-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KjLcFBYCOygLenZ93zUFrQcZDG+XdQh7ksalMbNbKFUQsnSUacW+ziNIE/PWNHIZ k9YtUsbX2YFCqBzphFUzcg== 0000895345-05-000161.txt : 20050214 0000895345-05-000161.hdr.sgml : 20050214 20050214091901 ACCESSION NUMBER: 0000895345-05-000161 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050214 ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050214 DATE AS OF CHANGE: 20050214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOW JONES & CO INC CENTRAL INDEX KEY: 0000029924 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 135034940 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-07564 FILM NUMBER: 05602925 BUSINESS ADDRESS: STREET 1: 200 LIBERTY ST CITY: NEW YORK STATE: NY ZIP: 10281 BUSINESS PHONE: 2124162000 MAIL ADDRESS: STREET 1: 200 LIBERTY ST CITY: NEW YORK STATE: NY ZIP: 10281 8-K/A 1 lh8ka.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 14, 2005 (January 20, 2005) DOW JONES & COMPANY, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-7564 13-5034940 (State or other (Commission File (I.R.S. Employer jurisdiction Number) Identification No.) of incorporation) 200 Liberty Street, New York, New York 10281 (Address of principal executive offices) (ZIP CODE) Registrant's telephone number, including area code: (212) 416-2000 Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) This Current Report on Form 8-K/A amends and supplements the Current Report on Form 8-K filed by Dow Jones & Company, Inc. ("Dow Jones" or the "Company") on January 26, 2005 in connection with the Company's acquisition of MarketWatch, Inc. ("MarketWatch"), which was completed on January 21, 2005. Pursuant to an Agreement and Plan of Merger, dated as of November 14, 2004, entered into by and among MarketWatch, Dow Jones and Golden Acquisition Corp. ("Merger Sub"), Merger Sub merged with and into MarketWatch with MarketWatch as the surviving corporation (the "Merger"). The Company's Current Report on Form 8-K dated January 26, 2005 is being amended to include (1) supplemental information under Item 7.01, (2) the audited and unaudited financial statements of MarketWatch required by Item 9.01 (a), and (3) the pro forma financial information required by Item 9.01 (b). ITEM 7.01. REGULATION FD DISCLOSURE Dow Jones is providing the following supplemental information, which was contained in offering material used in connection with a financing transaction: 1. a discussion of certain risks and uncertainties relating to Dow Jones' business and the Merger under the heading "Forward-Looking Statements" below; 2. a description of Dow Jones under the heading "Dow Jones & Company, Inc." below; and 3. a summary description of the Merger and MarketWatch under the heading "The MarketWatch Acquisition" below. The information contained in this Current Report on Form 8-K/A is neither an offer to sell nor a solicitation of an offer to buy any of the Company's securities. In accordance with General Instruction B.2 of Form 8-K, the information set forth in this Item 7.01 shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. The information set forth in this Item 7.01 shall not be deemed an admission as to the materiality of any information in this report on Form 8-K/A that is required to be disclosed solely to satisfy the requirements of Regulation FD. As used in the supplemental information provided herein, all references to "Dow Jones," "the Company," "we," and "our" and all similar references are to Dow Jones & Company, Inc., unless otherwise expressly stated or the context otherwise requires. SUPPLEMENTAL INFORMATION 1. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of us. We and our representatives may, from time to time, make written or verbal forward-looking statements, including statements contained herein (including information incorporated by reference herein). Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate," "will," and similar expressions, herein (including information incorporated herein by reference), in future filings with the SEC, in our press releases and in oral statements made by our representatives, identify statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and that are intended to come within the safe harbor protection provided by those sections. The forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risk and uncertainties that could cause actual results to differ materially from anticipated results. Such risks and uncertainties include, but are not limited to: Risks Relating to Our Business Advertising Revenues We derive a majority of our revenue from advertising, primarily in connection with our print publications and our online network of web sites. Our overall performance in print publishing is largely dependent on the operating performance of the global Wall Street Journal (including its extended online and television brand and content), which, to a significant extent, is dependent upon business-to-business ("B2B") advertising generated by the distinctive demographic profile of The Wall Street Journal's audience. Our advertising revenues are negatively impacted by economic downturns in any of our advertising markets, but particularly by downturns in our core market, B2B advertising. We have recently experienced depressed levels of advertising in the B2B market, and B2B advertising buyers continue to make spending decisions increasingly closer to publication dates, generally on a month-to-month basis. Our B2B advertising levels, particularly in technology and finance, which have typically represented approximately 40% of The Wall Street Journal's advertising linage, may or may not return to historical levels. We have experienced decreases in technology advertising, particularly computer software and communications advertising, which we believe may be a result of reduced corporate information technology spending and generally reduced levels of technology company profits and share prices. We have also experienced decreases in financial advertising, including weakness in retail financial advertising, which we believe may be due to retail financial institutions focusing on reaching more mass consumer audiences through advertisements in media that target these audiences, and a decline in tombstone ads, which we believe may be a result of reduced deal activity and changing advertising practices. Although we have taken initiatives (including the 2002 introduction of our Personal Journal section of The Wall Street Journal and our new Weekend Edition, which will be a weekend publication of The Wall Street Journal beginning in September 2005) to attract more consumer advertising and other diversified advertising, we may or may not be able to further penetrate these new consumer advertising segments. In particular, The Wall Street Journal's broad national circulation limits our ability to provide certain local advertising to consumers, which advertising is featured in the regional publications of some of our competitors. Furthermore, our new Weekend Edition may fail to generate anticipated advertising revenues, resulting in greater losses than are currently expected in its first two years of operation. In addition, the new Weekend Edition may draw advertising away from our other consumer advertising sections, such as the Weekend Journal section of The Wall Street Journal (introduced in 1998) and Personal Journal, for consumer advertising revenues. Our community newspapers rely on advertising revenue from local advertisers. These revenues may be negatively impacted by the condition of the economy in the areas where our community newspapers are circulated and by the advertising habits of large regional advertisers who may change their spending patterns or go out of business. Circulation Revenues Circulation revenues from our publications, in particular The Wall Street Journal, are another significant source of revenue for us. Our circulation revenue may be impacted by competition from other publications and other forms of media. In addition, the nature of The Wall Street Journal's circulation base, especially its distinctive demographics (in particular, its influential and affluent audience that makes significant B2B spending decisions and spends heavily on personal consumption items), is an important factor in generating circulation and advertising revenues. If we are unable to maintain our core demographic audience, our overall profitability could decline. Our circulation revenues at The Wall Street Journal and community newspapers may be negatively impacted by the preferences of many younger consumers for news in new media formats and from untraditional sources rather than from newspapers. If these younger consumers maintain these preferences as they age, this development could, in turn, adversely affect the willingness of advertisers to place ads with us and/or the rates they are willing to pay. Although we seek to cost-effectively maintain our circulation base and its distinctive demographics (including by implementing content, organization and design changes to The Wall Street Journal), we may not be successful in doing so. In addition, we may incur additional costs to do so and we cannot assure you that we will be able to recover these costs through increased circulation and advertising revenues. Subscriptions Certain of our electronic publishing businesses, including Dow Jones Newswires, are subscriber-based and are vulnerable to losses in the number of subscribers. For example, Dow Jones Newswires could lose subscriptions, measured by the number of terminals carrying Dow Jones Newswires, as a result of business consolidations and layoffs in the financial services industry. Similarly, WSJ.com, which currently is the largest paid subscription news site on the Internet, may not be able to continue to increase revenues through growing the number of subscribers. Unlike WSJ.com, our competitors do not, for the most part, utilize a full online paid subscription model, and most remain free web sites. Seasonality Our results of operations are subject to seasonal fluctuations, which typically cause revenues in the third quarter (which includes the months of July and August) to be lower than revenues in the remainder of the year. Cost Structure We have engaged in cost-cutting over the last several years, but we may not be able to continue limiting our expense growth. Factors that may impact our ability to control expense growth in the future include our prior cost cutting, the tightening of the labor market and the resulting risk of loss of key employees, and our planned growth initiatives, such as our acquisition of MarketWatch, Inc. ("MarketWatch") and our new Weekend Edition. If we are unable to continue to control expense growth in the future, there may be an adverse effect on our overall profitability. Competition All of our products and services face intense competition from other newspapers, national business magazines, television, trade publications, newsletters, research reports and services, free and paid Internet sites, and other new media. We compete for advertising revenues, subscriptions and consumers, which include readers, online users and television viewers. Metropolitan general interest newspapers and many small city or suburban papers carry business and financial content, as do many Internet-based services as well as television and radio. In addition, specialized magazines in the business and financial field, as well as general news magazines, publish substantial amounts of business-related material. The Wall Street Journal also competes for advertising with non-business publications offering audiences of high demographic quality, such as technology and lifestyle magazines. Circulation revenues at our community newspapers may be negatively impacted by local competition, including free publications. Nearly all of these other publications and services seek audiences and seek to sell advertising, making them competitive with our publications and services. Our efforts to expand in Europe have been limited by substantial competition from local language publications, other international publications, and local and international television networks, as well as the limited nature of the foreign language market which we serve. In Asia, our presence with our Pan-Asia publications may be threatened by