
loyalty, increasing page views across all areas of the site, and providing
opportunities for premium sponsorships, such as sponsoring moderated chat
events. Longer term, as we gather more information about the interests of the
community members, we intend to offer targeted advertising in specialized
discussion groups within the community and pursue electronic commerce
relationships with the goal of entering into revenue sharing relationships based
on transactions derived from community members.
EDITORIAL
We maintain news bureaus in New York City, Washington D.C., San Francisco,
Los Angeles and London, England. Our journalists generate between 600 and 800
finance and business-related, real-time headlines on an average trading day. We
have also devoted additional staff to cover special areas of interest, including
initial public offerings, investment conferences, the fixed income markets,
mutual funds, mortgages, microcap stocks, futures and options and technology
stocks. Also, we intend to expand our industry-based and real-time capital
markets coverage. For example, we recently added columns which cover the
telecommunications and the sports industries and introduced a "spot news" desk
to cover the major relevant stories of the day. MarketWatch.com also receives
live media feeds from PR Newswire and Business Wire, and has access to all major
financial wires and broadcast channels. We also work with CBS News' global
operations and presence to expand our coverage of international business and
financial news. In addition to providing news coverage for the
CBS.MarketWatch.com Web site, our journalists provide financial news to CBS
Television News and CBS Radio news programming. We believe that by providing
news reports for CBS and working with CBS News journalists, it will have the
opportunity to enhance our reputation and audience reach.
Our staff of approximately 50 professional journalists, including freelance
journalists who write for us, are experienced editors, bureau chiefs and
reporters with high standards for reporting and editing. We believe our staff
provides us with a significant competitive advantage. For example, Larry Kramer,
our Chief Executive Officer, was Executive Editor of the San Francisco Examiner,
and a financial reporter and Metro Editor of The Washington Post. Our staff also
includes Thom Calandra, our Editor-in-Chief, who has been a financial columnist
for the San Francisco Examiner, the London-based, lead markets editor for
Bloomberg News and Online Money Editor for USA Today Online; Paul Erdman, a
renowned economist and author; and Irwin Kellner, a former Chief Economist for
Manufacturers Hanover Trust Bank; as well as a number of other
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journalists who previously worked for Bloomberg News, Associated Press, UPI, CBS
Radio news, Fox News Internet and Dow Jones Television. We believe that we are
one of the few Web-based companies which offers this level of journalism.
ADVERTISING AND SALES
We are focused on providing our advertisers with a large, demographically
desirable audience. We believe that our Web site attracts users who as a group
are more affluent and better educated than users of many other Web sites and
therefore represents an attractive medium for companies that advertise and
engage in commerce over the Internet. Advertisements are displayed throughout
the Web site, when a user enters the service, reviews a news story or accesses a
quote or portfolio. Advertising revenues represented 56%, and 73% of our net
revenues for the year ended December 31, 1997 and the year ended December 31,
1998, respectively.
We currently derive, and expect to continue to derive, a substantial
majority of our revenue from advertising sales. We offer a variety of
advertising options that may be purchased individually or in packages such as
"run of site," targeted advertising and sponsorships. Currently we offer the
following advertising options on the CBS.MarketWatch.com Web site:
Run of Site. Run of site rotations are banner advertisements that
rotate on a random basis throughout the CBS.MarketWatch.com Web site,
appealing to advertisers seeking to establish general brand recognition
across MarketWatch.com's audience. Run of site rotations are typically sold
in blocks of 1,000 impressions and generally are sold with a minimum of
100,000 guaranteed impressions over the life of the advertising contract.
MarketWatch.com's current rate card CPM ranges from $15 to $25 depending on
length of contract and number of impressions purchased.
Targeted Advertising. Targeted advertisements are banner
advertisements that are displayed when a user browses through specific news
and quote pages, allowing advertisers to target users based on ticker
symbols requested or by specific areas of interest by advertising on
particular columns. Advertisers can also deliver their advertisements by
region or country, time of day, frequency of use, Internet Service
Provider, type of operating system or browser. Like run of site rotations,
targeted advertisements are sold in blocks of 1,000 impressions. Due to the
greater selectivity of the audience and because users typically spend more
time on news pages than on quote pages, MarketWatch.com's current rate card
CPM for targeted advertisements is generally higher than for run of site
rotations, generally ranging from $19 to $34. In order to enhance the
effectiveness of ad targeting, we are building a database of our registered
users through an email newsletter and securities portfolio tracking
service.
Sponsorships. Sponsorships allow advertisers to gain maximum exposure
on the MarketWatch.com site by featuring "buttons" on certain pages. For
example, eight online brokerage services (Ameritrade, Datek, DLJ Direct,
First Trade, Mr. Stock, Multex, ScoTTrade and Trading Direct) have
purchased premium sponsorship placements to gain fixed positions within the
CBS.MarketWatch.com Web site and thereby present a user with the
opportunity to move directly to the advertisers site to establish an
account or place an order. We offer other sponsorship opportunities
throughout our entire site. Sponsorships are typically sold for a fixed
monthly fee over the life of the contract and may include other advertising
components such as general rotation or targeted banner advertisements.
Content Sidebars. MarketWatch.com also offers fixed location bars, or
content sidebars, on selected high traffic pages to provide advertisers
with greater visibility in order to feature an advertiser's content,
information or tools. MarketWatch.com typically charges premium rates for
the placement of these content sidebars. Content sidebars can also be sold
as part of a sponsorship arrangement.
Historically, MarketWatch.com's advertisers have been from the technology
and financial services industry, but we have recently attracted advertisers from
brands outside of these industries, such as American Airlines, Bell South,
DeBeers, Sprint, Toyota and Volvo. MarketWatch.com believes that attracting
additional advertisers from businesses outside of the financial and technology
industries is important to our future success
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and revenue growth. From our inception (October 29, 1997) through December 31,
1998, more than 100 organizations have advertised on our Web site.
As of December 31, 1997, four customers comprised 53% of our gross accounts
receivable. As of December 31, 1998, four customers comprised 21% of our gross
accounts receivable balance. Sales of news to DBC accounted for 33% and 18% of
revenue for the period from inception (October 29, 1997) through December 31,
1997 and the year ended December 31, 1998, respectively.
Prior to January 1998, we used a third-party service to sell advertising on
our Web site. We are building a direct sales force, which, as of December 31,
1998, consisted of 12 members. We depend on our sales force to sell advertising
on our Web site. This involves a number of risks:
- our sales personnel have, in many cases, 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 from other companies in hiring and retaining
sales personnel.
Our business will be adversely affected if we do not develop and maintain
an effective sales force.
We believe that having an internal direct sales force allows us to better
understand and meet advertisers' needs, increase our access to potential
advertisers and maintain strong relationships with our existing advertising
clients. Our in-house sales staff includes experienced Internet sales personnel
as well as those from traditional media. The staff develops and implements its
advertising strategies by creating value-added packages for advertisers from the
wide range of news columns, editorial opinions and other tools and information
on the CBS.MarketWatch.com Web site, including identifying strategic accounts
and developing presentations and promotional materials and building
relationships with advertising buyers. DoubleClick provides advertising
management and delivery services for the CBS.MarketWatch.com Web site and
provides advertisers with reports describing the delivery of their
advertisements.
To date, relatively few advertisers from industries other than the
technology and financial services industries have devoted a significant portion
of their advertising budgets to Web advertising. If we do not attract
advertisers from other industries, our business could be adversely affected.
STRATEGIC RELATIONSHIPS
We believe that our strategic relationships with our principal investors,
CBS and DBC, allow us to differentiate the CBS.MarketWatch.com Web site as the
preeminent brand for real-time business news and financial programming on the
Web.
CBS
License. In connection with the formation of the LLC, the LLC entered into
a five-year license agreement under which the Web site was renamed
"CBS.MarketWatch.com" and the LLC was granted the right to use the CBS name and
logo as well as CBS Television Network news content in connection with the
CBS.MarketWatch.com Web site during this period. This agreement, as it was
amended and restated immediately prior to the effectiveness of this offering,
which we call the Amended and Restated License Agreement, will expire on October
29, 2005. Under the terms of the Amended and Restated License Agreement,
MarketWatch.com will pay CBS a percentage of Gross Revenues generated by the
CBS.MarketWatch.com Web site. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Amended and Restated License
Agreement will be subject to termination in the event that competitors of CBS
acquire specified amounts of our Common Stock and in other events. See "Certain
Transactions" for descriptions of events which could cause a termination of this
agreement. Subject to certain limitations, CBS will provide us with an aggregate
rate card amount of $30 million of network television, radio and Internet
advertising and promotion commencing from October 1997 through October
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2002. Internet advertising will be limited to five percent of the total
promotion delivered. CBS could terminate this advertising obligation if the
Amended and Restated License Agreement is terminated.
Reporting. We believe we can increase our brand awareness by providing
financial news reports for CBS News and CBS Radio. Our New York City-based
bureau is located in CBS facilities and frequently works with CBS News staff to
generate stories for distribution over the CBS broadcast networks. We have two
television correspondents who file daily reports on CBS Up-to-the-Minute
overnight programming and CBS Newspath, which supplies CBS News video to CBS
affiliated television stations for use in their news programs. Both
correspondents also file customized daily reports to major CBS affiliates via
satellite links, and contribute to the CBS Morning News. Our Editor-in-Chief,
Thom Calandra, files live weekday morning reports on KPIX-TV, the CBS owned
television station in San Francisco, and files reports with CBS in New York for
CBS News. Our correspondents often file reports on CBS Radio news programming,
covering breaking financial stories for the top-of-the-hour CBS Radio news
report that is broadcast over several hundred radio stations nationwide. In
addition, Frank Barnako, one of our reporters, does a twice-daily version of his
Internet Daily column for use by CBS Radio affiliates. We do not receive any
payments from CBS for this reporting. However, all reports delivered by our
correspondents are identified as our reports. Our correspondents file these
reports or provide services to CBS through an understanding we have with CBS
which we believe helps to strengthen our brand awareness. 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.
Non-Competition Provisions. The Amended and Restated License Agreement will
contain certain limited non-competition provisions. However, these provisions
will have certain exceptions and will not otherwise provide for an exclusive
relationship. As a result, there can be no assurance that CBS will not promote,
establish or otherwise provide content for a Web site or Internet service which
competes with MarketWatch.com.
We would need to change the name of our Web site and devote substantial
resources towards building a new brand name if our agreement with CBS were
terminated or not renewed. This agreement also has a number of risks associated
with it. CBS can require us to remove any content on our Web site which it
determines conflicts with, interferes with or is detrimental to its reputation
or business or for certain other reasons. We are also required to conform to
CBS's guidelines for the use of its trademarks. CBS has the right to approve all
materials, such as marketing materials, that include any CBS trademarks. CBS
also has control over the visual and editorial presentation of its television
news content on our Web site. Because of these restrictions, we may not be able
to perform our desired marketing activities.
Our license agreement with CBS will expire on October 29, 2005, and CBS
will have no obligation to renew it. CBS will also have the right to terminate
this agreement if:
- we breach a material term or condition of the agreement;
- we become insolvent or subject to bankruptcy or similar proceedings;
- a competitor of CBS acquires 15% or more of our voting power;
- we issue voting securities to, or actively participate in the acquisition
of our voting power by, a CBS competitor which results in such competitor
directly or indirectly owning 9% or more of our voting power; or
- we discontinue using the MarketWatch trademark and do not establish a
substitute mark acceptable to CBS.
If our agreement with CBS is terminated prior to the end of its term, our
business could be adversely affected.
CBS has agreed, subject to certain limitations, to provide us an aggregate
rate card amount of $30 million of advertising and on-air promotions during the
period from October 29, 1997 through October 29, 2002. 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
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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
Initial Contribution. At our formation, DBC contributed certain assets
related to its DBC Online/News Business which had been operating as departments
within DBC since October 1995. In addition, DBC assigned agreements for
advertising and content, portions of its award-winning Web site, dbc.com, and
its related trademarks, including "MarketWatch" and the MarketWatch.com Internet
domain name.
Data and hosting. DBC currently provides delayed financial data to
MarketWatch.com at no charge. It also provides real-time financial data to
MarketWatch.com for dissemination to subscribers of certain of MarketWatch.com
subscription services in exchange for a percentage of the subscription fee. In
addition, DBC hosts and manages the CBS.MarketWatch.com Web site infrastructure
and provides 24x7 network support.
General Services. DBC will also provide MarketWatch.com with certain
general services, including cash management, accounting services and human
resources services. MarketWatch.com will reimburse DBC for its actual costs of
providing these services.
Payments for News. Under the Amended and Restated Services Agreement, DBC
will also pay us through October 2002 a monthly per-subscriber fee for delivery
of our news to all DBC subscribers, other than certain commercial ones, with a
minimum payment of $100,000 per month.
Non-Competition Provisions. Through October 29, 2005, DBC will not be able
to:
- sell advertising on a Web site that primarily delivers financial news and
comprehensive stock quotes; or
- use the Internet to sell, or authorize another to sell, real-time snap
quotes to individual subscribers.
Although the Stockholders' Agreement will contain certain non-competition
provisions, these provisions will have certain exceptions and do not provide for
an exclusive relationship.
If DBC fails to provide these services satisfactorily, we would be required
to perform these services ourselves or obtain these services from another
provider. Replacing these services could cause us to incur additional costs. We
may not be able to replace these services on commercially reasonable terms or if
we choose to perform these services ourselves, we may not be able to perform
them adequately. During any such transition, our services could be disrupted for
an indefinite period of time and, as a result, we could lose a substantial
number of users and advertisers.