developments within the region such that readers may prefer local language or local market publications. As the economies of the various individual Asian nations develop over time, we may encounter further difficulties in continuing to appeal to a broader Pan-Asian audience. Our Dow Jones Newswires business and financial news products are distributed through a limited number of vendors, which distribute our news over their platforms into financial services companies, that receive our content by way of subscriptions with these vendors. Newswires has entered into a bundling arrangement to deliver a selection of our news on all Moneyline Telerate terminals worldwide; this arrangement is important to Newswires' international revenues and may be adversely affected by the impending acquisition by Reuters of the Moneyline Telerate business. Moreover, sales of our Dow Jones Newswire products may continue to be negatively impacted by technological changes and changes in the brokerage industry, which have resulted in a diminishing reliance on real time news as business and financial news has become increasingly available via Internet-based publications and services. In addition, as we strive to increase our international revenues from the Dow Jones Newswires business, we may not succeed given the competition from and subscribers' desire for, local language news services. There can be no assurance that we will be able to increase or to maintain the advertising, readership, circulation or subscriptions market share that we currently enjoy. In addition, changes in the regulatory and technological environment are bringing about a global consolidation of media and telecommunications companies and convergence among various forms of media. As a result, our operations could face increased competition from larger media entities. Intellectual Property We rely on a combination of trademarks, trade names, copyrights, and other proprietary rights, as well as contractual arrangements, including licenses, to establish and protect our intellectual property and brand names. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position. Dow Jones Indexes licenses, sometimes exclusively, our proprietary indexes and trademarks to exchanges and financial institutions for use as the basis of financial products. For example, Dow Jones has licensed the Dow Jones Industrial Average index and related trademarks to the American Stock Exchange as the basis of the DIAMONDS exchange-traded fund. Two lawsuits relevant to the index licensing industry are pending in the U.S. District Court for the Southern District of New York. Each of these suits is testing an index provider's ability to enforce its intellectual property rights with respect to certain licensing activities. Although we are not a party to either lawsuit, if the index provider's intellectual property rights are successfully challenged, our ability to license our own index-related property for certain uses may be impaired and our revenues related to such licensing activities could be negatively impacted. Acquisitions From time to time, we seek out strategic and financially attractive acquisition opportunities. Such acquisitions may affect our costs, revenues, profitability and financial position. Acquisitions, including our recent acquisition of MarketWatch, involve risks and uncertainties, including difficulties in integrating acquired operations, diversions of management resources and loss of key employees, challenges with respect to operating new businesses, debt incurred in financing such acquisitions (including the related possible reduction in our credit ratings and increase in our cost of borrowing) and unanticipated problems and liabilities. New Business Opportunities and Strategic Alliances There are substantial uncertainties associated with our efforts to leverage our brands to develop new business opportunities and to generate advertising and other revenues from these products. Initial timetables for the introduction and development of new products or services may not be achieved and price and profitability targets may not prove feasible. For example, we may be unable to successfully control expenses relating to the launch of our new Weekend Edition and may not achieve the gains from advertising revenues that we hope to achieve. We also face challenges in our attempts to achieve new strategic alliances and to improve the growth and profitability of existing strategic alliances. For example, we occasionally make non-controlling minority investments in public and private entities. We may have limited voting rights and, therefore, an inability to influence the direction of such entities. Therefore, the success of these ventures may be dependent upon the efforts of our partners, fellow investors and licensees. In addition, external factors, such as the development of competitive alternatives and market response, may negatively impact the success of these new opportunities and alliances. MDC/Cantor Fitzgerald Legal Proceeding We are currently party to a legal proceeding with Market Data Corp. ("MDC") and Cantor Fitzgerald Securities with respect to our obligations, if any, under a guarantee issued to MDC and Cantor Fitzgerald Securities. The guarantee relates to certain annual "minimum payments" owed through October 2006 by Telerate under certain conditions for data acquired by Telerate from Cantor Fitzgerald Securities and MDC under contracts entered into by Telerate when Telerate was a subsidiary of ours. We have established a reserve ($259.2 million as of September 30, 2004) to cover payments we may need to make if we are required to perform under the guarantee to Cantor Fitzgerald Securities and MDC. However, if we are required to make payments under this guarantee, whether pursuant to a judgment in the litigation or a settlement agreement, those payments would negatively impact our cash flow. Labor Relations Approximately 28% of our full-time employees is unionized. As a result, we are required to negotiate the wages, salaries, benefits, staffing levels and other terms with many of our employees collectively. Our results could be adversely affected if labor negotiations caused work interruptions or if we are unable to negotiate agreements on reasonable terms. In addition, in light of our efforts to manage expenses, we may face difficulties in attracting and retaining qualified personnel, particularly as the labor market tightens and more opportunities are available elsewhere with higher wages. Newsprint Prices Newsprint is our single most important raw material and represented approximately 7.5% of our total operating expenses in each of 2003 and 2004. The price of newsprint has historically been volatile. Consolidation in the North American newsprint industry has reduced the number of suppliers. This has led to paper mill closures and conversions to other grades of paper, which, in turn, have decreased overall newsprint capacity and increased the likelihood of price increases in the future. Our operating results could be adversely affected if newsprint prices increase significantly. World Events Our results of operations may be affected in various ways by events beyond our control, such as wars, political unrest, natural disasters and acts of terrorism. The September 11th terrorist attacks in the United States and the war in Iraq each contributed to a downturn in the U.S. domestic economy that, in turn, resulted in a temporary decline in advertising. Similar events may occur in the future and could have a material adverse effect on our operating results. Risks Relating to Marketwatch In addition to the acquisition-related risks described under "--Risks Relating to Our Business - Acquisitions" above, in connection with our acquisition of MarketWatch, we face the risk that the market for online advertising will not grow as rapidly as we expect or that we will ultimately be unable to capitalize on any such growth. Like our other online products and services, the MarketWatch business is vulnerable to the following risks and uncertainties, among others: competition for readers and advertising revenues; changes in demand for its products and services, including its licensing business; fluctuations in traffic levels on its web sites; and potential increased regulation, including with respect to privacy laws. --------------- The foregoing discussion of risks and uncertainties is not exhaustive, and we have disclosed other risks and uncertainties in our reports filed with the SEC. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. If any of these risks and uncertainties develops into actual events, these developments could have material adverse effects on our business, properties, results of operations or financial position. For these reasons, we caution you not to place undue reliance on our forward-looking statements. 2. Dow Jones & Company, Inc. We are a provider of global business and financial news and information through newspapers, newswires, magazines, the Internet, indexes, television and radio. In addition to The Wall Street Journal and our international and online editions, we publish Barron's, Dow Jones Newswires and Dow Jones Indexes. We also provide news and information of general interest to local communities through our Ottaway group of community newspapers throughout the U.S. We are co-owner with Reuters Group of Factiva, with Hearst of SmartMoney and with NBC Universal of the CNBC television operations throughout Asia and Europe. We also provide news content to CNBC and radio stations in the U.S. We have determined the following three reportable segments based on the manner in which we manage our business: print publishing, electronic publishing, and general-interest community newspapers. Over the three years ended 2004, approximately 60% of our revenues has been derived from the print publishing segment, with the remaining 40% divided almost equally between our general-interest community newspapers and our electronic publishing segments. PRINT PUBLISHING Print publishing, which is largely comprised of the global print editions of The Wall Street Journal, publishes business and financial news and information in the U.S., Europe, Asia and Latin America and on CNBC television. The Wall Street Journal utilizes a global management structure with shared news flows and workforce and a global advertising customer base and pricing. Through a licensing agreement with NBC Universal, The Wall Street Journal provides branding, news content and on-air expertise to CNBC, as a further extension of The Wall Street Journal brand and the content it produces. Print publishing also includes our Barron's weekly magazine. Our overall performance in print publishing is largely dependent on the operating performance of the global Wall Street Journal (including its extended U.S. television brand and content), which, in turn, is largely dependent on B2B advertising revenue, particularly from the financial and technology sectors. U.S. Publications The Wall Street Journal, our flagship publication, is one of the country's largest daily newspapers with average print circulation of 1,810,000 in 2004. The Wall Street Journal's three major national editions are printed at 17 printing plants located throughout the U.S. The Wall Street Journal also sells regional advertising in 18 regional editions. The Wall Street Journal has an overall daily print capacity of 96 pages, including 24 pages of color. In addition to its business coverage, The Wall Street Journal also covers the "business of life" with its Personal Journal section, which launched in 2002 and runs every Tuesday, Wednesday and Thursday, and Weekend Journal section, which debuted in 1998 and runs every Friday and includes pages devoted to travel, wine, sports, shopping, residential real estate and the arts. The Wall Street Journal also publishes special reports at various times of the year on topics such as technology, personal finance and executive compensation, e-commerce, and health and medicine as well as demographically targeted sections devoted to subjects of retirement and small business. In September 2004, we announced the September 2005 launch of the Weekend Edition of The Wall Street Journal, which is a key element of our 2005 to 2007 strategic plan. We expect the launch of the Weekend