CONTROL BY CBS AND DBC
After our initial public offering on January 15, 1999, CBS and DBC each
owned approximately 38% of our outstanding common stock. CBS and DBC have
certain rights to have representatives on our board of directors generally based
upon the percentage of our voting securities which they hold. Currently, they
each have three representatives. If we issue voting securities, or securities
convertible into or exchangeable for voting securities in the future, subject to
certain limitations, CBS and DBC will each have the right to purchase securities
from us so they can maintain their respective percentage ownerships. In
addition, if either CBS or DBC desires to transfer any shares of common stock
held by it, the other party has a right of first refusal to purchase all or a
portion of those shares, subject to certain exceptions. As a result of their
share ownership and other rights, CBS and DBC collectively will be able to
control our management and affairs, elect a majority of our Board of Directors
and approve significant corporate transactions. This concentration of ownership
and other rights could also delay or prevent a change in control.
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If a competitor of CBS directly or indirectly acquires more than 30% of the
voting power of DBC or substantially all of DBC's assets at a time when DBC
beneficially owns at least 10% of our outstanding common stock, CBS may within
45 days either:
- purchase all of our securities held by DBC; or
- require DBC to place these securities in a trust which would then dispose
of the securities with a view to maximizing the sale price while
disposing of such shares as promptly as reasonably practicable.
DBC would forfeit its Board representation in either event. We cannot
predict which option, if any, CBS would elect in such an event.
MARKETING AND DISTRIBUTION
We are seeking to establish the MarketWatch.com brand as the Web's leading
provider of business and financial information. CBS will agree to provide the
CBS.MarketWatch.com Web site with promotion and advertising with an aggregate
rate card amount of $30 million through October 2002. This promotion and
advertising will be carried or disposed on CBS Television Network programming,
programming on CBS owned and operated television and radio stations and/or
banner advertising on CBS Web sites over the period from October 29, 1997,
through October 29, 2002. These advertising placements may take the form of 30,
15 or 10 second commercial units, scrolls of the CBS.MarketWatch.com URL, on-air
mentioning of our Web site, banner advertising and/or in credit rolls or
sign-offs, with CBS having broad discretion as to the type and manner of
placement. As of December 31, 1998, CBS had delivered $7.1 million rate card
amount of promotion and advertising under this commitment.
CBS has displayed our MarketWatch.com logo and domain name on the CBS
Evening News with Dan Rather, CBS This Morning and on the news programming of
the CBS Television Network and many affiliated television stations. The logo is
usually displayed when business or financial news is covered during the
broadcast. When they occur, these promotional activities give the
CBS.MarketWatch.com Web site national promotion to the over 10.2 million people
who, according to recent national Nielsen Ratings for the television season
through March 1999, watch the CBS Evening News as well as the millions of
additional viewers of other CBS News broadcasts. CBS is not obligated to
continue to display our logo or domain name in this particular manner.
We use journalists' appearances on CBS Television and Radio news broadcasts
and on certain affiliate station broadcasts to highlight the CBS.MarketWatch.com
Web site and increase the association of the Web site with CBS. When making
appearances, our journalist is identified with the MarketWatch brand. The
CBS.MarketWatch.com Web site is also linked directly to the Web sites of CBS and
many of its affiliate television stations. Each time a user at these Web sites
clicks on the "Money" section he or she receives a graphic or story from the
CBS.MarketWatch.com Web site or one of its correspondents and a direct link to
the CBS.MarketWatch.com Web site. We also have an agreement with Westwood One,
America's #1 radio network, to build the CBS.MarketWatch.com Radio Network. As
part of this agreement, we will provide financial market updates to Westwood
One's radio stations across the country.
In addition to our CBS-related promotional activities, we advertise on a
number of heavily trafficked Web sites, such as Yahoo!, Lycos, Excite and
AltaVista, and conduct a variety of other marketing and public relations
programs. These programs include paid advertisements in print publications and
radio broadcasts and participation in personal finance, online journalism and
Internet-related conferences. We intend to increase advertising and marketing
expenditures over their historical levels to continue to build awareness with
its audience. To this end, we launched a national brand building campaign and
intend to make substantial expenditures to advertise our brand and the
CBS.MarketWatch.com Web site in traditional and online media.
We have entered into a number of, and are aggressively pursuing additional,
distribution relationships to enhance our brand name recognition and audience
reach. Key distribution relationships include:
Yahoo! Inc. Yahoo! has agreed to index certain of the
CBS.MarketWatch.com news headlines in the Finance section of Yahoo! with
links to the CBS.MarketWatch.com Web site for the full story. In
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addition, we will advertise on Yahoo! over the 12 month period following
the closing of our initial public offering. We also have a content
distribution relationship with Yahoo! under which we will provide at no
charge a version of our Market Snapshot Report on a daily basis to
registered users of the Investment Challenge fantasy investment game on
Yahoo!'s Finance section.
Quicken.com. Intuit has agreed to display certain of our news columns
and features in portions of its Quicken.com Web site. We will receive a
share of any revenues from the sale of advertising on the Quicken.com pages
which display this content.
CompuServe. CompuServe, ranked among the top Internet Service
Providers (ISP's) and among America Online's (AOL's) key lines of business,
selected CBS.MarketWatch.com to serve as the Financial News Center for its
newly launched service, CompuServe 4.0. CBS.MarketWatch.com created a
comprehensive, customized, cobranded version of the MarketWatch site for
the service.
Universal Feature Syndicate. In June 1998, we entered into an
agreement with Universal Feature Syndicate under which Universal Feature
Syndicate will market certain of the CBS.MarketWatch.com editorial features
to newspapers exclusively in North America and non-exclusively throughout
the world for syndication in print and electronic editions.
News Alert. In March 1998, we entered into an agreement with News
Alert, Inc. under which News Alert will provide certain third-party news
feed collection, databasing and display services for the
CBS.MarketWatch.com Web site. In addition, News Alert may also make certain
of the CBS.MarketWatch.com editorial content available as a news feed to
certain of News Alert's other customers.
Brand Label Quotes Pages. We also seek to increase our revenues and
name recognition by hosting co-branded financial information pages, or
Brand Label Quotes Pages, accessible to visitors of other companies' Web
sites who wish to retrieve market quotations and financial news. The
presence of links on the Brand Label Quotes Pages to relevant
MarketWatch.com news stories also helps drive traffic to the
CBS.MarketWatch.com Web site. Web sites with these Brand Label Quotes Pages
include Web sites operated by American Express Financial Direct, Callaway
Golf, Cigar Aficionado, Conde Naste's cnCurrency.com, Hoover's Inc., IPO
Monitor, iSleuth.com, Jack Carl Futures, National Discount Broker, Proctor
& Gamble, Rocky Mountain News, Muriel Siebert & Co., SportsLine USA, Wall
Street Access, Wine Spectator, and United Media, among others. Generally,
we sell advertising on portions of, and receive hosting fees for these
pages. For the year ended December 31, 1998, revenues from these Brand
Label Quotes Pages have constituted less than 10% of our aggregate
revenues.
We believe that distribution relationships of this type are important to
our continued growth and to increase our exposure to our target audience. We
intend to continue to aggressively pursue additional distribution relationships.
See "Factors that may affect our operating results -- Need to Establish and
Maintain Strategic Relationships with Other Web sites."
SUBSCRIPTION SERVICES
While substantially all of the programming available on the
CBS.MarketWatch.com Web site is currently free of charge, the
CBS.MarketWatch.com Web site offers subscription-based third-party financial
data services which are targeted for sophisticated investors. These services are
currently created and provided by DBC on a non-exclusive basis under a revenue
sharing arrangement. See "-- Strategic Relationships." MarketWatch.com is
developing and, in the future, intends to introduce additional subscription
services, such as exclusive news, commentary and analytic tools.
We act or will act as DBC's sales agent with respect to the following DBC
services in exchange for a fee for new subscribers obtained through the
CBS.MarketWatch.com Web site:
MarketWatch RT. MarketWatch RT is a browser-based, real-time financial data
service providing on demand real-time quotes from the American and New York
Stock Exchanges and NASDAQ. The service is available for a $34.95 monthly fee
which includes non-professional exchange fees of $12.50 for those three
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exchanges. Premium research from Baseline is also available through this
service. DBC pays MarketWatch.com a monthly royalty for each subscriber. DBC
provides all customer and MIS support for this service. In August 1998, we began
marketing MarketWatch RT Wireless, a product for use with hand-held computing
devices such as Windows CE devices and Palm Pilots. In the future, we do not
expect to derive a material amount of revenue from this service.
MarketWatch LIVE. MarketWatch LIVE is a Windows-based, real-time financial
data service providing "streaming" real-time quotes over the Internet from all
major US equity and futures exchanges. The base fee for this product is $79 per
month. Premium research from Baseline is also available through this service.
DBC pays MarketWatch.com a monthly royalty on revenues derived from this
service. DBC provides all customer and MIS support for this service. In the
future, we do not expect to derive a material amount of revenue from this
service.
MarketWatch PRO. In addition, it is the Company's intention to introduce a
new subscription service, MarketWatch PRO, during the second quarter of 1999.
Our Web site also offers, for a fee, third party financial data and other
services through the Web site, such as Hoover's, Inc., which provides company
profiles, Zacks Inc., which provides company earnings estimates, and Baseline,
which provides company research reports. We receive a portion of the revenue
from the sale of these products or services through the CBS.MarketWatch.com Web
site. We do not currently and, in the future do not intend to, derive a material
amount of revenue from these services.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
The CBS.MarketWatch.com Web site is hosted at, and all of its network
operations are controlled from, DBC's facilities in Hayward, California. DBC
provides multiple Web servers which run Microsoft Windows and Microsoft NT
operating systems and use Microsoft Internet Information Server. Internet access
is maintained through multiple DS3 connections with three different tier one
ISPs, UUNET, Digex and MCI. The computer equipment used to operate the
CBS.MarketWatch.com Web site at DBC's facilities is powered by multiple
uninterruptible power supplies. Our operations are dependent upon our ability to
protect systems against damage from fire, earthquakes, power loss,
telecommunications failure, break-ins, computer viruses, hacker attacks and
other events beyond our control. Our insurance policies have low coverage limits
and therefore our insurance may not adequately compensate us for any losses that
may occur due to any failures or interruptions in our systems. DBC is also
developing a redundant network operations center in Salt Lake City, Utah.
However, we do not presently have a formal disaster recovery plan.
We are expanding our internal development group to create new, and enhance
existing, services, tools and features. For example, this group recently
developed a database portfolio application that, among other features, allows
users to track up to 200 ticker symbols each in multiple portfolios and view the
portfolio information through a secure connection. We are also developing an
advanced charting application which is designed to provide intraday ticker and
interval charts. We also utilize third-party technology for certain of its
services and tools. For example, we licensed news database technology to allow
users to search for news stories from multiple third-party sources by ticker
symbol, keyword and news source. We have also entered into an agreement with a
software development firm that will provide a new community application system,
with functionality such as message boards, chat and instant messaging. As of
December 31, 1998, we had 12 personnel dedicated to product and content
development, and for the year ended December 31, 1998, our product development
expenditures were $1.5 million.
In the past, our Web site has experienced significant increases in traffic
when there are significant business or financial news stories. In addition, the
number of our users has continued to increase over time and we are seeking to
further increase our user base. Therefore, our Web site must accommodate a high
volume of traffic and deliver frequently updated information. Our Web site has
in the past and may in the future experience slower response times or other
problems for a variety of reasons.
We also depend on information providers, including DBC, to provide
information and data feeds on a timely basis. Our Web site could experience
disruptions or interruptions in service due to the failure or delay in
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the transmission or receipt of this information. In addition, our users depend
on Internet service providers, online service providers and other Web site
operators for access to our Web site. Each of them has experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. These types of occurrences
could cause users to perceive our Web site as not functioning properly and
therefore cause them to use other methods to obtain their business and financial
news and other information.
Our market is characterized by rapidly changing technology, evolving
industry standards and frequent new product announcements. These are exacerbated
by the recent growth of the Web and the intense competition in our industry. To
be successful, we must adapt to our rapidly changing market by continually
improving the performance, features and reliability of our services. We could
also incur substantial costs if we need to modify our services or infrastructure
in order to adapt to these changes. Our business could be adversely affected if
we incurred significant costs without adequate results or cannot adapt to these
changes.
COMPETITION
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. The number of Web sites on the Internet
competing for consumers' attention and spending has proliferated and we expect
that competition will continue to intensify. We compete, directly and
indirectly, for advertisers, viewers, members and content providers with the
following categories of companies:
- publishers and distributors of traditional off-line media, such as
television, radio and print, including those targeted to business,
finance and investing needs, many of which have established or may
establish Web sites, such as The Wall Street Journal, CNN and CNBC;
- general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to financial and
business-related content and services;
- online services or Web sites targeted to business, finance and investing
needs, such as TheStreet.com and Motley Fool; and
- Web search and retrieval and other online services, such as Excite, Inc.,
Infoseek Corporation, Lycos, Inc., Yahoo! Inc., and other high-traffic
Web sites, such as those operated by Netscape Communications Corporation,
which offer quotes, financial news and other programming and links to
other business and finance related Web sites.