Edition will build off the success of our Weekend and Personal Journal sections in attracting more consumer-oriented advertisers and reducing our reliance over time on B2B financial and technology advertising. The Weekend Edition will be delivered to readers at home on the weekend, which we believe will enable us to attract more consumer advertising. The Wall Street Journal production process employs electronic pagination and satellite transmission of page images to outlying printing plants to enable early delivery of fresher content to the majority of our readers. The Wall Street Journal is delivered principally in three ways. Each business day, approximately 124,000 copies of The Wall Street Journal are sold at newsstands. Most home and office subscription deliveries are handled through our National Delivery Service, Inc. subsidiary which in 2004 provided early morning delivery to about 1.4 million, or 77%, of The Wall Street Journal's subscribers each publishing day. The balance of The Wall Street Journal's home and office deliveries is made by second class postal service. Barron's, the Dow Jones Business and Financial Weekly, is a weekly magazine with average circulation in 2004 of 299,000 that caters to financial professionals, individual investors and others interested in financial markets. Barron's is printed in twelve of The Wall Street Journal's 17 printing plants. It is delivered by second-class postal service and through National Delivery Service with about 65,000 newsstand copies are sold each week. The Wall Street Journal Classroom Edition is published nine times during the school year and is read by an estimated 750,000 students every month during the academic year in more than 5,300 middle-school and high-school classrooms throughout the U.S. Individuals, organizations and corporations sponsor more than one-third of all subscriptions and schools sponsor the remainder. The Wall Street Journal Campus Edition is included in college newspapers throughout the U.S. and includes the week's top business news and feature stories. International Publications The Wall Street Journal Europe, which had an average circulation in 2004 of 87,000, is headquartered in Brussels, Belgium and printed in Belgium, Germany, Switzerland, Italy, Spain, the United Kingdom and Israel. It is available on the day of publication in continental Europe, the United Kingdom, and parts of the Middle East and North Africa. Starting in 2003, the content of the international editions of The Wall Street Journal added news and opinion articles from the Washington Post. The Asian Wall Street Journal, which had an average circulation of 80,000 in 2004, is headquartered in Hong Kong and printed in Hong Kong, Singapore, Japan, Thailand, Malaysia, Taiwan, the Philippines, Korea and Indonesia. It has the largest advertising market share of any pan-regional business newspaper in Asia. We also publish The Wall Street Journal Special Editions, which are a collection of Journal pages in local languages distributed as part of 36 newspapers in 34 countries. The Wall Street Journal Americas, serving Central and South America, is the centerpiece of the Special Editions published in Spanish and Portuguese in 18 leading Latin America newspapers. In the fourth quarter of 2004, we announced that The Far Eastern Economic Review, a Hong Kong based newsweekly magazine, would change its format to a monthly periodical of issues and ideas-largely written by Asian opinion leaders from the fields of politics, business and academics. The first issue of the The Far Eastern Economic Review in its new format was published in December 2004. This repositioning resulted in a workforce reduction of approximately 80 employees and reduced costs by approximately $3 million. ELECTRONIC PUBLISHING Electronic publishing includes the operations of Dow Jones Newswires, Consumer Electronic Publishing and Dow Jones Indexes/Ventures. Consumer Electronic Publishing includes the results of WSJ.com, its related vertical sites, our consumer electronic licensing and radio businesses and since its acquisition in January 2005, MarketWatch, which includes internet, licensing, radio and newswires operations. Revenues in the electronic publishing segment are mainly subscription based and comprise about 20% of our revenues. Dow Jones Newswires Dow Jones Newswires is the premier provider of real-time, comprehensive business news and information for financial professionals around the world. Its news is displayed on approximately 298,000 English-language terminals worldwide providing users with real-time information on equity, fixed income, foreign exchange, commodities and energy markets. Dow Jones Newswires has a dedicated staff of more than 900 journalists in addition to drawing on the global resources of The Wall Street Journal and the Associated Press ("AP"). Newswires also distributes selected portions of its content to the retail customers of on-line brokers. Dow Jones News Service is North America's leading source of business and financial news on U.S. and Canadian companies and markets for brokerage firms, banks, investment companies and other businesses. Capital Markets Report covers global debt and money markets. Corporate Filings Alert provides real-time news covering SEC filings, bankruptcy courts and government agencies. Dow Jones Newswires also publishes, on its own or with local partners, in Chinese, Japanese, Spanish, French, Portuguese, Dutch, Italian, German and Russian. In April 2004, we acquired the remaining interest in the news operations of Vereinigte Wirtschaftsdieste GmbH ("VWD"), a German local language news service, for $12 million. Previously, we were a minority shareholder in VWD. On March 19, 2004, we acquired Alternative Investor Group for $85 million, a company serving the private equity and venture capital markets with newsletters, conferences and databases. Alternative Investor was integrated with Dow Jones Newswires, its newsletters division and Technologic Partners business, which we acquired in late 2003, to form Dow Jones Financial Information Services. In 2004, Dow Jones Newswires won many accolades, including Technology Journalist of the Year, Excellence in Wire Service Reporting and a Codie award from the Software and Information Industry Association. Also, for the second year in a row, Dow Jones Newswires was named Inside Market Data's News Provider of the Year. Consumer Electronic Publishing The Wall Street Journal Online ("WSJ.com"), introduced in 1996, is a paid online subscription site that offers continuously updated coverage of business news both in the U.S. and abroad. WSJ.com content comprises the global resources of The Wall Street Journal and Dow Jones Newswires as well as its own dedicated journalists. In addition to continuously updated exclusive real-time news and scoops, subscribers have access to the full text of each day's global editions of The Wall Street Journal, more than 30,000 in-depth company background reports, an archive of The Wall Street Journal and Dow Jones news articles, and personalized news and stock portfolios. WSJ.com had 712,000 subscribers at the end of 2004 and was the largest paid subscription news site on the Internet. Other consumer web sites in the Wall Street Journal Network include OpinionJournal.com, which provides commentary on global issues from The Wall Street Journal editorial page; CareerJournal.com, which gives career guidance and job-search services for executives; StartupJournal.com, the premier web site for entrepreneurs seeking guidance on starting or buying a business or franchise; CollegeJournal.com, which provides guidance and job-search services for future business leaders; and RealEstateJournal.com, a comprehensive guide to commercial and residential property. In addition, with our recent acquisition of MarketWatch, our online network also includes MarketWatch.com, which provides timely market news and information free of charge, and BigCharts.com, an investment charting and research web site. See "The MarketWatch Acquisition." Consumer Electronic Publishing also includes our radio/audio business and our consumer electronic licensing division, which offers electronic rights to use Dow Jones' content. The Wall Street Journal Radio Network produces and distributes late-breaking business reports during the week to more than 229 radio stations across the country, covering 92% of the population. Dow Jones Indexes/Ventures In 1997, we began licensing the Dow Jones Industrial Averages as well as other indexes as the basis for trading options, futures, unit trusts, annuities, exchange traded funds, mutual funds, derivatives and specialized structured products. Dow Jones Indexes also maintains a variety of specialty indexes, such as the Dow Jones-AIG Commodity Index, the Dow Jones Select Dividend Index and the Dow Jones Islamic Market Indexes. Dow Jones Indexes now offers more than 4,000 indexes. During 2004, Dow Jones Indexes launched a new family of hedge fund indexes and also partnered with Wilshire Associates to provide the Dow Jones Wilshire index family, which features the Dow Jones Wilshire 5000 and is expanding to include a complete global family of country, region, sector, cap-range and style indexes. Dow Jones Ventures include our reprints/permissions. The reprints/permissions business sells print or electronic reprints of The Wall Street Journal and Barron's stories. COMMUNITY NEWSPAPERS Community newspapers consists of our wholly-owned Ottaway Newspapers, Inc. Revenues in this segment are largely dependent on local consumer-based advertising revenue and comprise about 20% of our revenues. Our Ottaway community newspapers segment serves relatively small, self-contained communities, outside the heavy competitive pressures of large metropolitan papers and other media. In 2002, we divested five low-growth, non-strategically-located papers, which provided after-tax proceeds of $235 million and utilized $190 million of capital loss carryforwards. In 2003, we acquired the faster growing, more strategically located The Record of Stockton, California. Ottaway publications now include 15 general-interest dailies, published in nine states: California, Connecticut, Maine, Massachusetts, Michigan, New Hampshire, New York, Oregon and Pennsylvania. Average 2004 circulation of the dailies was approximately 436,000; Sunday circulation for our newspapers was 483,000. Ottaway also publishes more than 30 weekly newspapers and "shoppers." The primary delivery method for the newspapers is by carrier delivery. 3. The MarketWatch Acquisition On January 21, 2005, we completed the acquisition of MarketWatch for a purchase price of approximately $533 million, excluding transaction costs, financed in part by $438.7 million of commercial paper borrowings. The acquisition was consummated in accordance with the Agreement and Plan of Merger, dated as of November 14, 2004, among Dow Jones, Golden Acquisition Corp. (our wholly-owned subsidiary formed in connection with the acquisition) and MarketWatch, pursuant to which Golden Acquisition Corp. merged with and into MarketWatch, with MarketWatch remaining as the surviving corporation and a wholly-owned subsidiary of Dow Jones. MarketWatch is a leading provider of business news, financial information and analytical tools and operates two award-winning web sites: MarketWatch.com and BigCharts.com. These free, advertising-supported web sites serve approximately seven million unique visitors per month with timely market news and information. MarketWatch also operates the MarketWatch Information Services group, which is a leading licensor of market news, data, investment analysis tools and other online applications to financial services firms, media companies and corporations. MarketWatch produces a syndicated television program and provides updates every 30 minutes on the MarketWatch.com Radio Network. MarketWatch also offers subscription products for individual investors, including the Hulbert Financial Digest suite of products, Retirement Weekly and ETF Trader. We believe that the MarketWatch acquisition will complement The Wall Street Journal Online network, which provides premium business news to about three million unique visitors per month. By combining the traffic of the Wall Street Journal network of web sites and MarketWatch, our web sites are expected to have close to nine million unduplicated unique visitors per month. We also expect that the licensing businesses of MarketWatch will provide additional assets, such as online charting and other tools, which will extend the reach of our business-to-business licensing operations. We intend to integrate MarketWatch into our Consumer Electronic Publishing business, which comprises The Wall Street Journal Online at WSJ.com, other free advertising-supported vertical web sites, licensing of content to web sites, and The Wall Street Journal Radio Network. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of business acquired. The historical consolidated financial statements of MarketWatch required by Item 9.01 (a) are attached hereto as Exhibits 99.3 and 99.4 and are hereby incorporated by reference herein as follows: o MarketWatch's consolidated balance sheets at December 31, 2003 and 2002, respectively, and consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2003 and 2002, respectively, are attached hereto as Exhibit 99.3 and are hereby incorporated by reference herein; o MarketWatch's unaudited condensed consolidated balance sheet at September 30, 2004 and unaudited condensed consolidated statements of operations and cash flows for the nine months ended September 30, 2004 and 2003, respectively, are attached hereto as Exhibit 99.4 and are hereby incorporated by reference herein. (b) Pro forma financial information. The unaudited pro forma condensed combined financial information required by Item 9.01 (b) is included as Exhibit 99.5 hereto, which exhibit is hereby incorporated by reference herein. (c) Exhibits 23.1 Consent of PricewaterhouseCoopers LLP. 99.1* Joint Press Release of MarketWatch, Inc. and Dow Jones & Company, Inc., dated January 24, 2005, announcing the completion of the acquisition of MarketWatch by Dow Jones. 99.2* $260,000,000 60-Day Credit Agreement, Dated As Of January 20, 2005, Among Dow Jones & Company, Inc., As Borrower, The Several Lenders From Time To Time Parties Hereto, And JPMorgan Chase Bank, As Administrative Agent. 99.3 Audited consolidated financial statements of MarketWatch, Inc. as of December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002. 99.4 Unaudited consolidated financial statements of MarketWatch, Inc. as of September 30, 2004 and for the nine months ended September 30, 2004 and 2003. 99.5 Unaudited Pro Forma Condensed Combined Financial Information at September 30, 2004, for the nine months ended September 30, 2004 and for the year ended December 31, 2003. * Previously filed. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DOW JONES & COMPANY, INC. Dated: February 14, 2005 By: /s/ Robert Perrine ---------------------------- Robert Perrine Chief Accounting Officer and Controller EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23.1 Consent of PricewaterhouseCoopers LLP. 99.1* Joint Press Release of MarketWatch, Inc. and Dow Jones & Company, Inc., dated January 24, 2005, announcing the completion of the acquisition of MarketWatch by Dow Jones. 99.2* $260,000,000 60-Day Credit Agreement, Dated As Of January 20, 2005, Among Dow Jones & Company, Inc., As Borrower, The Several Lenders From Time To Time Parties Hereto, And JPMorgan Chase Bank, As Administrative Agent. 99.3 Audited consolidated financial statements of MarketWatch, Inc. as of December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002. 99.4 Unaudited consolidated financial statements of MarketWatch, Inc. as of September 30, 2004 and for the nine months ended September 30, 2004 and 2003. 99.5 Unaudited Pro Forma Condensed Combined Financial Information at September 30, 2004, for the nine months ended September 30, 2004 and for the year ended December 31, 2003. * Previously filed EX-23.1 2 lhexh23_1.txt CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------- We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-02071) and Form S-8 (File Nos. 33-45963, 33-49311, 33-55079, 333-57175, 333-70921, 333-67523, 333-61138, 333-39842, 333-101395, 333-115370 and 333-122650) of Dow Jones & Company, Inc. of our report dated March 24, 2004 relating to the financial statements of MarketWatch, Inc., which is incorporated by reference in the Current Report on Form 8-K/A of Dow Jones & Company, Inc. dated February 14, 2005. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Francisco, California February 11, 2005 EX-99.3 3 lhexh99_3.txt AUDITED CON. FIN. STATEMENTS OF MKTW EXHIBIT 99.3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of MarketWatch, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of MarketWatch, Inc. and its subsidiary at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 our opinion. As discussed in Note 10 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets during 2002 in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". PricewaterhouseCoopers LLP San Francisco, California March 24, 2004
MARKETWATCH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) December 31, --------------------------- 2003 2002 ----------- -------------- Assets Current assets: Cash and cash equivalents $ 48,079 $ 43,328 Accounts receivable, net of allowances for bad debts of $396 and $450 at December 31, 2003 and 2002, respectively 7,022 5,364 Prepaid expenses 685 696 ----------- ----------- Total current assets 55,786 49,388 Property and equipment, net 4,387 6,680 Goodwill, net 22,429 22,429 Prepaid acquisition costs 2,498 -- Other assets 128 148 ----------- ----------- Total assets $ 85,228 $ 78,645 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 2,566 $ 3,198 Accrued expenses 6,120 4,233 Deferred revenue 1,377 917 ----------- ----------- Total current liabilities 10,063 8,348 ----------- ----------- Commitments and contingencies (Note 6) Stockholders' equity: 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; 17,484,239 shares and 17,060,711 shares issued and outstanding at December 31, 2003 and 2002, respectively 180 171 Additional paid-in capital 323,141 320,993 Contribution receivable -- (56) Accumulated deficit (248,156) (250,811) ----------- ----------- Total stockholders' equity 75,165 70,297 ----------- ----------- Total liabilities and stockholders' equity $ 85,228 $ 78,645 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
MARKETWATCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) Years Ended December 31, -------------------------------------- 2003 2002 2001 ---- ---- ---- Net revenues: Advertising $ 24,084 $ 18,970 $ 20,797 Licensing 21,281 24,631 24,775 Subscriptions 1,808 923 284 ----------- --------- --------- Total net revenues 47,173 44,524 45,856 Cost of net revenues 16,943 16,339 18,623 ----------- --------- --------- Gross profit 30,230 28,185 27,233 ----------- --------- --------- Operating expenses: Product development 6,586 6,954 8,308 General and administrative 11,431 11,315 12,600 Sales and marketing 9,910 20,279 29,975 Amortization of goodwill and intangibles -- -- 51,542 Restructuring costs -- -- 1,409 ----------- --------- --------- Total operating expenses 27,927 38,548 103,834 ----------- --------- --------- Income (loss) from operations 2,303 (10,363) (76,601) Interest income 502 710 1,554 Loss in joint venture -- -- (1,476) ----------- --------- --------- Net income (loss) before taxes 2,805 $ (9,653) (76,523) Provision for income taxes 150 -- -- ----------- --------- --------- Net income (loss) $ 2,655 $ 9,653) $ (76,523) =========== ========= ========= Basic net income (loss) per share $ 0.15 $ (0.57) $ (4.60) =========== ========= ========= Diluted net income (loss) per share $ 0.14 $ (0.57) $ (4.60) =========== ========= ========= Shares used in the calculation of basic net income (loss) per share 17,317 16,959 16,648 =========== ========= ========= Shares used in the calculation of diluted net income (loss) per share 18,594 16,959 16,648 =========== ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
MARKETWATCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Additional Common Stock Paid-In Contribution Accumulated ------------ Shares Amount Capital Receivable Deficit Total ----------------- ----------- ------------ ----------- ----- Balances, December 31, 2000 16,541,403 $ 166 $ 319,425 $ (21,539) $ (164,635) $ 133,417 Issuance of common stock upon exercise of options 60,962 1 79 80 Issuance of common stock through employee stock purchase plan 139,165 1 436 437 Advertising received from CBS 11,640 11,640 Net loss (76,523) (76,523) ---------- ------- ---------- -------- ---------- ---------- Balances, December 31, 2001 16,741,530 168 319,940 (9,899) (241,158) 69,051 Issuance of common stock upon exercise of options 18,491 -- 67 67 Issuance of common stock through employee stock purchase plan 162,039 2 387 389 Issuance of common stock upon acquisition of Hulbert Financial Digest 138,651 1 599 600 Advertising received from CBS 9,843 9,843 Net loss (9,653) (9,653) ---------- ------- ---------- -------- ---------- ---------- Balances, December 31, 2002 17,060,711 171 320,993 (56) (250,811) 70,297 Issuance of common stock upon exercise of options 328,687 7 1,287 1,294 Issuance of common stock through employee stock purchase plan 94,841 2 388 390 Contribution of non-cash services from CBS 473 473 Advertising received from CBS 56 56 Net income 2,655 2,655 ---------- ------- ---------- -------- ---------- ---------- Balances, December 31, 2003 17,484,239 $ 180 $ 323,141 $ -- $(248,156) $ 75,165 ========== ======= ========== ======== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
MARKETWATCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, -------------------------------------- 2003 2002 2001 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 2,655 $ (9,653) $ (76,523) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for bad debt (66) -- 1,020 Depreciation and amortization 3,755 4,753 57,713 Loss in joint venture -- -- 1,476 Non-cash charges from stockholder 56 9,843 11,640 Changes in operating assets and liabilities: Accounts receivable (1,592) 2,978 2,555 Prepaid expenses and other assets 31 73 2,160 Accounts payable and accrued expenses 1,304 (746) (2,469) Deferred revenue 460 74 108 --------- -------- -------- Net cash provided by (used in) operating activities 6,603 7,322 (2,320) --------- -------- -------- Cash flows from investing activities: Purchase of property and equipment (1,605) (1,856) (4,440) Prepaid acquisition costs (1,931) -- -- Acquisition of business, net of cash acquired -- (231) -- Investment in joint venture -- -- (1,476) --------- -------- -------- Net cash used in investing activities (3,536) (2,087) (5,916) --------- -------- -------- Cash flows from financing activities: Issuance of common stock 1,684 456 517 --------- -------- -------- Net cash provided by financing activities 1,684 456 517 --------- -------- -------- Net change in cash 4,751 5,691 (7,719) Cash and cash equivalents at the beginning of the period 43,328 37,637 45,356 --------- -------- -------- Cash and cash equivalents at the end of the period $ 48,079 $ 43,328 $ 37,637 ========= ======== ========= Supplemental disclosure of non-cash activity: Prepaid acquisition costs for Pinnacor included in prepaid acquisition costs and accounts payable $ 567 -- -- Non-cash contribution of services from CBS 473 -- -- Common stock issued for acquisition of business -- $ 600 -- The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS The Company MarketWatch, Inc. (the "Company"), a leading multi-media publisher of business and financial news and provider of information and analytical tools, was formed on October 29, 1997 in the state of Delaware as a limited liability company and was jointly owned by Data Broadcasting Corporation ("DBC"), now known as Interactive Data Corporation ("IDC"), and CBS Broadcasting Inc. ("CBS"), with each member owning a 50% interest in the Company. In connection with the formation of the limited liability company, the Company, CBS and DBC entered into a contribution agreement (the "Contribution Agreement"), under which DBC contributed to the Company cash and DBC's then existing "Online/News" business, which primarily consisted of customer contracts and intellectual property, and CBS agreed to provide $50.0 million of rate card amount of advertising and promotions over a period of five years in return for its ownership interest. Subsequently, the $50.0 million rate card amount was revised to $30.0 million upon completion of the Company's initial public offering (see Note 3). In addition, CBS and the Company entered into a license agreement dated October 29, 1997 (the "License Agreement") where CBS, in exchange for a royalty of 30% of net advertising revenue, as defined, granted to the Company the non-exclusive right and license to use certain CBS news content and registered trademarks, including the CBS "Eye" design, until October 29, 2005, subject to termination on the occurrence of certain events. Subsequently, the 30% royalty was decreased to 8% (see Note 3). In addition, the Company entered into a services agreement with DBC (the "Services Agreement") on October 29, 1997 under which DBC charged the Company for certain general services, the Company received payment from DBC for supplying news and the Company receives a fee for licensing MarketWatch RT and MarketWatch Live. On January 6, 2000, the Company entered into a joint venture agreement with the Financial Times Group, a part of Pearson plc, a British media company ("Pearson") to establish Financial Times Marketwatch.com (Europe) Limited, an Internet provider of real time business news, financial programming and analytical tools. Under the agreement, the Company licensed its trademark and technology to the joint venture, contributed certain domain names and 500,000 pounds sterling in exchange for 500,000 shares of the joint venture. The Financial Times contributed trademarks for an ongoing royalty fee, provided 15.0 million pounds sterling worth of rate card advertising over five years and contributed 500,000 pounds sterling in cash for 500,000 shares in the joint venture. The Company recorded 50% of the loss incurred by FT MarketWatch.com based on its ownership percentage and accounted for the joint venture under the equity method. In October 2001, the Company signed a non-binding memorandum of understanding ("MOU") to transfer its ownership of the joint venture to the Financial Times Group. Since the Company no longer had a commitment to fund the joint venture, the previously recorded losses of $645,000 were reversed during the three months ended September 30, 2001. In November 2001, the Company completed the sale and purchase agreement finalizing the transfer of ownership in the joint venture to the Financial Times Group. As part of the ownership transfer, the Company signed a transitional services agreement with the Financial Times Group under which the Company would migrate the technology developed for the joint venture Web site to the Financial Times Group for a fee. The agreement also assigned certain equipment to the Company that was owned by the joint venture. In addition, the Company signed a license agreement with the Financial Times Group under which it will provide content and tools for a monthly fee. The total contributions to the joint venture for the years ended December 31, 2001 and 2000 were $1.5 million and $5.0 million, respectively. On May 5, 2000, the Company issued 1,136,814 shares of the Company's common stock to DBC for $43.0 million in cash and the same number of shares to CBS for $13.0 million in cash and $30.0 million in rate card advertising and promotion, which expired on May 5, 2002. The remaining $56,000 of rate card advertising and promotion from CBS was utilized by April 25, 2003. In January 2001, an affiliate of Pearson acquired DBC's 34.1 % stake in the Company. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but are less than majority-owned and are not otherwise controlled by the Company, are accounted for under the equity method. The Company operates in one segment. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Revenue Recognition The Company generates its net revenues from three primary sources: the sale of advertising on the Company's Web sites, broadcast properties and membership center fees; the license of content; and subscription revenues from newsletters and other products. Online advertising revenues, derived from the sale of advertisements, revenues from newsletter and other sponsorships on the Company's Web sites, are recognized using the lesser of the ratio of impressions delivered over total guaranteed impressions or on the straight line basis over the term of the contract in the period the advertising is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is reasonably assured. 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 sites. 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. The Company produces a weekend television program for distribution on CBS affiliates and daily radio broadcasts for distribution by Westwood One Radio Network. The Company shares in the revenue earned through the sale by CBS sales forces and Westwood One of advertising space during its television and radio programming, respectively. Revenue for the television program is recognized as the shows are aired and revenue is earned. Revenue for the radio show is recognized monthly as advertisements are run and earned. Membership center revenues consist of fees for leads generated from promotions placed in the membership center section of the CBS.MarketWatch.com Web site. Membership center customers pay MarketWatch a fixed fee for each customer that comes to their site and registers for their product from the CBS.MarketWatch.com Web site. Revenue from the membership center is recognized in the month the leads are generated. Licensing revenues consist of revenue earned from the licensing of MarketWatch content and tools. License revenues consist of fixed monthly amounts related to the license of financial tools and news content that are recognized ratably over the term of the licensing agreement or amounts based on the number of qualified account holders. Subscription revenue relates to customer subscriptions to the Company's newsletters, and the IDC online services, MarketWatch RT and MarketWatch Live, which provide subscribers access to real-time exchange data and analytical products and are sold through the Company's Web sites. Revenue from subscriptions is recognized ratably over the subscription period. Deferred revenues relate to prepayments of license and advertising contracts and subscription fees for which amounts have been collected but for which revenue has not yet been recognized. Revenues from barter transactions, in accordance with the provisions of Accounting Principles Board Opinion No. 29 ("APB 29"), "Accounting for Nonmonetary Transactions," are recognized during the period in which the advertisements are displayed on the Company's Web sites. Under the provisions of APB 29, barter transactions are recorded at the fair value of the goods or services received. For the years ended December 31, 2003, 2002 and 2001, the Company recognized $572,000, $483,000 and $1.5 million, respectively, in barter revenue, which was valued by an independent third party using typical ad placement values for similar advertising placements. The Company did not record barter revenue and the related expenses for advertising provided to American Online, Inc. ("AOL") under an agreement in accordance with Emerging Issues Task Force 99-17, EITF 99-17 "Accounting for Advertising Barter Transactions". Under the provisions of EITF 99-17, revenue and expense should be recognized at fair value from an advertising barter transaction only if the fair value of the advertising surrendered in the transaction is determinable based on the entity's own historical practice of receiving cash, marketable securities, or other consideration that is readily convertible to a known amount of cash for similar advertising from buyers unrelated to the counterparty in the barter transaction. Since these criteria were not met with respect to the Company's barter agreement with AOL, which ended on December 31, 2002, the Company did not recognize revenue. Under the agreement with AOL, for the year ended December 31, 2002, AOL received 141 mentions and 26 graphics on the CBS.MarketWatch.com Weekend Show and 15% of a CBS.MarketWatch.com and AOL cobranded advertisement that ran 51 times in the NY Daily News and 34 times in the San Francisco Examiner. For the year ended December 31, 2001, AOL received 65 mentions and 58 graphics on the CBS.MarketWatch.com Weekend Show, and 15% of a CBS.MarketWatch.com and AOL cobranded advertisement that ran 114 times in the NY Daily News and 104 times in the San Francisco Examiner. For the years ended December 31, 2002 and 2001, the Company received 1.8 billion and 8.2 billion impressions, respectively, from AOL. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 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 amortized using the straight-line method over the shorter of their useful lives or the remaining lease term. Depreciation and amortization expense relating to property and equipment for the years ended December 31, 2003, 2002 and 2001 was $ 3.8 million, $4.8 million and $5.1 million, respectively. Intangible Assets and Goodwill Prior to January 1, 2002, goodwill and intangibles were amortized using the straight-line method. Goodwill was being amortized over three years, and intangibles were being amortized over periods ranging from 1.5 to 3.5 years. Through December 31, 2001, the Company assessed the recoverability of its long-term assets by comparing the projected discounted cash flows associated with those assets against their respective carrying amounts. Impairment, if any, was based on the excess of the carrying amount over the fair value of those assets. If it was probable that the projected future undiscounted cash flows of the acquired assets were less than the carrying value of the goodwill, the Company would recognize an impairment loss in accordance with the provision of Statement of Financial Accounting Standards No. 121 ("SFAS No.121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In addition, if the analysis warranted revised estimated useful lives, the Company would adjust the lives of the assets in accordance with Accounting Principles Board Opinion No. 17, "Intangible Assets." No impairment was identified as of December 31, 2001. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and other Intangible Assets" and ceased amortization of the Company's goodwill balance. In lieu of amortization, the Company was required to perform an impairment review of its goodwill balance upon the initial adoption of SFAS No. 142 and, thereafter, periodically evaluate goodwill for impairment. The Company will use a two-step process to evaluate impairment. The first step is to identify a potential impairment by comparing the fair value of the Company to the carrying value, including goodwill. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any. The Company has completed the impairment review under SFAS No. 142 and has determined that an adjustment for impairment was not required during the years ended December 31, 2003 and 2002. Amortization of goodwill and intangibles for the years ended December 31, 2003, 2002 and 2001 was $0, $0 and $52.0 million, respectively, of which $0, $0 and $416,000, respectively, was included in cost of sales. Net Income (Loss) per Share Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). For 2002 and 2001, potential common shares were not included in the computation because they were antidilutive. For 2003, potential common shares of 1,276,782, were included in the computation and were related to shares issuable upon the exercise of stock options. Product Development Costs Costs attributable to the development of new products are expensed as incurred. The Company develops software that enables users to access information on its Web sites and subscription services. Development costs incurred prior to technological feasibility are expensed as incurred. 