We anticipate that the number of direct and indirect competitors will
increase in the future. This could result in price reductions for its
advertising, reduced margins, greater operating losses or loss of market share,
any of which would materially adversely affect our business, results of
operations and financial condition.
Although the Amended and Restated License Agreement and Stockholders'
Agreement will contain non-competition provisions, these provisions will have
certain exceptions. As a result, there can be no assurance that CBS or DBC will
not promote, establish or otherwise provide content for a competitive Web site
or Internet service.
We believe our programming and content compete favorably with our
competitors, as many of them do not primarily provide real-time coverage by
experienced journalists. However, many of our existing competitors, as well as a
number of potential new competitors, have longer operating histories in the Web
market, greater name recognition, larger customer bases and higher amounts of
user traffic and significantly greater financial, technical and marketing
resources. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies, make more attractive offers
to potential employees, distribution partners, advertisers and content providers
and may be able to respond more quickly to new or emerging technologies and
changes in Web user requirements. Further, there can be no assurance that they
will not develop services that are equal or superior to ours or that achieve
greater market acceptance than our offerings. Increased competition could also
result in price reductions, reduced margins or loss of market share, any of
which could materially adversely affect our business, results of operations and
financial condition.
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The Web, and MarketWatch.com specifically, also must compete with
traditional advertising media, such as print, radio and television, for a share
of advertisers' total advertising budgets. Web companies and MarketWatch.com
would lose revenue if the Web is not perceived as an effective advertising
medium. As a result, there can be no assurance that we will be able to compete
successfully against its current or future competitors or that competition will
not have a material adverse effect on our business, results of operations and
financial condition.
POTENTIAL COMPETITION FROM CBS AND DBC
Although our agreements with CBS and DBC contain certain limited
non-competition provisions, these provisions have certain exceptions and are not
exclusive relationships. For example:
- CBS could license its name and logo to other Web sites or Internet
services that deliver general news, sports or entertainment. These sites
or services could also offer financial news, so long as delivering
comprehensive stock quotes and financial news to consumers in the English
language is not their primary function and their principal theme and
format;
- DBC may provide hosting services to other Web sites;
- DBC could also establish an advertising-supported Web site that does not
have as its primary function and its principal theme and format the
delivery of financial news and stock quotes;
- CBS or DBC could license its content to other Web sites or Internet
services; or
- CBS or DBC could make certain investments in other Web sites or Internet
services.
Any of these could adversely affect us. For example, these sites or
services could compete with us or CBS and DBC might promote these other sites or
services more actively than they promote our Web site.
INTELLECTUAL PROPERTY
We rely primarily on a combination of copyrights, trademarks, trade secret
laws, our user policy and restrictions on disclosure to protect our intellectual
property, such as our content, trademarks, trade names and trade secrets. We
also enter into confidentiality agreements with our employees and consultants,
and seek to control access to and distribution of our other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the content on our Web site or our other
intellectual property without authorization. There can be no assurance that
these precautions will prevent misappropriation or infringement of our
intellectual property. A failure to protect our intellectual property in a
meaningful manner could have a material adverse effect on our business,
operating results and financial condition. In addition, we may need to engage in
litigation in order to enforce our intellectual property rights in the future or
to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of management and
other resources, either of which could have a material adverse effect on our
business, operating results and financial condition.
We license the CBS logo, name and certain news content from CBS pursuant to
the Amended and Restated License Agreement. This agreement could terminate in
certain circumstances and also involves a number of other risks.
We also use certain licensed third-party technology, such as software from
DoubleClick, and data and content from third parties. In these license
agreements, the licensors have generally agreed to defend, indemnify and hold us
harmless with respect to any claim by a third party that the licensed software
or content infringes any person's proprietary rights. There can be no assurance
that the outcome of any litigation between such licensors and a third party or
between us and a third party will not lead to royalty obligations for which we
are not indemnified or for which such indemnification is insufficient, or that
we will be able to obtain any additional license on commercially reasonable
terms if at all. In the future, we may seek to license additional technology or
content in order to enhance our current features or to introduce new services,
such as certain of the community features we may introduce. There can be no
assurance that any such licenses will be available on commercially reasonable
terms, if at all. The loss of or inability to obtain or maintain any of these
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technology licenses could result in delays in introduction of new services until
equivalent technology, if available, is identified, licensed and integrated,
which could have a material adverse effect on our business, results of
operations and financial condition.
Because we license some data and content from third parties, our exposure
to copyright infringement actions may increase because we must rely upon such
third parties for information as to the origin and ownership of such licensed
content. We generally obtain representations as to the origins and ownership of
such licensed content and generally obtain indemnification to cover any breach
of any such representations. However, there can be no assurance that such
representations will be accurate or that such indemnification will be sufficient
to provide adequate compensation for any breach of such representations.
There can be no assurance that infringement or other claims will not be
asserted or prosecuted against us in the future whether resulting from our
internally developed intellectual property or licenses or content from third
parties. Any future assertions or prosecutions could materially adversely affect
our business, results of operations and financial condition. Any such claims,
with or without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel or require us to introduce new
content or trademarks, develop non-infringing technology or enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on acceptable terms, if at all. In the event of a successful
claim of infringement and our failure or inability to introduce new content or
trademarks, develop non-infringing technology or license the infringed or
similar technology on a timely basis, our business, results of operations and
financial condition could be materially adversely affected.
EMPLOYEES
As of December 31, 1998, there were 65 personnel dedicated full time to our
business, 12 of these personnel worked in product and content development, 17 in
sales and marketing, 27 in editorial and 9 in administration. Such personnel are
currently on the payroll of DBC and are provided to us pursuant to the Original
Services Agreement with DBC. Effective as of January 1, 1999, such personnel
became our direct employees. We have never had a work stoppage and no personnel
are represented under collective bargaining agreements. We consider our employee
relations to be good.
We believe that our future success will depend in part on its continued
ability to attract, integrate, retain and motivate highly qualified sales,
technical, and managerial personnel, and upon the continued service of our
senior management and key sales and technical personnel. None of our personnel
is bound by an employment agreement that prevents such person from terminating
his or her relationship at any time for any reason. Competition for qualified
personnel is intense, particularly in the San Francisco Bay Area, where our
headquarters is located. At times we have experienced difficulties in attracting
new personnel. There can be no assurance that we will successfully attract,
integrate, retain and motivate a sufficient number of qualified personnel to
conduct our business in the future.
GOVERNMENT REGULATION
There are currently few laws or regulations that specifically regulate
communications or commerce on the Web. However, laws and regulations may be
adopted in the future that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting certain types of
information and content over the Web. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet Service
Providers and online services providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. This could
increase the cost of transmitting data over the Internet. Moreover, it may take
years to determine the extent to which existing laws relating to issues such as
property ownership, libel and personal privacy are applicable to the Web. Any
new laws or regulations relating to the Web could adversely affect our business.
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FACTORS THAT MAY AFFECT OUR OPERATING RESULTS
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;
- 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 such as our recent
agreement with Yahoo!;
- the amount and timing of our costs related to our marketing efforts or
other initiatives;
- fees we may pay for distribution or content agreements or other costs we
incur as we expand our operations;
- new services introduced by us or our competitors;
- competitive factors;
- technical difficulties or system downtime affecting the Web generally or
the operation of our Web site; or
- economic conditions specific to the Web as well as general economic
conditions.
Therefore, our operating results for any particular quarter may not be
indicative of future operating results.
We expect that over time our revenues will come from a mix of advertising,
content licensing, e-commerce relationships and subscription service fees.
However, we expect to be substantially dependent on advertising revenues for the
foreseeable future. Therefore, our quarterly revenues and operating results are
likely to be particularly affected by the level of our advertising revenue in
each quarter. Our operating expenses are based on our expectations of our future
revenues and are relatively fixed in the short term. If we have lower revenues,
particularly advertising revenues, than we expect, we may not be able to quickly
reduce our spending in response. Our cost structure could also change
dramatically as we increasingly operate independently from DBC. If we continue
to rely on DBC for the services described under "-- Strategic
Relationships -- DBC," 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
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Web site typically fluctuate with the occurrence of significant events in the
business and financial news, such as fluctuations in the stock markets, that
could cause changes in our audience size.
NEED TO DEVELOP AND IMPLEMENT OUR OWN INTERNAL SYSTEMS
Although our predecessor business has been operating since October 1995, we
did not become a separate legal entity until October 1997 when we were formed as
a limited liability company and we introduced our CBS.MarketWatch.com Web site.
We have been and continue to be substantially dependent on DBC to host our
Web site and for many of our financial, administrative and operational services
and related support functions. We may not be able to perform these financial,
administrative, operational and support functions effectively as an independent
company. In addition, we believe that we will need further improvements in these
systems, controls and procedures to manage our growth. Our future financial
performance could be adversely affected if we or DBC do not perform these
functions effectively or if we do not implement these systems, controls and
procedures successfully.
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 December 1998, approximately 12% of our traffic came from
Yahoo!. There is intense competition for placements on these sites, and we may
not be able to enter into such relationships on commercially reasonable terms or
at all. Even if we enter into distribution relationships with these Web sites,
they themselves may not attract significant numbers of users. Therefore, our
site may not receive additional users from these relationships. Moreover, we may
have to pay significant fees to establish these relationships.
Occasionally we enter into agreements with advertisers, content providers
or other high traffic Web sites that require us to exclusively feature these
parties in certain sections of our Web site. Existing and future exclusivity
arrangements may prevent us from entering into other content agreements,
advertising or sponsorship arrangements or other strategic relationships. Many
companies we may pursue for a strategic relationship also offer competing
services. As a result, these competitors may be reluctant to enter into
strategic relationships with us. Our business could be adversely affected if we
do not establish and maintain additional strategic relationships on commercially
reasonable terms or if any of our strategic relationships do not result in
increased use of our Web site.
RISKS RELATING TO OUR ABILITY TO TRACK AND MEASURE THE DELIVERY OF
ADVERTISEMENTS
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
site. We depend on third parties to provide these measurement services. If they
are unable to provide these services in the future, we would be required to
perform them ourselves or obtain them from another provider. This could cause us
to incur additional costs or cause interruptions in our business during the time
we are replacing these services. We are implementing additional systems designed
to record demographic data on our users. If we do not develop these systems
successfully, we may not be able to accurately evaluate the demographic
characteristics of our users. Companies may not advertise on our Web site or may
pay less for advertising if they do not perceive our measurements or
measurements made by third parties to be reliable.
NEED TO EXPAND OUR BUSINESS AND RELATED PROBLEMS
We believe that we will need to expand our business and operations both to
operate as an entity independent from DBC and in order to grow our business.
This growth is likely to continue to place a significant strain on our
resources. As we grow, we will also have to implement new operational and
financial systems, procedures and controls. If we are unable to accomplish any
of these, our business could be adversely affected.
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RISKS OF DEVELOPING NEW AND ENHANCED SERVICES AND FEATURES FOR OUR WEB SITE
We believe that our Web site will be more attractive to advertisers if we
develop a larger audience comprised of demographically-favorable users.
Accordingly, we intend to introduce additional or enhanced services in the
future in order to retain our current users and attract new users. If we
introduce a service that is not favorably received our current users may not
continue using our service as frequently. New users could also choose a
competitive service over ours.
We may also experience difficulties that could delay or prevent us from
introducing new services. Furthermore, these services may contain errors that
are discovered after the services are introduced. We may need to significantly
modify the design of these services on our Web site to correct these errors. Our
business could be adversely affected if we experience difficulties in
introducing new services or if these new services are not accepted by users.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE WEB
Our market is new and rapidly evolving. Our business would be adversely
affected if Web usage does not continue to grow. Web usage may be inhibited for
a number of reasons, such as:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- availability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth or its performance and reliability may
decline. In addition, Web sites have experienced interruptions in their service
as a result of outages and other delays occurring throughout the Internet
network infrastructure. If these outages or delays frequently occur in the
future, Web usage, as well as usage of our Web site, could grow more slowly or
decline.
RISKS ASSOCIATED WITH OUR BUSINESS MODEL WHICH DEPENDS ON WEB ADVERTISING
We expect to derive a substantial amount of our revenues from advertising
for the foreseeable future. No standards have been widely accepted to measure
the effectiveness of Web advertising. If such standards do not develop, existing
advertisers may not continue their current levels of Web advertising.
Furthermore, advertisers that have traditionally relied upon other advertising
media may be reluctant to advertise on the Web. Advertisers that already have
invested substantial resources in other advertising methods may be reluctant to
adopt a new strategy. Our business would be adversely affected if the market for
Web advertising fails to develop or develops more slowly than expected.
Different pricing models are used to sell advertising on the Web. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to project our future advertising rates and revenues. For
example, advertising rates based on the number of "click throughs," or user
requests for additional information made by clicking on the advertisement,
instead of rates based solely on the number of impressions, or times an
advertisement is displayed, could adversely affect our revenues because
impression-based advertising comprises a substantial majority of our current
advertising revenues. Our advertising revenues could be adversely affected if we
are unable to adapt to new forms of Web advertising. Moreover, "filter" software
programs that limit or prevent advertising from being delivered to a Web user's
computer are available. Widespread adoption of this software could adversely
affect the commercial viability of Web advertising.
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
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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.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing and research development
facilities are located in approximately 11,000 square feet of office space in
San Francisco, California leased from CBS. This lease expires in March 2003. See
"Certain Transactions." We believe that our current facilities will be adequate
to meet our needs for the foreseeable future. All of our communications and
network infrastructure is hosted at DBC's facilities in the San Francisco Bay
Area, with a redundant site being implemented in Salt Lake City, Utah. Any
system failure at these locations could lead to interruptions, delays or
cessations in service to users of the CBS.MarketWatch.com Web site, which could
have a material adverse effect on our business, results of operations and
financial condition.
ITEM 3. LEGAL PROCEEDINGS
The Company was not a party to any significant legal proceedings at
December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended 1998
ITEM 4A. EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of MarketWatch.com:
NAME AGE POSITION
---- --- --------
Larry S. Kramer.................. 48 President, Chief Executive Officer and
Director
J. Peter Bardwick................ 40 Chief Financial Officer and Secretary
Thom Calandra.................... 42 Editor-in-Chief and Vice President of
News
William Bishop................... 30 Vice President of Business Development
Scot McLernon.................... 41 Vice President of Advertising Sales
Michele Chaboudy................. 52 Vice President of Marketing
Mr. Kramer has served as President, Chief Executive Officer and a member of
the Board of Directors of MarketWatch.com since October 1997. From February 1994
until October 1997, Mr. Kramer served as Vice President for News and Sports of
DBC. In January 1991, Mr. Kramer co-founded DataSport Inc. ("DataSport"), a
developer of hand-held sports information monitors, and he served as DataSport's
President from its founding until February 1994, when DataSport was acquired by
DBC. Prior to founding DataSport, Mr. Kramer spent more than twenty years in
journalism, including serving as a financial reporter, Metro Editor and
Assistant Managing Editor of The Washington Post, and most recently serving as
Executive Editor of the San Francisco Examiner. He has been a recipient of
National Press Club, Gerald E. Leob and Associated Press Awards. During Mr.
Kramer's tenures at The Washington Post and the San Francisco Examiner, his
staffs at each paper won a Pulitzer Prize. Mr. Kramer serves as a member of the
Board of Directors of American Information Company, which conducts an auto
buying service under the name "Consumers Car Club" through its carclub.com Web
site. Mr. Kramer holds a B.S. degree in Journalism from Syracuse University and
an M.B.A. degree from the Harvard Business School.
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Mr. Bardwick has served as Chief Financial Officer of MarketWatch.com since
June 1998. From June 1996 until June 1998, Mr. Bardwick was Managing Director of
Star Media Capital, a Dallas, Texas-based, boutique investment bank serving the
media and broadcasting industries. From April 1993 until December 1995, Mr.
Bardwick served first as Chief Financial Officer and Executive Vice President,
and then as a consultant to The Beasley Broadcasting Group, a national radio
broadcasting company. Mr. Bardwick previously was also Vice President, Finance,
for Westwood One, Inc., a producer of nationally syndicated radio news and
entertainment programming. (Westwood One is currently affiliated with CBS, but
was not during Mr. Bardwick's employment). He was a Vice President in Corporate
Finance with Salomon Brothers Inc and was with Citicorp Investment Bank prior to
that time. Mr. Bardwick holds a B.A. degree in Political Science from the
University of Michigan and an M.B.A. degree from the University of Michigan,
Graduate School of Business.
Mr. Calandra has served as Editor-in-Chief and Vice President of News of
MarketWatch.com since October 1997. He was Director of News with DBC from April
1996 until October 1997 and was a consultant to DBC from February 1996 until
April 1996. From October 1995 until January 1996, he served as Financial Editor
with USA Today Online, the USA Today newspaper's Web site. Mr. Calandra was
employed by Bloomberg LP, a financial news service, from January 1994 until
September 1995, serving in its London office and holding positions as the lead
markets editor and European financial columnist. From August 1988 until December
1993, he served as financial columnist and business reporter with the San
Francisco Examiner. Mr. Calandra holds a B.A. degree in Arts from City
University of New York and an M.A. degree in English from the University of
Arizona.
Mr. Bishop has served as Vice President of Business Development of
MarketWatch.com since the Company's formation in October 1997. From August 1995
until October 1997, Mr. Bishop was employed by DBC, most recently as Director of
DBC Online. From August 1993 until May 1995, Mr. Bishop attended the Johns
Hopkins University School of Advanced International Studies. Mr. Bishop holds a
B.A. degree in East Asian Studies from Middlebury College and an M.A. degree in
International Economics from John Hopkins University.
Mr. McLernon has served as Vice President of Advertising Sales of
MarketWatch.com since January 1998. From March 1997 until December 1997, he
served as National Director of Advertising Sales with Quote.com, Inc., a
financial news Web site operator. Mr. McLernon was also the National Director of
Internet Strategy with Softbank Interactive Marketing, a subsidiary of Softbank
Corp., a distributor and wholesaler of software and peripheral equipment for
PCs, from March 1996 until March 1997. From June 1994 until March 1996, he
served as Account Manager with Interactive Marketing. From May 1993 until June
1994 he was a sales consultant with Pacific Bell Interactive Services.
Ms. Chaboudy has served as Vice President of Marketing of MarketWatch.com
since May 1998. From January to May 1998, she was a consultant to
MarketWatch.com. From November 1997 until January 1998, she was an independent
marketing consultant. From March 1997 until November 1997, Ms. Chaboudy served
as a Director, responsible for marketing and business development, at the Wired
News division of Wired Digital Inc., a magazine publisher. From September 1996
until March 1997, she was a marketing consultant. From January 1996 until
September 1996, she served as the Senior Vice President for Marketing and Sales
for World Pages Inc., an Internet directory provider. From April 1995 until
December 1995, she was a Director of Urban & Associates, a consulting firm
serving the newspaper industry. Ms. Chaboudy served as Vice President of
Marketing for the Houston Post from May 1993 until April 1995. Ms. Chaboudy
holds a B.A. degree in History from DePauw University, an M.B.A. degree from
Pepperdine University and a Master's degree in Library & Information Sciences
from Indiana University.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since January 15, 1999, our common stock, par value $.01, has been traded on The
Nasdaq Stock Market under the symbol MKTW. the principal market for trading of
our common stock is NASDAQ under the
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symbol MKTW. The approximate number of record holders of our common stock as of
March 19, 1999 was 148 (although we believe there was a greater number of
beneficial owners). We do not intend to pay dividends for the foreseeable
future.
The trading price of the Company's Common Stock has been and may continue to be
subject to wide fluctuations 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 the Company or its
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to the Company, and news reports relating to
trends in the Company's 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 trading price of the Company's Common Stock, regardless of the
Company's operating performance.
ITEM 6. SELECTED FINANCIAL DATA
MARKETWATCH.COM DBC ONLINE/NEWS(1)
--------------------------- --------------------------------------------------
INCEPTION
(OCTOBER 29, INCEPTION
1997) JANUARY 1, 1997 (OCTOBER 1, 1995)
YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, OCTOBER 28, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------ ------------ --------------- ------------ -----------------
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS):
Net revenues...................... $ 7,027 $ 630 $1,172 $ 607 $ --
Gross profit...................... 4,190 482 512 156 --
Operating expenses................ 16,444 563 1,895 2,023 236
Net loss.......................... $(12,413) $ (81) $ (943) $(1,172) $(147)
Basic and diluted net loss per
share(2)........................ $ (1.38) $(0.01)
Shares used to compute basic and
diluted net loss per
Share(2)(3)..................... 9,000 9,000
MARKETWATCH.COM DBC ONLINE/NEWS
------------------------------------- -------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- ----------------- -----------------
BALANCE SHEET DATA (IN
THOUSANDS):
Cash........................... $ 140 $ -- $ -- $ --
Working capital (deficit)...... (5,889) 139 (1,502) (68)
Total assets................... 4,487 237 409 99
Advances from DBC(4)........... 3,946 -- 1,644 178
Total stockholders' equity
(deficit).................... (3,130) 152 (1,320) (147)
- ---------------
(1) Represents the results of operations of the Predecessor Business for the
period indicated.
(2) Reflects the conversion of MarketWatch.com LLC into a corporation as if such
transaction had occurred as of the beginning of the period indicated.
(3) See Note 2 to Notes of MarketWatch.com Financial Statements for information
concerning the number of shares used in computing net loss per share.
(4) Advances from DBC by DBC Online/News at October 28, 1997 was neither paid by
the Predecessor Business nor assumed by MarketWatch.com.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto of MarketWatch.com and the Predecessor Business
which appear elsewhere in this document. The following discussion contains
forward-looking statements that reflect MarketWatch.com's plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this document, particularly in "Factors That May Affect Our Future Operating
Results."
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. The Company completed its 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. It was 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.
The DBC Online/News Business developed the dbc.com Web site to deliver
financial quotes and news to users free of charge. While operating as DBC
Online/News, DBC sold advertising banners and sponsorships and subscriptions to
MarketWatch RT. With the formation of the LLC, the dbc.com site was changed to
the CBS.MarketWatch.com site. Since the formation of the LLC, MarketWatch.com
has operated as a provider of business news, financial programming and analytic
tools, with services including new 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. We have also begun selling news to DBC and
subscriptions to MarketWatch Live.
DBC's principal products are Signal, StockEdge, BMI, InSite, BondEdge and
QuoTrek, which provide real-time streaming quotes and financial market data to
subscribers using the Internet, cable television, FM radio, satellite and direct
telephone lines. DBC developed DBC Online/News with the original intent of
enhancing its existing services to its subscribers. Subsequently DBC began to
sell advertising on the dbc.com Web site. While MarketWatch.com's principal
source of revenue is advertising, DBC's principal source of revenue is
subscriptions. 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.
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AGREEMENTS WITH CBS AND DBC
Upon formation of the LLC, DBC agreed to contribute $2.0 million in cash
and the intellectual property of the DBC Online/News Business for its 50%
ownership interest. DBC simultaneously entered into a five-year services
agreement to provide us with our Web site infrastructure and certain operational
and administrative services at DBC's cost. Under this original Services
Agreement, DBC also agreed to pay us between $2.50 and $5.00 per month for each
DBC subscriber who receives real-time streaming quotes, subject to a minimum of
$100,000 per month. We refer to these payments as the Subscriber Payments. CBS
agreed to contribute $50 million in rate card advertising and promotion over
five years for its 50% ownership interest. CBS simultaneously entered into a
five-year License Agreement to license its CBS "Eye" design and certain CBS news
content, in exchange for royalties approximating 30% of our advertising banner
revenue.
Immediately prior to the closing of our initial public offering, the
agreements were amended so that:
- CBS will contribute $30 million in rate card advertising through October
2002 instead of $50 million,
- the CBS license was extended for three years to October 29, 2005,
- the royalties were modified from 30% of advertising revenue to
approximately 8% of all 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.
RESULTS OF OPERATIONS
Due to the creation of the MarketWatch.com business on October 29, 1997,
the Company's December 31, 1997 statement of operations data includes
information reflecting the ten month period of the predecessor business ending
October 28, 1997 (the "Ten Month Period") and the two month period of the
MarketWatch.com business ended December 31, 1997 (the "Two Month Period"). In
order to provide a meaningful basis for comparing the years ended December 31,
1998 and December 31, 1997, the Ten Month Period has been combined with the Two
Month Period for purposes of the following discussion and analysis.
MARKETWATCH.COM/
MARKETWATCH.COM DBC ONLINE/NEWS DBC ONLINE/NEWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
(IN THOUSANDS)
Net revenues:
Advertising..................... $ 5,115 $ 1,010 $ 303
News to DBC..................... 1,285 210 --
Subscription.................... 627 582 304
-------- ------- -------
Total net revenues...... 7,027 1,802 607
Cost of revenues:
Advertising and news............ 2,398 483 280
Subscription.................... 439 325 171
-------- ------- -------
Total cost of
revenues.............. 2,837 808 451
-------- ------- -------
Gross profit...................... 4,190 994 156
-------- ------- -------
Operating expenses:
Product development............. 1,468 1,071 1,159
General and administrative...... 3,429 1,191 732
Sales and marketing............. 11,547 196 132
-------- ------- -------
Total operating
expenses.............. 16,444 2,458 2,023
-------- ------- -------
Operating loss.................... (12,254) (1,464) (1,867)
Interest expense.................. (159) (181) (90)
-------- ------- -------
Loss before income tax benefit.... (12,413) (1,645) (1,957)
Income tax benefit................ -- 621 785
-------- ------- -------
Net loss.......................... $(12,413) $(1,024) $(1,172)
======== ======= =======
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MARKETWATCH.COM/
MARKETWATCH.COM DBC ONLINE/NEWS DBC ONLINE/NEWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
(AS A PERCENTAGE OF NET REVENUES)
Net revenues:
Advertising................................. 73% 56% 50%
News to DBC................................. 18 12 --
Subscription................................ 9 32 50
---- --- ----
Total net revenues.................. 100 100 100
Cost of revenues:
Advertising and news........................ 34 27 46
Subscription................................ 6 18 28
---- --- ----
Total cost of revenues.............. 40 45 74
---- --- ----
Gross profit.................................. 60 55 26
---- --- ----
Operating expenses:
Product development......................... 21 59 191
General and administrative.................. 49 66 120
Sales and marketing......................... 164 11 22
---- --- ----
Total operating expenses............ 234 136 333
---- --- ----
Operating loss................................ (174) (81) (307)
Interest expense.............................. (2) (10) (15)
---- --- ----
Loss before income tax benefit................ (177) (91) (322)
Income tax benefit............................ -- 34 129
---- --- ----
Net loss...................................... (177)% (57)% (193)%
==== === ====
We have compared below the results of operations of MarketWatch.com/DBC
Online/News for the years ended December 31, 1998 and 1997. We have also
compared the results of operations for MarketWatch.com/DBC Online/News for the
years ended December 31, 1997 and 1996.