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 are recognized as an expense during the period in which the services are provided based on the rate card value of such services (See Notes 3 and 8). Advertising expense for the years ended December 31, 2003, 2002 and 2001 was $1.2 million, $11.0 million and $15.1 million, respectively. Income Taxes Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. Concentrations of Credit Risk Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Management deposits its cash with six financial institutions. Management periodically performs credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. As of December 31, 2003, 2002 and 2001, none of the Company's customers accounted for 10% or more of its gross accounts receivable. The fair value of accounts receivable approximates carrying value due to their short-term nature. Comprehensive Income Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. During each of the three years in the period ended December 31, 2003, the Company has not had any significant transactions that are required to be reported in comprehensive income. 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 ("APB No.25"), "Accounting for Stock Issued to Employees" and its related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148. "Accounting for Stock-Based Compensation, Transition and Disclosure." In accounting for stock-based transactions with non-employees, the Company records compensation expense in accordance with SFAS No. 123 and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." The following pro forma information presents the Company's net income (loss) and basic and diluted net income (loss) per share for the years ended December 31, 2003, 2002 and 2001 as if compensation cost had been measured under the fair value method of SFAS No. 123, "Accounting for Stock Based Employee Compensation," for the employee stock option and employee stock purchase plans. Years Ended December 31, ---------------------------------- 2003 2002 2001 ----------- ---------- --------- Net income (loss): As reported $ 2,655 $ (9,653) $ (76,523) Stock-based employee compensation expense determined under fair value based method (2,754) (3,964) (3,692) --------- ---------- ---------- Pro forma net loss $ (99) $ (13,617) $ (80,215) ========= ========== ========== Net income (loss) per share: As reported, basic $ 0.15 $ (0.57) $ (4.60) ========= ========== ========== As reported, diluted $ 0.14 $ (0.57) $ (4.60) ========= ========== ========== Pro forma, basic $ (0.01) $ (0.80) $ (4.82) ========= ========== ========== Pro forma, diluted $ (0.01) $ (0.80) $ (4.82) ========= ========== ========== The Company calculated the fair value of its equity-based compensation plans using the Black-Scholes model. The following weighted average assumptions were used related to option grants: Years Ended December 31, ------------------------------------- 2003 2002 2001 --------- ---------- ---------- Stock Options - ------------- Expected dividend 0 % 0 % 0 % Risk-free interest rate 2.4 % 3.4 % 4.2 % Expected volatility 68 % 105 % 115 % Expected life (in years) 4 4 4 Employee Stock Purchase Plan - ---------------------------- Expected dividend 0 % 0 % 0 % Risk-free interest rate 1.3 % 1.8 % 2.6 % Expected volatility 78 % 105 % 115 % Expected life (in months) 6 6 6 According to the Black-Scholes option-pricing model, the weighted average estimated fair value of employee stock option grants during 2003, 2002 and 2001 was $3.71, $2.93, and $2.44 per share, respectively, and the weighted average fair value of shares granted under the Purchase Plan for the years ended December 31, 2003, 2002 and 2001 was $4.10, $2.40 and $2.37, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Because additional stock options are expected to be granted each year, the above pro forma disclosures are not representative of pro forma effects on reported financial results for future years. Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities." Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. Certain provisions of FIN 46 were deferred until the period ending after March 15, 2004. The adoption of FIN 46 did not have a material impact on the Company's financial position, cash flows or results of operations. In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition", which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" and to rescind the SEC's related "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104 did not have a material effect on the Company's financial position or results of operations. NOTE 3 - AGREEMENTS WITH CBS AND PEARSON In January 1999, the Company entered into a Stockholders' Agreement ("Stockholders' Agreement") with CBS and IDC under which CBS reduced the advertising commitment from the Contribution Agreement to an aggregate rate card amount of $30.0 million in return for a change in the royalty rate payable under the License Agreement, extension of the License Agreement to 2005 and modified to certain non-competition provisions. Additionally, both CBS and Pearson, which acquired IDC's 34.1% stake in the Company (see Note 1), have a right of first refusal in the event either party desires to sell any securities of the Company to a third-party or if the Company issues new securities. In addition, the Company and CBS entered into an Amended and Restated License Agreement (the "Amended and Restated License"), which became effective immediately prior to the initial public offering. 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 is obligated to pay a royalty to CBS of: (i) during 1999: (a) 8% of Gross Revenues (as defined below) in excess of $500,000 and up to and including $50.5 million and (b) 6% of Gross Revenues in excess of $50.5 million; and (ii) in subsequent years through the termination of the license agreement on October 29, 2005: (a) 8% of Gross Revenues up to and including $50.0 million and (b) 6% of Gross Revenues in excess of $50.0 million. CBS has the right to terminate the agreement in certain circumstances, including the Company's 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 has retained 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. Gross Revenues means gross operating revenues that are derived from an Internet service or Web site that provides information or services of a financial nature or uses the CBS trademarks licensed to the Company. Gross Revenues excludes certain revenues including those from Pearson, an amount equal to certain commissions paid to sales representatives and an amount equal to certain revenues attributable to an acquired company's results of operations for the 12 months prior to the acquisition. The terms of the Amended and Restated License do not prohibit CBS from licensing its name and logo to another Web site or Internet service that does not have as its primary function and its principal theme and format the delivering of comprehensive real-time or delayed stock market quotations and financial news in the English language to consumers. CBS is also not prohibited from licensing its news content to, or investing in, another Web site or Internet service. In January 1999, the Company and IDC entered into an Amended and Restated Services Agreement (the "Amended Services Agreement"), in which IDC would 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 IDC to grant the Company certain nonexclusive licenses to its data and information feeds and provides for certain network Web site hosting performance standards. IDC also paid 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 IDC subscribers, as defined. The Company is also required to pay IDC 25% and 75% of subscription revenues for MarketWatch RT(TM) and MarketWatch Live(TM), respectively. The term of the Amended Services Agreement will expire on October 29, 2005. 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, were given certain registration rights for the securities of the Company held by them under the Registration Agreement. In October 1999, CBS committed to provide advertising and promotions over a five-year period in return for its ownership position (see Note 1). The Company had recorded the $50.0 million commitment by CBS as a contribution receivable and reduced the receivable and recorded an expense based on the rate card amount of the advertising and promotion during the period provided. Under the terms of the Stockholders' Agreement, the Company recorded a $20.0 million reduction to the contribution receivable and additional paid-in capital upon completion of the initial public offering. Under the terms of the stock purchase agreement that was entered into with CBS in March 2000, CBS agreed to provide an additional $30.0 million in advertising during the period from March 1, 2000 through April 25, 2003. As of December 31, 2003, CBS delivered fully under these commitments. NOTE 4 - BALANCE SHEET COMPONENTS Allowance for bad debts was as follows (in thousands): Years Ended December 31, --------------------------------- 2003 2002 2001 ---- ---- ---- Balance at beginning of period $ 450 $ 752 $ 628 Charged to expenses (66) -- 1,020 Write-offs, net of recoveries 12 (302) (896) Balance at end of period $ 396 $ 450 $ 752 ====== ======= ====== Prepaid expenses were as follows (in thousands): December 31, --------------------- 2003 2002 ------- ------ Prepaid marketing $ 128 $ 239 Other 557 457 ------- ------ $ 685 $ 696 ======= ====== Property and equipment, net, consisted of the following (in thousands): December 31, --------------------- 2003 2002 ------- ------ Computer and equipment $ 13,224 $ 12,288 Leasehold improvements 5,967 5,931 Furniture and fixtures 2,111 2,126 ------- ------ 21,302 20,345 Less accumulated depreciation and amortization (16,915) (13,665) ======= ====== $ 4,387 $ 6,680 ======= ====== Accrued expenses were as follows (in thousands): December 31, --------------------- 2003 2002 ------- ------ Accrued television production $ 266 $ 661 Accrued royalty 972 807 Accrued compensation and related expenses 2,767 1,432 Restructuring accrual 4 110 Accrued income taxes 99 -- Deferred rent 870 745 Customer refunds (1) 845 -- Other (2) 297 478 ------- ------ $ 6,120 $ 4,233 ======= ====== 1. In January 2004, the Company cancelled one of its subscription newsletters and refunded its customers a pro-rata share of their remaining subscriptions. 2. In the fourth quarter of 2003, the Company settled a liability with one of its vendors, which resulted in a decrease in expenses of approximately $688,000. NOTE 5 - INCOME TAXES The provision for income taxes composed of the following (in thousands): Years Ended December 31, --------------------------------- 2003 2002 2001 ---- ---- ---- Current: Federal $ 60 $ -- $ -- State 90 -- -- ------ ------- ------ Total current provision $ 150 $ -- $ -- ====== ======= ====== The components of the net deferred tax assets and liabilities were as follows (in thousands): Years Ended December 31, --------------------------------- 2003 2002 2001 ---- ---- ---- Deferred tax assets: Net operating loss carryforwards $ 39,221 $ 40,107 $ 37,446 Property and equipment 2,758 3,595 3,377 Accruals and reserves 1,087 1,062 704 ------- ------- ------- Total deferred tax assets 43,066 44,764 41,527 ------- ------- ------- Deferred tax liabilities: Intangible assets (6) -- (115) ------- ------- ------- Net deferred assets 43,060 44,764 41,412 Less valuation allowance (43,060) (44,764) (41,412) ------- ------- ------- Deferred tax asset $ -- $ -- $ -- ======= ======= ======= Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its deferred tax assets. The valuation allowance for the year ended December 31, 2003 decreased by $1.7 million and increased for the years ended December 31, 2002 and 2001 by $3.4 million and $10.4 million, respectively. At December 31, 2003, the Company had federal and state net operating loss carry-forwards of approximately $102.9 million and $72.7 million, respectively, available to offset future regular taxable income. The Company's net operating loss carryforwards will expire on various dates through 2023, if not utilized. The availability of net operating losses to offset future taxable income may be limited as a result of ownership changes in 1999. The amount of such limitations, if any, has not been determined. U.S. operating loss carryforwards of approximately $28.7 million resulted from the exercise of employee stock options, the tax benefit of which, when recognized, will be accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision. The difference between the income tax expense (benefit) at the statutory rate of 34% and the Company's effective tax rate was due primarily to the valuation allowance established to offset the deferred tax asset and the impact of state taxes. The provision for income tax was different than the amount computed using the applicable statutory federal income tax rate with the difference for the years summarized below: Years Ended December 31, ------------------------------------ 2003 2002 2001 ---- ---- ---- Provision computed at federal statutory rate 34 % (34) % (34) % State taxes, net of federal benefit 5 (4) (5) Amortization of goodwill -- 26 Other permanent differences 37 3 (1) Tax losses not benefited (71) 35 14 ------- ------- ------- Provision for income taxes 5 % -- % -- % ======= ======= ======= NOTE 6 - COMMITMENTS AND CONTINGENCIES Leases The Company subleases office space from CBS for its corporate headquarters in San Francisco, California, and its operations in New York City through 2010. In addition, the Company leases space in Minneapolis, Washington D.C., Chicago, Los Angeles, Boston and Dallas. Rent expense under the leased properties was $1.7 million, $1.7 million and $1.