The results of operations for DBC Online/News reflect the carve-out
historical results of operations of the online and news businesses of DBC prior
to the formation of MarketWatch.com. These results of operations include all
revenue and costs directly attributable to the DBC Online/News Business,
including costs for facilities, functions and services used by the business at
shared sites and allocations of costs for certain administrative functions and
services performed by centralized departments within DBC. Costs have been
allocated based on DBC management's estimate of the costs that would have been
incurred if the DBC Online/News Business had been a separate entity.
The following are descriptions of the components of revenue and expenses:
- - Advertising revenues consist primarily of sales of advertising banners and
sponsorships.
- - News to DBC revenues are the Subscriber Payments from DBC which represent fees
from the sale to DBC by MarketWatch.com of its news for between $2.50 and
$5.00 per month for each DBC subscriber who receives real-time streaming
quotes, subject to a minimum of $100,000 per month. Prior to the formation of
the LLC, DBC Online/News did not charge DBC for this news. After our initial
public offering, we only receive Subscriber Payments from DBC subscribers
other than certain commercial subscribers.
- - Subscription revenues are from the sale of subscriptions to DBC's MarketWatch
RT and MarketWatch Live products and not from the sale of any proprietary
services of MarketWatch.
- - Cost of revenues for advertising and news includes compensation and benefits
for news reporters and editors, royalties payable to CBS and content
providers, Web site infrastructure costs allocated from DBC, exchange fees and
beginning in 1998, and the cost of serving ads by DoubleClick. Web
infrastructure costs include communications lines, computer equipment, and DBC
network operations personnel costs. All such
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cost incurred are necessary to support both news and advertising revenue
streams. Allocation of costs between each revenue stream has not been made
since all costs would continue to be incurred if we did not have either DBC
news or advertising revenue.
- - Cost of revenues for subscriptions includes exchange fees, communication lines
and royalties paid to DBC.
- - Product development expenses are primarily compensation and benefits for
software developers and expenses for contract programmers and developers.
- - General and administrative expenses consist primarily of compensation and
benefits for finance and administrative personnel, allocations from DBC for
administrative services, occupancy costs, professional fees, depreciation and
charges for bad debts.
- - Sales and marketing costs consist primarily of promotion and advertising
provided by CBS beginning in 1998, Internet banner ads, advertising
commissions, promotional materials and compensation, benefits and sales
commissions to our direct sales force. Sales and marketing expenses prior to
formation of MarketWatch.com were not significant.
See Note 2 to the Financial Statements for a description of how we
recognize our net revenues.
RESULTS OF OPERATIONS -- 1998 COMPARED TO 1997
NET REVENUES
Net revenues for the year ended December 31, 1998 increased compared to the
year ended December 31, 1997 due to increases in the number of banner and
sponsorship ads placed on our web sites. The increases were caused by several
interrelated factors, including the following:
- increased number of advertisers;
- increased audience acceptance of our Web sites and resultant page views;
- increased size 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
secure new advertising contracts from existing customers or obtain new
customers. We expect to continue to derive a substantial majority of net
revenues from selling advertisements. The market for Web advertising is
intensely competitive, 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 for the year ended December 31, 1998 increased compared to
the year ended December 31, 1997 due to the addition of news reporters and
editors, additional network communications lines to accommodate increased
traffic on our sites, and fees payable to DoubleClick to serve ads. Costs
charged by DBC were $441,000 and $221,000 for the years ended December 31, 1998
and 1997, respectively. Royalties to CBS were $307,000 and $0 for the years
ended December 31, 1998 and 1997, respectively. As a percent of net revenues,
cost of revenues decreased by 5% because certain news content and Web
infrastructure expenses are relatively fixed.
OPERATING EXPENSES
Since inception, operating expenses have increased significantly to reflect
the costs associated with the growth and development of MarketWatch.com and our
Web site. We continue to be substantially dependent on DBC for many of our
financial, administrative and operational services and related support
functions. We
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plan to implement independent financial, operational and management controls,
and reporting systems and procedures to support the continued expansion of our
operations. As a consequence, we intend to continue to increase expenditures in
all operating areas to support our planned growth and the development of its
infrastructure.
Product Development. Product development expenses for the year ended
December 31, 1998 increased compared to the year ended December 31, 1997 due to
increased headcount and expenses related to development of software by third
parties. As a percentage of net revenues, product development expenses declined
due to the much greater increase in revenues and the relatively small amount of
such expenses. We intend to increase the absolute dollar level of product
development expenditures in future periods in order to further enhance the
programming on the web site and these expenses may fluctuate as a percentage of
revenue over time depending on the projects undertaken by us from time-to-time.
We include in product development expenses the amortization of deferred
compensation related to options granted below fair market value. Amortization of
deferred compensation was $58,000 and $0 for the years ended December 31, 1998
and December 31, 1997, respectively.
General and Administrative. General and administrative expenses for the
year ended December 31, 1998 increased compared to the year ended December 31,
1997 due to increased headcount, occupancy and bad debts. Costs charged by DBC
were $261,000 and $161,000 for the years ended December 31, 1998 and 1997,
respectively. We anticipate hiring additional personnel and incurring additional
costs related to being a public company, including directors and officers
liability insurance, investor relation programs and professional service fees.
Accordingly, we intend to increase the absolute dollar level of general and
administrative expenses in future periods.
We include in general and administrative expenses the amortization of
deferred compensation related to options granted below fair market value.
Amortization of deferred compensation was $189,000 and $0 for the years ended
December 31, 1998 and December 31, 1997, respectively.
Sales and Marketing. Sales and marketing expenses for the year ended
December 31, 1998 increased compared to the year ended December 31, 1997 due to
a number of factors including:
- promotions and advertising contributed by CBS in 1998;
- development of our direct sales force in 1998, and increased sales
commissions from higher advertising sales;
- increased Web banner ads to promote our products and services; and
- purchase of traditional print and broadcast ads in 1998 to promote our
products and services.
We expect to increase our sales staff and significantly increase the
absolute dollar level of sales and marketing expenses in future periods.
CBS has agreed to provide advertising and promotions over a five-year
period ending October 29, 2002. The Company will record an expense at the time
the advertising and promotion is provided based on the rate card value. The
Company has recorded advertising expense of $7.1 million at the rate card value
for the year ended December 31, 1998 related to services provided by CBS.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1998 compared to December
31, 1997 decreased to a comparatively lower advance balance due to DBC over the
year ended December 31, 1998.
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RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996
NET REVENUES
Net revenues were $1.8 million and $607,000 for years ended December 31,
1997 and December 31, 1996, respectively. The year ended December 31, 1996 was
the first period in which DBC made its Web site and the MarketWatch RT online
service publicly available. The increase in revenue for the year ended December
31, 1997 is primarily attributable to an increase in the number of customers
advertising on the Web site.
COST OF REVENUES
Cost of revenues were $808,000 and $451,000 for the years ended December
31, 1997 and December 31, 1996, respectively. Cost of revenues, as a percentage
of net revenues, for the years ended December 31, 1997 and December 31, 1996,
respectively, were 45% and 74%. The decrease in cost of revenues, as a
percentage of net revenues for the year ended December 31, 1997 is primarily
attributable to advertising revenues increasing while a portion of the costs
associated with providing the advertising remained relatively constant. Included
in cost of revenues are costs allocated from DBC. Allocated expenses were
$221,000 and $160,000 for the years ended December 31, 1997 and December 31,
1996, respectively.
OPERATING EXPENSES
Product Development. Product development expenses were $1.1 million and
$1.2 million for the years ended December 31, 1997 and December 31, 1996,
respectively. Product development, as a percentage of net revenues, were 59% and
191% for the years ended December 31, 1997 and December 31, 1996, respectively.
The decrease in product development expenses in absolute dollars in the year
ended December 31, 1997 is primarily due to high product development costs
incurred during the period from January 1996 through April 1996 in the
development of the Web site and the MarketWatch RT online service.
General and Administrative. General and administrative expenses were $1.2
million and $732,000 for the years ended December 31, 1997 and December 31,
1996, respectively. General and administrative expenses, as a percentage of net
revenues, were 66% and 120% for the years ended December 31, 1997 and December
31, 1996, respectively. General and administrative expenses as a percentage of
net revenues, decreased from the year ended December 31, 1996 due to costs
associated with the implementation of billing systems related to MarketWatch RT
incurred during 1996. Included in general and administrative expenses are costs
allocated from DBC. Allocated expenses were $161,000 and $135,000 for the years
ended December 31, 1997 and December 31, 1996, respectively.
Sales and Marketing. Sales and marketing expenses were $196,000 and
$132,000 for the years ended December 31, 1997 and December 31, 1996,
respectively. Sales and marketing, as a percentage of net revenues were 11% and
22% for years ended December 31, 1997 and December 31, 1996, respectively. Sales
and marketing expenses as a percentage of revenues decreased due to an increase
in net revenue in 1997 and a reduction in advertising costs associated with the
initial promotion of the Web site in 1996. During 1997, substantially all sales
and marketing efforts were outsourced to a third-party firm in order to reduce
costs associated with maintaining an internal staff.
INTEREST EXPENSE
DBC funded the working capital requirements of the DBC Online/News Business
division based upon a centralized cash management system. Interest expense was
$181,000 and $90,000 for the years ended December 31, 1997 and December 31,
1996, respectively. Interest on amounts due to DBC is charged at The Chase
Manhattan National Bank's prime plus 2% (10.50% at December 31, 1997).
INCOME TAX
No benefit for federal and state income taxes is reported in the financial
statements as MarketWatch.com has elected to be taxed as a partnership prior to
the merger of the limited liability company into a corporation.
26
29
Therefore, for the periods presented, the federal and state tax effects of our
tax losses were recorded by the members of the LLC in their respective income
tax returns. Subsequent to the Reorganization, we will account for income taxes
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Had we applied the provisions of
SFAS No. 109 for the period from inception (October 29, 1997) through December
31, 1997, the deferred tax asset generated, primarily from net operating loss
carryforwards, would have been offset by a full valuation allowance.
The DBC Online/News Business has accounted for income taxes in accordance
with SFAS No. 109. The operating losses of the DBC Online/News Business were
included in the consolidated tax returns of DBC and were used to offset taxable
income. Therefore, the DBC Online/News Business has reflected a current tax
benefit related to these tax losses.
LIQUIDITY AND CAPITAL RESOURCES
Since inception on October 29, 1997, we have funded our operations
primarily from cash contributed and advanced by DBC and from revenues from
advertising sales. DBC contributed capital of $218,000 and $1,782,000 to us
during the period from inception (October 29, 1997) through December 31, 1997
and the year ended December 31, 1998, respectively. As of December 31, 1998, we
had a working capital deficit of $5.9 million. In January 1999, we completed our
initial public offering of 3,162,500 shares of common stock which resulted in
net proceeds to the Company of approximately $48.2 million after deducting
underwriting discounts and offering expenses.
Cash used in operating activities was $4.5 million for the year ended
December 31, 1998 compared to $205,000 for the period from inception (October
29, 1997) through December 31, 1997. Significant uses of cash in operations for
the year ended December 31, 1998 include costs associated with increased sales
and marketing activities to establish and to promote our products and services
and increased accounts receivable and deferred offering costs, offset by
accounts payable and accrued expenses for the costs of our initial public
offering.
Cash used in investing activities was $1.1 million for the year ended
December 31, 1998 compared to $13,000 for the period from inception (October 29,
1997) through December 31, 1997 and primarily reflects capital expenditures.
Cash from financing activities were $5.7 million for the year ended December 31,
1998 compared to $218,000 for the period from inception (October 29, 1997)
through December 31, 1997 and primarily reflects contributions and advances from
DBC.
Capital expenditures were $1.1 million for the year ended December 31, 1998
and $13,000 for the period from inception (October 29, 1997) through December
31, 1997. The company does not have any commitments for capital expenditures at
December 31, 1998. However, as of December 31, 1998, we had commitments under
noncancellable operating leases of $1.5 million through March 31, 2003. In
addition, under the terms of our agreements with Yahoo!, we are committed to
make payments for advertising and slotting of $870,000 through 1999. Upon
completion of our initial public offering, the minimum commitment increased from
$870,000 over a twelve month period to $1.6 million over a twelve month period,
beginning upon the closing of the initial public offering. In addition, we are
obligated to pay Yahoo! a fee based on the amount of traffic directed to our Web
site.
To date, we continue to be substantially dependent on DBC for much of our
financial, administrative and operational services and related support functions
including cash management. 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 Limited Liability Company Agreement of the LLC
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 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 December 31, 1998, advances from DBC
under this Credit Agreement were $3.9 million. We used
27
30
a portion of the net proceeds from the initial public offering to repay all
outstanding advances from DBC. See Note 7 to our financial statements.
At October 28, 1997 the DBC Online/News Business owed DBC $2.7 million for
working capital advances which we have not assumed. Subsequent to October 28,
1997, the amounts due to DBC by the DBC Online/News Business have been reduced
by the collection of accounts receivable existing prior to our formation. Any
remaining obligation has remained unpaid.