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. In addition, the Company has entered into various sublease arrangements associated with excess facilities under the 2001 restructuring program. Such subleases have terms extending through 2005 and amounts estimated to be received have been included in determining the restructuring accrual. Net noncancelable lease commitments as of December 31, 2003 can be summarized as follows (in thousands): Gross lease Sublease Net lease commitments income commitments ------------- ---------- ------------ 2004 $ 1,853 $ (123) $ 1,730 2005 1,977 (84) 1,893 2006 2,054 -- 2,054 2007 2,122 -- 2,122 2008 1,174 -- 1,174 Due after five years 584 -- 584 -------- -------- -------- Total net lease commitments $ 9,764 $ (207) $ 9,557 ======== ======== ======== Commitments As of December 31, 2003, the Company has entered into employment agreements with eight of its officers. These agreements expire through December 2004. Such agreements provide for annual salary levels ranging from $175,000 to $325,000, as well as annual bonuses of up to 100% of the base salary. As of December 31, 2003, the Company is committed to paying $628,000 to AOL over the next year in fulfillment of an agreement. Under the agreement, the Company created a co-branded site that enables AOL members to access CBS.MarketWatch.com content and investment management tools through the AOL portal. The Company and AOL have also agreed to collaborate in sales and marketing efforts. The Company maintains agreements with independent content providers for certain news, stock quotes and other information. The terms of these agreements are generally one to two years, with optional extension periods ranging from one to three years. Contingencies From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company is not currently aware of any legal proceedings or claims that will have a material adverse effect on the Company's financial position or results of operations. In 2001, several plaintiffs filed class action lawsuits in federal court against the Company, certain of its current and former officers and directors and its underwriters in connection with its January 1999 initial public offering. The complaints generally assert claims under the Securities Act, the Exchange Act and rules promulgated by the Securities and Exchange Commission. The complaints seek class action certification, unspecified damages in an amount to be determined at trial, and costs associated with the litigation, including attorneys' fees. The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On June 25, 2003, a committee of the Company's board of directors approved a Memorandum of Understanding ("MOU") and related agreements that set forth the terms of a settlement between the Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. Indemnifications During its normal course of business, the Company has made certain indemnifications, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnifications include intellectual property indemnifications to the Company's customers in connection with the sales of its products and services, indemnifications to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnifications to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. NOTE 7 - EMPLOYEE BENEFIT PLANS 401K The Company has a 401(k) deferred savings plan covering substantially all employees. Employee contributions were matched 25% by the Company, up to a maximum of $2,500 per employee per year in 2003, 25% up to a maximum of $2,500 per year for 2003 and 2002 and 33% up to a maximum of $2,500 per year for and 2001. Matching contributions by the Company in the years ended December 31, 2003, 2002 and 2001 were approximately $266,000, $192,000 and $348,000, respectively. Employee Stock Purchase Plan Effective August 15, 2000, the Company's Board of Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the issuance of a maximum of 500,000 shares of the Company's common stock. Eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company's common stock on every February 14th and August 14th. The price of the common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each six-month offering period or the specified purchase date. In addition, on each January 1, the aggregate number of shares of the Company's common stock reserved for issuance under the Plan shall be increased automatically by a number of shares purchased under the Plan in the preceding calendar year, provided that the Board may in its sole discretion reduce the amount of the increase in any particular year. During the years ended December 31, 2003, 2002 and 2001, 94,841, 162,039 and 139,165 shares, respectively, were purchased under the Purchase Plan. At December 31, 2003, 405,159 shares were available under the Purchase Plan for future issuance. Stock Option Plans In 1998, the Board of Directors adopted the 1998 Equity Incentive Plan (the "1998 Plan") and the 1998 Directors' Stock Option Plan (the "1998 Directors' Plan") and all outstanding employee options became part of the 1998 Plan. The 1998 Plan and 1998 Directors' Plan became effective upon the completion of the Company's initial public offering. Stockholders have approved both plans. In each of the calendar years 2000 and 2002, the Board of Directors reserved an additional 1,500,000 shares for issuance under the 1998 Plan. In 2002, the Board of Directors reserved an additional 50,000 shares for issuance under the 1998 Directors' Plan. To date, the Company has reserved an aggregate of 4.65 million shares for issuance under both plans. The 1998 Plan allows for the issuance of incentive stock options and non-qualified stock options. The 1998 Directors Plan allows for the issuance of non-qualified stock options. The stated exercise price of all options granted are not less than 100% of the fair market value on the date of grant. Options are generally granted for a term of ten years and vest one-third after each year of service over a three-year period. Pursuant to the consummation of the acquisition of BigCharts during 1999, the Company assumed the BigCharts, Inc. 1995 Stock Plan (the "BigCharts Plan"). Options issued under the BigCharts Plan become exercisable over varying periods as provided in the individual plan agreements. BigCharts had issued 585,824 shares under the BigCharts Plan. In June 2001, the Company offered a voluntary stock option exchange program that provided the Company's employees and directors the opportunity to cancel certain stock options of the Company's common stock, in exchange for new options to purchase 75% of the shares subject to the cancelled options six months and one day after the options were cancelled. The new options would be granted on or after January 19, 2002 at the then fair market value of the Company's common stock. Options to purchase approximately 2.7 million shares were eligible for the exchange program. On July 18, 2001, the Company cancelled options to purchase approximately 989,000 shares, and granted new options to purchase approximately 725,000 shares on January 22, 2002. The following summarizes the activity in the Company's stock option plans: Weighted Average Options Exercise Outstanding Price ----------- ---------- Options outstanding, December 31, 2000 2,883,537 $ 21.31 Options granted 572,010 3.17 Options canceled (1,566,559) 31.51 Options exercised (60,962) 1.32 ----------- Options outstanding, December 31, 2001 1,828,026 8.15 Options granted 1,617,318 4.04 Options canceled (145,130) 7.73 Options exercised (18,491) 3.65 ----------- Options outstanding, December 31, 2002 3,281,723 6.17 Options granted 952,640 8.17 Options canceled (125,460) 7.31 Options exercised (328,437) 7.31 ----------- Options outstanding, December 31, 2003 3,780,466 $ 6.83 =========== At December 31, 2003, 2002 and 2001, 376,389, 1,203,569 and 1,125,757 options were available for future grant, respectively, and 1,914,835, 1,429,107 and 813,651 options were exercisable, respectively. The weighted average exercise price and weighted average remaining contractual life of the vested options were $7.59 and 6.61 years, respectively, at December 31, 2003; $8.66 and 8.16 years, respectively, at December 31, 2002; and $9.80 and 8.08 years, respectively, at December 31, 2001. The following table summarizes information about options at December 31, 2003: Options outstanding Options exercisable ------------------------------------ ------------------- Average Weighted Remaining Weighted Average Contractual Average Exercise Range of Life Exercise Price Exercise Prices Number (in Price Number per per Share Outstanding years) per Share Exercisable Share - ----------------- ------------ ---------- ---------- ----------- -------- $1.32 - $1.74 9,660 3.85 $ 1.35 9,326 $ 1.33 $2.41 - $3.95 1,056,517 8.16 3.52 494,804 3.36 $4.00 - $6.40 1,547,839 7.01 4.31 1,071,745 4.13 $7.30 - $9.78 914,416 9.31 8.42 86,926 8.01 $10.54 - $19.00 54,874 5.91 14.03 54,874 14.03 $21.31 - $28.80 69,000 6.32 25.21 69,000 25.21 $33.25 - $42.00 109,160 5.99 38.04 109,160 38.04 $50.00 - $74.00 19,000 5.62 56.32 19,000 56.32 --------- --------- $1.32- $74.00 3,780,466 7.82 $ 6.83 1,914,835 $ 7.59 ========= ========= In January 2004, in conjunction with the acquisition of Pinnacor, the Company adopted a 2004 stock incentive plan and 2004 employee stock purchase plan. The Company assumed the Pinnacor stock option plan and issued options under the Company's 2004 stock incentive plan. NOTE 8 - RELATED PARTY TRANSACTIONS Under its license agreement with CBS, the Company expensed $3.0 million, $2.8 million, and $2.8 million for the years ended December 31, 2003, 2002 and 2001, respectively, related to licensing of CBS news content and trademarks. In addition, the Company has recorded advertising expenses of $56,000, $9.8 million, and $11.6 million at rate card value for the years ended December 31, 2003, 2002 and 2001, respectively, for advertising and promotion provided by CBS. Rental payments to CBS for leasing of certain facilities were $1.2 million, $1.1 million, and $1.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. During 2003, CBS forgave $473,000 in rental expenses which was recorded in equity as a CBS contribution to the Company. Licensing revenues from IDC were $0, $1.0 million, and $1.4 million for the years ended December 31, 2003, 2002 and 2001, respectively. Licensing revenues from FT.com and Financial Times were $1.5 million, $1.8 million and $1.