We expect to incur significantly higher costs, particularly content
creation costs, and sales and marketing costs, in the future to grow our
business. We believe that the net proceeds from our initial public offering,
together with our current cash and cash equivalents, will be sufficient to meet
our anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. We may need to raise funds sooner if we acquire any
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 DISCLOSURE
We rely on DBC's computer and communications networks for the operation of
its Web site, and on DBC's information systems for customer billing, accounting
and administration. DBC has advised us that it has substantially completed a
comprehensive review of its products, information systems and critical suppliers
for year 2000 compliance, and has reported that its computer and communications
networks are year 2000 compliant. DBC is currently installing new billing,
accounting and administrative systems which are scheduled to be fully
operational during 1999 and which have been represented will be fully year 2000
compliant when fully operational. 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 compliance testing completed and
ongoing, 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 its advertising and user
measurement. We have been informed by them that their solutions are, or will be,
year 2000 compliant in all material respects.
We have made no investigation of any of our embedded systems, such as
electrical, heating or telephones. However, if any year 2000 issues arose with
respect to these systems, we do not expect that they would have any materially
adverse effect on our business in the long term.
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. Furthermore, the
purchasing patterns of 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 of operations and financial condition.
We do not presently have a contingency plan for handling year 2000 problems
that are not detected and corrected prior to their occurrence. DBC has advised
us that it has developed certain contingency options in the event of a failure
due to year 2000 issues. Any failure to address any Year 2000 issue could
adversely affect our business, financial condition and results of operations. 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 had in the past. However, we may not be able to replace
DoubleClick with another vendor on reasonable terms, or if we delivered
advertising ourselves, we would not be able to track or measure the advertising
to the same extent as DoubleClick.
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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Accountants........................ 35
Balance Sheets as of December 31, 1998 and 1997........... 37
Statements of Operations for the three-year periods ended
December 31, 1998...................................... 38
Statements of Stockholders' Equity for each of the years
in the two-year period ended December 31, 1998......... 39
Statements of Cash Flows for the three-year periods ended
December 31, 1998...................................... 40
Notes to Financial Statements............................. 41
29
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of MarketWatch.com, Inc.
In our opinion, the accompanying financial statements present fairly, in
all material respects, the financial position of MarketWatch.com, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998 and for the period from inception (October
29, 1997) through December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 12, 1999
30
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Data Broadcasting Corporation
In our opinion, the accompanying statements of operations and of cash flows
present fairly, in all material respects, the financial position of the DBC
Online/News Business, a division of Data Broadcasting Corporation, and the
results of its operations and its cash flows for the period from January 1, 1997
through October 28, 1997 and for the year ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Business' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 15, 1998
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MARKETWATCH.COM, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Current assets:
Cash...................................................... $ 140,000 $ --
Accounts receivable, net of allowances for doubtful
accounts of $226,000, and $10,000, respectively........ 1,586,000 224,000
Prepaid expenses.......................................... 2,000 --
------------ ------------
Total current assets.............................. 1,728,000 224,000
Other assets................................................ 11,000 --
Property and equipment, net................................. 932,000 13,000
Deferred offering costs..................................... 1,816,000 --
------------ ------------
Total assets...................................... $ 4,487,000 $ 237,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,969,000 $ --
Accrued expenses.......................................... 1,688,000 75,000
Deferred revenue.......................................... 14,000 10,000
Advances from DBC......................................... 3,946,000 --
------------ ------------
Total current liabilities......................... 7,617,000 85,000
------------ ------------
Commitments (Note 6)
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 9,000,000 shares issued and outstanding.... 90,000 90,000
Additional paid-in capital................................ 53,366,000 51,925,000
Deferred compensation..................................... (1,144,000) --
Contribution receivable................................... (42,948,000) (51,782,000)
Accumulated deficit....................................... (12,494,000) (81,000)
------------ ------------
Total stockholders' equity (deficit).............. (3,130,000) 152,000
------------ ------------
Total liabilities and stockholders' equity........ $ 4,487,000 $ 237,000
============ ============
The accompanying notes are an integral part of these financial statements.
32
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MARKETWATCH.COM, INC.
STATEMENTS OF OPERATIONS
MARKETWATCH.COM, INC. (NOTE 1) DBC ONLINE/NEWS (NOTE 1)
---------------------------------- ---------------------------
INCEPTION JANUARY 1,
(OCTOBER 29, 1997) 1997
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 28, DECEMBER 31,
1998 1997 1997 1996
------------ ------------------ ----------- ------------
Net revenues:
Advertising (including $233,000
from DBC for the year ended
December 31, 1998).......... $ 5,115,000 $ 320,000 $ 690,000 $ 303,000
News to DBC.................... 1,285,000 210,000 -- --
Subscription................... 627,000 100,000 482,000 304,000
------------ ---------- ----------- -----------
Total net revenues..... 7,027,000 630,000 1,172,000 607,000
Cost of revenues:
Advertising and news........... 2,398,000 92,000 391,000 280,000
Subscription................... 439,000 56,000 269,000 171,000
------------ ---------- ----------- -----------
Total cost of
revenues............. 2,837,000 148,000 660,000 451,000
------------ ---------- ----------- -----------
Gross profit..................... 4,190,000 482,000 512,000 156,000
------------ ---------- ----------- -----------
Operating expenses:
Product development............ 1,468,000 186,000 885,000 1,159,000
General and administrative..... 3,429,000 248,000 943,000 732,000
Sales and marketing............ 11,547,000 129,000 67,000 132,000
------------ ---------- ----------- -----------
Total operating
expenses............. 16,444,000 563,000 1,895,000 2,023,000
------------ ---------- ----------- -----------
Operating loss................... (12,254,000) (81,000) (1,383,000) (1,867,000)
Interest expense................. (159,000) -- (181,000) (90,000)
------------ ---------- ----------- -----------
Loss before income tax benefit... (12,413,000) (81,000) (1,564,000) (1,957,000)
Income tax benefit............... -- -- 621,000 785,000
------------ ---------- ----------- -----------
Net loss......................... $(12,413,000) $ (81,000) $ (943,000) $(1,172,000)
============ ========== =========== ===========
Basic and diluted net loss per
share.......................... $ (1.38) $ (0.01)
============ ==========
Shares used in the calculation of
basic and diluted net loss per
share.......................... 9,000,000 9,000,000
============ ==========
The accompanying notes are an integral part of these financial statements.
33
36
MARKETWATCH.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
--------------------- ADDITIONAL
PAR VALUE PAID-IN DEFERRED CONTRIBUTION ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE DEFICIT TOTAL
--------- --------- ----------- ------------ ------------ ------------ -----------
Capital contribution
receivable from DBC upon
formation (Note 1).......... -- $ -- $ 2,000,000 $ -- $ (2,000,000) $ -- $ --
Capital contribution
receivable from CBS upon
formation (Note 1).......... -- -- 50,000,000 -- (50,000,000) -- --
Issuance of shares to DBC and
CBS at formation (Note 1)... 9,000,000 90,000 (90,000) -- -- -- --
Cash contribution received
from DBC.................... -- -- -- -- 218,000 -- 218,000
Fair value of services
provided by DBC to the
Company..................... -- -- 15,000 -- -- -- 15,000
Net loss...................... -- -- -- -- -- (81,000) (81,000)
--------- ------- ----------- ----------- ------------ ------------ -----------
Balance at December 31,
1997........................ 9,000,000 90,000 51,925,000 -- (51,782,000) (81,000) 152,000
Cash contribution received
from DBC.................... -- -- -- -- 1,782,000 -- 1,782,000
Issuance of compensatory stock
options to employees........ -- -- 1,391,000 (1,391,000) -- -- --
Amortization of deferred
compensation................ -- -- -- 247,000 -- -- 247,000
Fair value of services
provided by DBC to the
Company..................... -- -- 50,000 -- -- -- 50,000
Advertising received from
CBS......................... -- -- -- -- 7,052,000 -- 7,052,000
Net loss...................... -- -- -- -- -- (12,413,000) (12,413,000)
--------- ------- ----------- ----------- ------------ ------------ -----------
Balance at December 31,
1998........................ 9,000,000 $90,000 $53,366,000 $(1,144,000) $(42,948,000) $(12,494,000) $(3,130,000)
========= ======= =========== =========== ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
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37
MARKETWATCH.COM, INC.
STATEMENTS OF CASH FLOWS
MARKETWATCH.COM, INC. (NOTE 1) DBC ONLINE/NEWS (NOTE 1)
------------------------------ ---------------------------
INCEPTION
(OCTOBER 29, JANUARY 1,
1997) 1997
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 28, DECEMBER 31,
1998 1997 1997 1996
------------- ------------- ----------- ------------
Cash flows used in operating
activities:
Net loss.......................... $(12,413,000) $ (81,000) $ (943,000) $(1,172,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Provision for bad debt
expense...................... 216,000 10,000 -- --
Depreciation and
amortization................. 470,000 -- 86,000 63,000
Deferred income taxes.......... -- -- (73,000) (29,000)
Noncash charges from
stockholders................. 7,102,000 15,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable.......... (1,578,000) (234,000) 4,000 (178,000)
Prepaid expenses and other
current assets............ (13,000) -- (64,000) (16,000)
Deferred offering costs...... (1,816,000) -- -- --
Accounts payable and accrued
expenses.................. 3,583,000 75,000 14,000 3,000
Deferred revenue............. 4,000 10,000 2,000 14,000
------------ --------- ---------- -----------
Net cash used in operating
activities.............. (4,445,000) (205,000) (974,000) (1,315,000)
------------ --------- ---------- -----------
Cash flows used in investing
activities:
Purchase of property and
equipment...................... (1,143,000) (13,000) (90,000) (158,000)
------------ --------- ---------- -----------
Cash flows provided by financing
activities:
Contributions from DBC............ 1,782,000 218,000 -- --
Advances from DBC (Note 7)........ 3,946,000 -- 1,064,000 1,473,000
------------ --------- ---------- -----------
Net cash provided by
financing Activities.... 5,728,000 218,000 1,064,000 1,473,000
------------ --------- ---------- -----------
Net change in cash.................. 140,000 -- -- --
Cash at beginning of period......... -- -- -- --
------------ --------- ---------- -----------
Cash at end of period............... $ 140,000 $ -- $ -- $ --
============ ========= ========== ===========
The accompanying notes are an integral part of these financial statements.
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MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS:
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 is jointly owned by Data Broadcasting Corporation ("DBC")
and CBS Broadcasting Inc. ("CBS") (collectively, the "Members"), with each
Member owning 50% of the Company. The operations of the Company are governed by
a limited liability company agreement dated October 29, 1997 (the "LLC
Agreement"). The Company's Web site, CBS.MarketWatch.com, delivers a wide range
of financial news and information, including real-time and delayed market prices
of stocks, bonds, options and mutual funds and original news and commentary from
financial and market analysts, economists and reporters, all of which is
available to viewers. However, certain proprietary information and real-time
market prices are available only through subscriptions to MarketWatch RT and
MarketWatch Live products. The Company operates in one segment. In September
1998, the Company's Board of Directors authorized the reorganization of the
limited liability company into a corporation effective immediately prior to the
IPO. Upon the consummation of the reorganization, the corporation was authorized
to issue 30,000,000 shares of $.01 par value Common Stock of which 9,000,000
shares were issued to the founding Members. The Company was also authorized to
issue 5,000,000 shares of $.01 par value Preferred Stock. All share and per
share data have been retroactively adjusted to reflect the reorganization. (See
Note 8).
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 was required to contribute 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 consists of customer contracts and
intellectual property in return for its ownership position. CBS will provide $50
million of rate card amount advertising and promotions over a period of five
years in return for its ownership position. Under the terms of the Stockholders
Agreement, the $50 million rate card amount has been revised to $30 million upon
completion of the IPO (See Note 8).
In addition, CBS and the Company have entered into a license agreement
dated October 29, 1997 (the "License Agreement") where CBS, in exchange for 30%
of net advertising revenue, as defined, has 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, respectively (See Notes 7 and 8).
Immediately prior to the closing of its IPO, the Company entered into a
Stockholders' Agreement, Amended and Restated Services and License Agreements, a
Registration Rights Agreement and a Revolving Credit Agreement. (See Note 8).
The accompanying financial statements and related notes also reflect the
carve-out historical results of operations and cash flows of the online and news
business ("DBC Online/News" or "Business") of Data Broadcasting Corporation
("DBC"). The Statement of Operations includes all revenues and costs directly
attributable to DBC Online/News, including costs for facilities, functions and
services used by the Business at shared sites and allocations of costs for
certain administrative functions and services performed by centralized
departments within DBC. Cost have been allocated to the Business based on DBC
management's estimate of costs attributable to the operation of the online and
new business. Such costs are not necessarily indicative of the costs that would
have been incurred if DBC Online/News had been a separate entity.
36
39
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR THE INITIAL CAPITALIZATION OF THE COMPANY
The Company has recorded DBC's equity contributions under the Contribution
Agreement at the value of the cash contributed. DBC's contribution of the
intellectual property of the Online/News business has been recorded at its
historical carrying amount, which is zero. DBC contributed none of the tangible
assets or liabilities of the Online/News business; only intellectual property.
The Company has recorded the contribution of the Online/News business at its
historical carrying amount since the fair value of the business is not
objectively determinable by a corresponding contribution of monetary assets by
CBS.
As described above, CBS has committed to provide advertising and promotions
over a five-year period in return for its ownership position. The Company has
recorded the $50 million commitment by CBS as a contribution receivable and will
reduce the receivable and record an expense based on the rate card amount of the
advertising and promotion during the period provided. (See Note 7). Under the
terms of the Stockholders Agreement, the Company recorded a $20 million
reduction to the contribution receivable and additional paid-in capital upon
completion of the IPO (See Note 8).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue recognition
The Company generates its revenues from three primary sources: the sale of
advertising on the Company's Web site, subscriptions to premium services
available through the Web site and the sale of news to DBC.
Advertising revenue, derived from the sale of banner advertisements and
sponsorships on the Company's Web site, is recognized ratably in the period the
advertising is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of a minimum number of "impressions,"
or times that an advertisement is viewed by users of the Company's Web site.
Additionally, certain sponsorship agreements provide links to third-party Web
sites and generate either fixed transaction fees for monthly access or variable
fees which are dependent upon the number of transactions consummated at the
third-party Web site by linked customers. Such amounts are recognized as revenue
in the month earned.
Subscription revenue relates to customer subscriptions to the DBC premium
online services, MarketWatch RT and MarketWatch Live, which provide subscribers
access to real time exchange data and premium analytical products and are sold
through the Company's Web site. Subscriptions are charged to customers' credit
cards and are billed in advance on a monthly basis. Revenue from subscriptions
is recognized ratably over the subscription period. Deferred revenues relate to
subscription fees for which amounts have been collected but for which revenue
has not been recognized.
Revenue related to the sale of news to DBC is recognized in the month the
services are provided.
Revenues from barter transactions are recognized in accordance with the
provisions of Accounting Principles Board Opinion No. 29 ("APB 29") during the
period in which the advertisements are displayed on the Company's Web site.
Under the provisions of APB 29, barter transactions are recorded at the fair
value of the goods or services received. To date, barter transactions have been
insignificant.
Property and equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over its estimated useful life, ranging from three to five
years. Leasehold improvements are depreciated using the straight-line method
over the shorter of their useful lives or the remaining lease term.
37
40
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Basic and diluted net loss per share
The Company computes net loss per share in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS 128 and SAB 98, basic and diluted net loss per share is
computed by dividing the net loss available to common stockholders for the
period by the weighted average number of common shares outstanding for the
period. The calculation of diluted net loss per share excludes all shares of
common stock issuable upon exercise of employee stock options as the effect of
the exercise would be antidilutive.
Product development costs
Product development costs primarily consist of costs attributable to the
development of new products and are expensed as incurred.
The Company develops software which enables users to access information on
its Web site and subscription services. Development costs incurred prior to
technological feasibility are expensed as incurred. The Company defines
establishment of technological feasibility as the completion of a working model.
Software development costs incurred subsequent to the establishment of
technological feasibility through the period of market availability of products
are capitalized. Costs eligible for capitalization have been immaterial for all
periods presented.
Promotion and advertising
Advertising costs are expensed as incurred. Promotion and advertising
provided by CBS under the Contribution Agreement, will be recognized as an
expense and capital contribution during the period in which the services are
provided based on the rate card value of such services (See Note 7). For the
period from inception (October 29, 1997) through December 31, 1997 promotion and
advertising services provided by CBS were not material. For the year ended
December 31, 1998, $7,052,000 was expensed for promotion and advertising
services provided by CBS.
Use of estimates in the financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements. Actual
results could differ from those estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to a significant
concentration of credit risk consist primarily of cash and accounts receivable.
Management deposits all its cash with a single financial institution. Management
periodically performs credit evaluations of its customers' financial condition
and generally does not require collateral on accounts receivable. Most of the
Company's accounts receivable are from Internet-related businesses. As of
December 31, 1997, four customers comprised 53% of gross accounts receivable. As
of December 31, 1998, four customers comprised 21% of the gross accounts
receivable balance. The fair value of accounts receivable approximates cost due
to their short-term nature. Sales of news to DBC accounted for 33% and 18% of
revenue for the period from inception (October 29, 1997) through December 31,
1997 and the year ended December 31, 1998, respectively.
Stock-based compensation
The Company accounts for its stock-based employee compensation agreements
in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and
38
41
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation."
NOTE 3 -- BALANCE SHEET COMPONENTS:
Property and equipment consists of the following:
DECEMBER 31,
---------------------
1998 1997
---------- -------
Computers and equipment....................... $ 628,000 $ 9,000
Leasehold improvements........................ 300,000 4,000
Furniture and fixtures........................ 228,000 --
---------- -------
1,156,000 13,000
Less accumulated depreciation and
amortization................................ (224,000) --
---------- -------
Total property and equipment, net... $ 932,000 $13,000
========== =======
Allowance for doubtful accounts is as follows:
INCEPTION
(OCTOBER 29,
1997)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Balance at beginning of period............. $ 10,000 $ --
Charged to expenses........................ 216,000 10,000
Write-offs net of recoveries............... -- --
-------- -------
Balance at end of period................... $226,000 $10,000
======== =======
NOTE 4 -- 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.
39
42
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The benefit for income taxes consists of the following:
PERIOD FROM
JANUARY 1, 1997
THROUGH YEAR ENDED
OCTOBER 28, DECEMBER 31,
1997 1996
--------------- ------------
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
======== ========
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
$5,135,000.
NOTE 5 -- OPTIONS:
The Members and the management committee of the LLC authorized options to
purchase membership interests in the Company may be granted to officers and
employees of the Company. For the year ended December 31, 1998, the Company
recorded $1,391,000 of deferred compensation expense representing the difference
between the deemed fair value by the Company's Board of Directors of the common
stock on the date of grant and the option exercise price on the date of grant.
Deferred compensation will be amortized over the three year vesting period of
the options. During the year ended December 31, 1998, $247,000 of deferred
compensation was recognized as expense. The fair market value of the membership
interest is determined by the Board of Directors on the date of grant. In
determining the fair market value of the membership interest on each grant date,
the Board of Directors considered, among other things, the value of assets
contributed to the Company from DBC, the Company's absolute and relative level
of revenues and other operating results, the state of the Company's Website
development, the absence of a public trading market for the Company's
securities, the intensely competitive nature of the Company's market and the
appreciation of stock values of a number of generally comparable Internet
companies. Each option converted into an option to purchase the equivalent
percentage of Common Stock upon the reorganization of the limited liability
company into a
40
43
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
corporation, as discussed in Note 8. The following table reflects the option
activity restated to reflect the reorganization.
WEIGHTED
AVERAGE WEIGHTED
OPTIONS EXERCISE AVERAGE
OUTSTANDING PRICE FAIR VALUE
----------- -------- ----------
Options granted at fair value for the periods from
Inception (October 29, 1997) through December 31,
1997............................................. 446,250 $ 4.09 $ 4.09
Options granted at fair value for the year ended
December 31, 1998................................ 231,500 $10.64 $10.64
Options granted below fair during the year ended
December 31, 1998................................ 198,000 $ 5.87 $12.89
Options cancelled for the year ended December 31,
1998............................................. (12,250) $ 4.41 $ 4.41
-------
Options outstanding at December 31, 1998........... 863,500 $ 6.25 $ 7.86
=======
At December 31, 1998, 636,500 options were available for future grant and
144,690 options were vested. The weighted average exercise price and weighted
average remaining contractual life of the vested options are $4.00 and 8.43
years, respectively.
The following table summarizes information about options outstanding at
December 31, 1998:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE
-------------- ----------- ----------- --------
$ 4.00............................................. 563,500 8.93 $ 4.00
$ 6.00 - $ 8.50.................................... 121,750 9.00 $ 7.92
$ 9.50 - $13.00.................................... 132,500 9.32 $11.29
$14.00 - $16.00.................................... 45,750 9.58 $15.01
-------
863,500 9.04 $ 6.25
=======
1998 Equity Incentive and Directors' Stock Option Plan
In September 1998, the Board of Directors adopted, subject to stockholder
approval, the 1998 Equity Incentive Plan (the "1998 Plan") and the 1998
Directors' Stock Option Plan (the "1998 Directors' Plan"). The 1998 Plan and
1998 Directors' Plan became effective upon the completion of the Company's IPO.
An aggregate of 636,500 shares have been reserved for issuance under both plans.
FAIR VALUE DISCLOSURES
The Company applies APB No. 25 and related Interpretations in accounting
for its stock option plan. Had the Company's stock based compensation cost been
determined based on the minimum value at the grant
41
44
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
date for awards under the method prescribed by SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
INCEPTION
(OCTOBER 29, 1997)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------------ ------------------
Net loss:
As reported..................................... $(12,413,000) $ (81,000)
============ =========
Pro forma....................................... $(13,289,000) $(118,000)
============ =========
Net loss per share:
As reported..................................... $ (1.38) $ (0.01)
============ =========
Pro forma....................................... $ (1.48) $ (0.01)
============ =========
The Company calculated the value of each option grant using the minimum
value method with the following assumptions: no dividend yield, weighted average
expected option term of 10 years: risk free interest rates of 5.8% to 5.7%, and
5.5% to 4.6% for the period from inception (October 29, 1997) through December
31, 1997 and for the year ended December 31, 1998, respectively and an expected
volatility factor of 72%.
NOTE 6 -- COMMITMENTS:
Beginning in April 1998, the Company subleases office space for its
corporate headquarters in San Francisco, California from CBS. Rent expense under
the sublease was $137,000 for the year December 31, 1998. Future annual minimum
lease payments under the leases were as follows:
YEAR ENDING DECEMBER 31,
1999..................................................... 322,000
2000..................................................... 335,000
2001..................................................... 348,000
2002..................................................... 362,000
2003..................................................... 90,000
----------
$1,457,000
==========
The Company has entered into employment agreements with two of its officers
which expire in June 2001. Such agreements provide for minimum annual salary
levels ranging from $200,000 to $240,000, as well as annual bonuses of up to 50%
of the base salary.
During August 1998, the Company entered into a license agreement with
Yahoo! Inc. whereby the Company is required to provide news headlines, make
payments for advertising and slotting of $870,000 through 1999 and remit
referral fees monthly based on the number of click-throughs to the Company's
web-site. Payments under the agreement for advertising are expensed in the
period in which the advertising is provided. Payments for slotting fees are
recognized ratably over the term of the agreement. Payments for referral fees
are expensed in the month incurred. Expenses for the year ended December 31,
1998 under this agreement totaled $670,000. Upon completion of the Company's
IPO, the minimum commitment increased from $870,000 over a twelve month period
to $1.6 million over a twelve month period beginning on the first day of the
month following the closing of the IPO.
In September 1998, the Company amended its Web Site Linking and Data
Services Agreement with News Alert, Inc. Under the amended agreement, beginning
in September 1998, the Company is required to
42
45
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
pay a minimum of $20,000 per month over a twelve month period to News Alert,
Inc. for co-branding and hosting charges.
The Company maintains agreements with independent content providers for
certain news, stock quotes and other information. The terms of these agreements
are generally one year, with optional extension periods ranging from one to
three years. At December 31, 1998 minimum payments under these agreements are
$615,000.
NOTE 7 -- RELATED PARTY TRANSACTIONS:
The accompanying DBC Online/News financial statements include costs for
cash management, accounting, legal and network operations, that were provided to
the Business by DBC, in addition to allocated costs for facility charges at
shares sites, including rent and equipment usage. Costs for cash management
accounting, legal and network operations have been allocated to the Business
based on DBC management's estimated percentage of the time spent by DBC
employees on the Business to total department time. The costs for facility
charges are based on the percentage of usage by DBC Online/News to the overall
costs. Such allocations are not necessarily indicative of the costs that would
have been incurred if DBC Online/News had been a separate entity. However,
management believes the differences between the allocated costs and cost to
obtain such services from an outside third party would be insignificant.
Charges allocated to DBC Online/News were $295,000 and $306,000 for the
year ended December 31, 1996 and for the period from January 1, 1997 through
October 28, 1997, respectively. For the year ended December 31, 1996, allocated
charges of $160,000 and $135,000 were included in cost of revenues and general
and administrative expenses, respectively. For the period from January 1, 1997
through October 28, 1997, allocated charges of $191,000 and $115,000 were
included in cost of revenues and general and administrative expenses,
respectively. Other expenses charged by DBC included in the Statement of
Operations represent actual costs incurred by DBC which were directly
attributable to the Business primarily include payroll and related costs,
consulting, commissions, depreciation and access fees for information from
various exchange markets.
DBC funded the working capital requirements of the Business based upon a
centralized cash management system. Interest on amounts due to DBC was charged
at prime plus 2% (10.5% at October 28, 1997). Amounts due under the obligation
to DBC were not assumed by MarketWatch upon formation. Subsequent to October 28,
1997, the amounts due to DBC would be reduced by cash collected by DBC on
existing accounts receivable. Any remaining obligation has remained outstanding.
Prior to the formation of the Company and contribution of the intellectual
property (See Note 1), the Online/News business owed DBC $2.7 million. The
amounts due under this intercompany obligation were not assumed by the Company.
An analysis of DBC's owners net deficit for the Online/News business is as
follows:
JANUARY 1, 1997
THROUGH YEAR ENDED
OCTOBER 28, 1997 DECEMBER 31, 1996
---------------- -----------------
Owners net deficit beginning balance................. $(1,319,000) $ (147,000)
Net loss............................................. (943,000) (1,172,000)
----------- -----------
Owners net deficit ending balance.................... $(2,262,000) $(1,319,000)
=========== ===========
Under the LLC Agreement, DBC will advance the Company up to an aggregate of
$5,000,000 through October 29, 2000. Borrowings bear interest at a variable rate
per annum equal to The Chase Manhattan Bank's prime rate plus 2% (9.75% at
December 31, 1998) and are repayable at such time as the Company has sufficient
cash, as determined by the Members.
43
46
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
An analysis of the advances from DBC to the Company are as follows:
INCEPTION
(OCTOBER 29, 1997)
YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
Balance as of the beginning of the Period.......... $ -- $ --
Expenses paid by DBC on behalf of the Company...... 9,483,000 538,000
Expenses allocated by DBC to the Company........... 755,000 70,000
Royalty fees to DBC................................ 158,000 16,000
News revenue from DBC.............................. (1,285,000) (210,000)
Web advertising revenue from DBC................... (340,000) --
Receivables collected by DBC on behalf of the
Company.......................................... (995,000) (196,000)
Interest payable on advances from DBC.............. 164,000 --
Cash advances (payments) From DBC, net............. (2,212,000) --
Cash contributions................................. (1,782,000) (218,000)
----------- ---------
Balance as of the end of the period................ $ 3,946,000 $ --
=========== =========
The majority of expenditures and liabilities of the Company were incurred
by DBC and directly charged to the Company. These direct charges totaled
$538,000 for the period from inception (October 29, 1997) through December 31,
1997 and $9,483,000 for the year ended December 31, 1998. Direct charges
primarily consist of payroll and related costs, consulting, commissions and
access fees for information from various exchange markets. Additionally, under
the terms of a Services Agreement dated October 29, 1997, DBC will provide the
Company with certain general services which include cash management, accounting,
network operations and hosting of the Company's Web pages and data feeds.
Charges for these services and equipment usage are allocated based upon DBC
management's estimate of costs attributable to the operations of
MarketWatch.com. Such fees totaled $70,000 for the period from inception
(October 29, 1997) through December 31, 1997 and $755,000 for the year ended
December 31, 1998.
The Company is required by the Services Agreement to share net revenue from
its current subscription services with DBC. The Services Agreement requires DBC
to pay the Company 25% and 75% of the Net Revenues of MarketWatch RT and
MarketWatch Live, respectively. The Services Agreement defines "Net Revenues" as
gross subscription fees collected, less various direct costs. These direct
charges included in cost of revenue and totaled $16,000 for the period from
inception (October 29, 1997) through December 31, 1997 and $200,000 for the year
ended December 31, 1998.
The Services Agreement also provides for the Company to sell its
proprietary news and commentary to DBC in exchange for a fee based on the number
of DBC subscribers. These fees amounted to $210,000 for the period from
inception (October 29, 1997) through December 31, 1997 and $1,285,000 for the
year ended December 31, 1998. For the five years ending October 29, 2002, these
fees are subject to a monthly minimum of $100,000.
DBC provided office space at various facilities to the Company through June
30, 1998. The Company has recorded rent expense of $15,000 for the period from
inception (October 29, 1997) through December 31, 1997 and $50,000 for the year
ended December 31, 1998 related to the rent provided by DBC based upon an
allocation methodology using its occupancy percentage and the rental amount paid
by DBC. Management believes the allocation methodology to be reasonable. Such
amounts have been recorded as capital contributions.
Under the Amended License Agreement, the Company is required to pay to CBS
8% on certain net advertising revenues, as defined, in excess of the first
$1,000,000 as compensation for licensing CBS' news content and trademarks. No
amounts have been accrued under the agreement for the period from inception
(October 29,
44
47
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1997) through December 31, 1997. $307,000 has been accrued at December 31, 1998
under the License Agreement.
Under the terms of the Contribution Agreement, CBS will provide advertising
and promotions over a five year period. The Company will record an expense at
the time the advertising and promotion is provided based on the rate card value.
The Company has recorded advertising expense of $7,052,000 at rate card value
for the year ended December 31, 1998 related to advertising and promotion
provided by CBS. As of December 31, 1998, CBS is committed to provide
$22,948,000 rate card amount of advertising and promotions, upon execution of
the Stockholders' Agreement prior to closing the IPO (See Note 8).
An executive of the Company is also a member of the Board of Directors of a
customer. For the period from inception (October 29, 1997) through December 31,
1997, $40,000 of advertising revenues were attributable to this customer. For
the year ended December 31, 1998, $80,000 of advertising revenues were
attributable to this customer.
CBS provides office space at its facility in New York and association with
the CBS name to the Company in exchange for access to certain news content and
news personnel. The Company has not recorded any revenue or expense for this
barter transaction for the periods presented because such amounts are
insignificant.
Under the terms of an insertion order, DBC has committed to purchase
approximately $225,000 of advertising from the Company in 1998 and approximately
$500,000 of advertising from the Company in each of 1999 and 2000. At December
31, 1998, DBC had purchased $233,000 of advertising under the insertion order.
This commitment may be terminated by DBC on 30 days' notice.
NOTE 8 -- SUBSEQUENT EVENTS:
Initial Public Offering
In January 1999, the Company completed an initial public offering of
3,162,500 shares of common stock at $17 per share. The following table sets
forth the Company advances from DBC and stockholders equity (deficit) as of
December 31, 1998 (i) on an actual basis, and (ii) as adjusted to give effect to
the sale of the 3,162,500 shares of Common Stock at $17 per share less the
underwriters discount and deferred offering costs and the reduction of the
advertising commitment from CBS.
DECEMBER 31, 1998
------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Advances from DBC........................................... $ 3,946 $ --
-------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding actual and
as adjusted............................................ -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 9,000,000 shares issued and outstanding
actual; 12,162,500 shares issued and outstanding as
adjusted............................................... 90 122
Additional paid-in capital................................ 53,366 81,518
Deferred compensation..................................... (1,144) (1,144)
Contribution receivable................................... (42,948) (22,948)
Accumulated deficit....................................... (12,494) (12,494)
-------- --------
Total stockholders' equity (deficit).............. $ (3,130) $ 45,054
======== ========
Stockholders' Agreement
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 $30 million in return for a change in the percentage
royalty under the
45
48
MARKETWATCH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
CBS License Agreement Amendment
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 and was not retroactively applied. 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 1998, (A) 8% of Gross Revenues
in excess of $1.0 million and up to and including $51.0 million and (B) 6% of
Gross Revenues in excess of $51.0 million, (ii) 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 (iii) in subsequent years
through the termination of the License Agreement on October 29, 2005, (A) 8% of
Gross Revenues up to and including $50.0 million and (B) 6% of Gross Revenues in
excess of $50.0 million. CBS will have the right to terminate the agreement in
certain circumstances, including breach of a material term or condition of the
agreement, insolvency, bankruptcy or other similar proceeding, discontinuance of
use of the MarketWatch logo without providing an acceptable substitute, or
acquisition or issuance of certain percentages of the Company's Common Stock or
voting power by or to a CBS competitor. In addition, CBS will retain significant
editorial control over the use and presentation of the CBS news content and the
CBS logo and has the ability to prevent the Company from displaying certain
types of content which are unacceptable to CBS. The Amended and Restated License
will expire on October 29, 2005.
The terms of the Amended and Restated License will not prohibit CBS from
licensing its name and logo to certain other Web sites or Internet services. CBS
is also not prohibited from licensing its news content to, or investing in,
another Web site or Internet service.
DBC Services Agreement Amendment
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 provide for certain network Website hosting
performance standards. DBC will also pay the Company a monthly per subscriber
fee ranging from $2.50 to $5.00, subject to a monthly minimum of $100,000
through October 2002, for delivery of the Company's news to all DBC subscribers,
as defined. The term of the Amended Services Agreement will expire on October
29, 2005.
Revolving Credit Agreement
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 under
the LLC Agreement from DBC, will be included against the borrowings under the
Credit Agreement. This Credit Agreement will supercede DBC's loan obligation
under the LLC Agreement described in Note 7.
Registration Rights 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.
46
49
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that we will have filed our definitive proxy statement pursuant to Regulation
14A no later than 120 days after the end of the fiscal year covered by this
report, and certain information is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to our directors is set forth under the caption
"Proposal No. 1 -- Election of Directors" in our definitive Proxy Statement (the
"Proxy Statement") in connection with the Annual Meeting of Stockholders to be
held in May 1999. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth under the caption "Executive Compensation -- Certain Transactions" in
the Proxy Statement. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
[See index on Item 8]
2. Financial Statement Schedule.
All financial statement schedules have been omitted since the required
information is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the financial
statements or notes thereto.
3. List of Exhibits.
The exhibits filed as part of this Form 10-K are listed in the Index to
Exhibits immediately preceding such exhibits, which Index to Exhibits is
incorporated herein by reference.
(b) Reports on Form 8-K.
None.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
47
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1999.
MarketWatch.com, Inc.
By: /s/ LARRY S. KRAMER
------------------------------------
Larry S. Kramer
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LARRY S. KRAMER President, Chief Executive March 31, 1999
- ----------------------------------------------------- Officer and Director (Principal
Larry S. Kramer Executive Officer)
/s/ J. PETER BARDWICK Chief Financial Officer and March 31, 1999
- ----------------------------------------------------- Secretary (Principal Financial
J. Peter Bardwick Officer)
/s/ JOE BRICHLER Controller (Principal March 31, 1999
- ----------------------------------------------------- Accounting Officer)
Joe Brichler
/s/ JAMES A. DEPALMA Director March 31, 1999
- -----------------------------------------------------
James A. DePalma
/s/ ALAN J. HIRSCHFIELD Director March 31, 1999
- -----------------------------------------------------
Alan J. Hirschfield
/s/ ALLAN R. TESSLER Director March 31, 1999
- -----------------------------------------------------
Allan R. Tessler
/s/ MARK F. IMPERIALE Director March 31, 1999
- -----------------------------------------------------
Mark F. Imperiale
/s/ MICHAEL H. JORDAN Director March 31, 1999
- -----------------------------------------------------
Michael H. Jordan
/s/ ANDREW HEYWARD Director March 31, 1999
- -----------------------------------------------------
Andrew Heyward
/s/ ROBERT LESSIN Director March 31, 1999
- -----------------------------------------------------
Robert Lessin
/s/ DANIEL MASON Director March 31, 1999
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Daniel Mason
48
51
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE
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2.01 Merger Agreement dated January 13, 1999, entered into by
MarketWatch.com, LLC (the "LLC") and the Registrant
3.01 Registrant's Amended and Restated Certificate of
Incorporation
3.02 Registrant's Bylaws, which are incorporated herein by
reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-65569) filed with the Securities and
Exchange Commission (the "SEC") on October 13, 1998 (the
"Registration Statement.").
4.01 Form of Specimen Stock Certificate for Registrant's Common
Stock, which is incorporated herein by reference to the
Registration Statement
4.02 Registration Rights Agreement dated January 13, 1999,
entered into among the Registrant, CBS Broadcasting Inc.
(formerly known as CBS Inc.) ("CBS") and Data Broadcasting
Corporation ("DBC").
4.03 Stockholders' Agreement dated January 13, 1999, entered into
among the Registrant, the LLC, CBS and DBC.
10.01 Form of Indemnity Agreement entered into by Registrant with
each of its directors, which is incorporated herein by
reference to the Registrant's Amendment No. 3 to the
Registration Statement, filed with the SEC on January 13,
1999.
10.02 Limited Liability Company Agreement of the LLC, dated
October 29, 1997, between CBS and DBC, which is incorporated
by reference to the Registration Statement.
10.03 Contribution Agreement dated October 29, 1997 among the LLC,
CBS and DBC, which is incorporated by reference to the
Registration Statement.
10.04 License Agreement dated October 29, 1997 between the LLC and
CBS, which is incorporated by reference to the Registration
Statement.
10.05 Services Agreement dated October 29, 1997 between the LLC
and DBC, which is incorporated by reference to the
Registration Statement.
10.06 Lease dated as of August 27, 1998 between the Registrant and
CBS Corporation, which is incorporated by reference to the
Registration Statement.
10.07 Amended and Restated License Agreement dated January 13,
1999, entered into by and between the Registrant and CBS.
10.08 Amended and Restated Services Agreement dated January 13,
1999, entered into by and between the Registrant and DBC.
10.09 Revolving Credit Agreement dated January 13, 1999, entered
into by and between the Registrant and DBC, together with
Revolving Promissory Note dated January 13, 1999, made by
the Registrant in favor of DBC.
10.10* Form of Non-Plan Option, which is incorporated herein by
reference to the Registration Statement.
10.11* Registrant's 1998 Directors Stock Option Plan, which is
incorporated herein by reference to the Registration
Statement.
10.12* Registrant's 1998 Equity Incentive Plan, which is
incorporated herein by reference to Amendment No. 2 to the
Registration Statement, filed December 16, 1998.
10.13* Employment Agreement dated as of July 1, 1998 between the
Registrant and Lawrence Kramer, which is incorporated herein
by reference to the Registration Statement.
10.14* Employment Agreement dated as of July 1, 1998 between the
Registrant and J. Peter Bardwick, which is incorporated
herein by reference to the Registration Statement.
10.15 Insertion Order dated as of August 25, 1998 between DBC and
the LLC, which is incorporated herein by reference to the
Registration Statement.
27.01 Financial Data Schedule (EDGAR Version Only).
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* Indicates a management contract or compensatory plan or arrangement.