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. The Company recognized costs to IDC of $633,000, $641,000 and $934,000, for the years ended December 31, 2003, 2002 and 2001, respectively, for data feeds. In March 2003, IDC purchased Comstock, Inc. and the Company expensed $577,000 for data feeds from Comstock, Inc. for the year ended December, 31, 2003. In addition, the Company recognized revenue of $2.6 million, $2.2 million and $2.6 million for the years ended December 31, 2003, 2002 and 2001, respectively, from television and radio programming on CBS stations. The Company recognized costs to CBS of $1.2 million, $1.6 million, and $1.5 million for the years ended December 31, 2003, 2002 and 2001, respectively, for production of the television and radio programming. IDC purchased $56,000, $33,000, and $123,000 for the years ended December 31, 2003, 2002 and 2001, respectively, of advertising under an insertion order. At December 31, 2003 and 2002, $453,000 and $532,000, respectively, were included in accounts receivable for radio and television revenue due from CBS. In addition, at December 31, 2003 and 2002, $11,000 and $135,000, respectively, were included in accounts receivable related to licensing and subscription revenues due from IDC and $92,000 and $0, respectively, were included in accounts receivable related to licensing revenues due from FT.com and Financial Times, subsidiaries of Pearson. At December 31, 2003 and 2002, the Company had a liability of $972,000 and $807,000, respectively, owed to CBS for royalty fees and a liability of $203,000 and $70,000, respectively, due to IDC for data feeds. Direct charges for subscription revenues for certain IDC data feeds were $38,000, $58,000 and $136,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Under the terms of the Amended and Restated Services Agreement, IDC agreed to provide the Company with certain general services including accounting, network operations, hosting of the Company's Web pages and data feeds. Allocated charges for these services totaled $106,000 for the year ended December 31, 2001. NOTE 9 - RESTRUCTURING CHARGES In the second quarter of 2001, the Company implemented a plan to reduce costs and improve operating efficiencies by discontinuing initiatives and enhancements of its wireless and broadband businesses, and recorded a restructuring charge of $1.4 million. The restructuring charge consisted primarily of severance and benefits of $300,000 related to the involuntary termination of approximately 35 employees; the estimated lease costs of $510,000 pertaining to future obligations for non-cancelable lease payments for excess facilities; and the write-off of leasehold improvements, furniture and fixtures, software and computer equipment with a net book value of $530,000. The assets were taken out of service, as they were deemed unnecessary due to the reductions in workforce. In addition, the Company accrued for legal and consulting costs of $70,000 related to the restructuring. At December 31, 2003, $4,000 remains to be paid out for lease costs and other expenses. The restructuring is expected to be completed by January 31, 2004. NOTE 10 - CHANGE IN ACCOUNTING FOR GOODWILL AND CERTAIN OTHER INTANGIBLES In accordance with SFAS No. 142, goodwill and indefinite life intangibles amortization was discontinued as of January 1, 2002. The carrying amount of goodwill at December 31, 2003 and 2002 totaled $22.4 million. SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment; while the second phase (if necessary), measures the impairment. Under SFAS No. 142, the Company is required to perform a goodwill impairment review annually and more frequently if the facts and circumstances warrant a review. No impairment was required as a result of the annual reviews in 2003 and 2002. In accordance with SFAS No. 142, the effect of this accounting change is reflected prospectively. Supplemental comparative disclosure as if the change had been retroactively applied to the year ended December 31, 2001 is as follows (in thousands, except per share amounts). Year Ended December 31, 2001 -------------- Reported net income (loss) $ (76,523) Add back: Goodwill amortization 50,830 Add back: Intangible amortization 1,130 --------- Adjusted net income (loss) $ (24,563) ========= Basic and diluted net loss per share: Reported net loss per share $ (4.60) Goodwill amortization 3.05 Intangible amortization 0.07 --------- Adjusted net loss per share: $ (1.48) ========= There was no goodwill amortization for the years ended December 31, 2003 and 2002. NOTE 11-SUBSEQUENT EVENT On January 16, 2004, the Company completed the acquisition of Pinnacor Inc. ("Pinnacor"), formerly known as ScreamingMedia, a provider of information services and analytical applications to financial services companies and global corporations. The combined companies provide a diversified suite of integrated financial and new service products and solutions, including financial and news links. Under the terms of the agreement, a new company ("Holdco") with two wholly-owned subsidiaries, Pine Merger Sub, Inc. ("Pine Merger Sub") and Maple Merger Sub, Inc. ("Maple Merger Sub"), were formed to combine the businesses of the Company and Pinnacor. Each Company stockholder received one share of Holdco common stock for each share of the Company common stock held by such stockholder. Each Pinnacor stockholder received either $2.42 in cash or 0.2659 of a share of Holdco common stock for each share of Pinnacor common stock held by such stockholder, subject to proration. The purchase price of $107.7 million was determined as follows (in thousands): Fair value of common stock $ 53,676 Fair value of options and warrants 6,718 Cash 44,002 Direct transaction costs 3,342 --------- $ 107,738 ========= The fair value of the common stock was determined based on an 6,141,435 shares issued and priced using the average market price of the common stock over the five-day period surrounding the date of the acquisition was announced in July 2003. The fair value of the Company's stock options and warrants issued was determined using the Black-Scholes option-pricing model. The Company prepaid $ 2.5 million dollars in direct transaction costs as of December 31, 2003 which are presented as a noncurrent asset. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands): Cash acquired $ 41,606 Other tangible assets acquired 6,279 Amortizable intangible assets: Developed technology 4,050 Acquired customer base 3,750 In-process research and development 300 Goodwill 64,340 --------- 120,325 Liabilities assumed (12,674) Deferred stock-based compensation 87 --------- Total $ 107,738 ========== The assets will be amortized over a period of years shown on the following table: Developed technology 4 years Acquired customer base 7 years Fixed assets acquired 1 to 5 years The fair value underlying the $300,000 assigned to acquired in- process research and development ("IPR&D") in the Pinnacor acquisition will be charged to the Company's results of operations during the quarter ended March 31, 2004 and was determined by identifying the research projects in areas which technological feasibility had not been established and there was no alternative future use. A preliminary estimate of $64.3 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not deductible for tax purposes. Goodwill will not be amortized and will be tested for impairment, at least annually. The purchase price allocation for Pinnacor is subject to revision as more detailed analysis is completed and additional information on the fair value of Pinnacor's assets and liabilities becomes available. Any change in the fair value of the net assets of Pinnacor will change the amount of the purchase price allocable to goodwill. The following attributes of the combination of the two businesses were considered significant factors to the establishment of the purchase price, resulting in the recognition of goodwill: o Pinnacor's acquired technology includes certain additional products that may allow the combined company to develop more comprehensive products and pursue expanded market opportunities. o The ability to hire the Pinnacor workforce, which will include a significant number of experienced engineering, development and technical staff with specialized knowledge of the sector in which the combined company will operate. o Potential operating synergies are anticipated to arise and are more likely to include cost savings from the elimination of redundant data content provision, data center operations and expenses associated with operating as a public company and limited reductions in overlapping staffing positions and general facility costs. The following unaudited pro forma information presents a summary of results of operations of the Company assuming the acquisition of Pinnacor occurred on January 1, 2003 (in thousands, except per share amounts): Year Ended December 31, 2003 ----------------- Net revenues $ 80,677 ============== Net income $ 140 ============== Net income per share: Basic $ 0.01 ============== Diluted $ 0.01 ============== NOTE 12 - COMPARATIVE QUARTERLY FINANCIAL DATA (unaudited) (in thousands except per share data) Quarter Ended ----------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (as restated) (as restated) (as restated) (as restated) 2003 - ---- Net revenues $ 11,118 $ 11,100 $ 11,576 $ 13,379 Gross profit $ 6,810 $ 6,779 $ 7,068 $ 9,573 Net income (loss) $ (249) $ (127) $ 393 $ 2,638 Net income (loss) per share, basic $ (0.01) $ (0.01) $ 0.02 $ 0.15 Net income (loss) per share, diluted $ (0.01) $ (0.01) $ 0.02 $ 0.14 Shares used in per share calculation, basic 17,157 17,262 17,382 17,469 Shares used in per share calculation, diluted 17,157 17,262 18,754 18,844 Quarter Ended --------------------------------------------------------- March 31 June 30 September 30 December 31 --------- ---------- ------------ ----------- (as restated) (as restated) (as restated) (as restated) 2002 - ---- Net revenues $ 9,816 $ 12,012 $ 10,982 $ 11,714 Gross profit $ 5,742 $ 7,862 $ 6,736 $ 7,845 Net income (loss) $ (5,851) $ (4,068) $ (664) $ 930 Net income (loss) per share, basic $ (0.35) $ (0.24) $ (0.04) $ 0.05 Net income (loss) per share, diluted $ (0.35) $ (0.24) $ (0.04) $ 0.05 Shares used in per share calculation, basic 16,792 16,954 17,028 17,060 Shares used in per share calculation, diluted 16,792 16,954 17,028 17,488 NOTE 13 - RESTATEMENT (unaudited) The Company has restated its condensed consolidated statements of operations for each of the quarterly periods in fiscal years 2003 and 2002 and its cash flows and condensed consolidated balance sheets for the three-month periods ended March 31, 2003 and 2002, June 30, 2003 and 2002, and September 30, 2003 and 2002. The restatement reflects the adoption of a corrected method in which the Company calculates its quarterly CBS royalty expenses by recognizing royalty expenses based on the estimated effective annual royalty rate, which requires management to estimate the annual gross revenues subject to the CBS royalty fees and excluded revenues not subject to the CBS royalty fees, and apply the derived effective annual royalty rate to all revenues in each of the quarters within a fiscal year. Historically, the Company recognized CBS royalty expenses in the quarter in which it became obligated to pay such expenses based on the specified royalty rate applied to the relevant revenue of that quarter. The restatement has an effect on the Company's cost of net revenues, gross profits, net income (loss) and earnings (loss) per share for the restated quarterly periods. The restatement has no impact on the Company's 2003 and 2002 annual operating results, cash flow or royalty due to CBS as the restatement relates only to the timing of the accruals of the CBS royalty expenses among the quarters within a fiscal year. The following table presents the impact of the restatement adjustments on the statement of operations for each of the quarterly periods in fiscal year 2003 (in thousands, except per share data):
Quarter Ended ------------------------------------------------------ March 31 March 31 June 30 June 30 -------- -------- ------- ------- As Previously As Previously Reported As Restated Reported As Restated ------------- ----------- ------------- ------------ 2003 - ---- Gross profit $ 7,094 $ 6,810 $ 6,697 $ 6,779 Net income (loss) $ 35 $ (249) $ (209) $ (127) Net income (loss) per share, basic $ 0.00 $ (0.01) $ (0.01) $ (0.01) Net income (loss) per $ 0.00 $ (0.01) $ (0.01) $ (0.01) share, diluted Shares used in per 17,157 17,157 17,262 17,262 share calculation, basic Shares used in per 18,047 17,157 17,262 17,262 share calculation, diluted
Quarter Ended ----------------------------------------------------------- September 30 September 30 December 31 December 31 ------------ ------------ ----------- ----------- As Previously As Previously Reported As Restated Reported As Restated ------------- ----------- ------------- ------------ 2003 - ---- Gross profit $ 6,975 $ 7,068 $ 9,464 $ 9,573 Net income (loss) $ 300 $ 393 $ 2,529 $ 2,638 Net income (loss) per share, basic $ 0.02 $ 0.02 $ 0.14 $ 0.15 Net income (loss) per $ 0.02 $ 0.02 $ 0.13 $ 0.14 share, diluted Shares used in per 17,382 17,382 17,469 17,469 share calculation, basic Shares used in per 18,754 18,754 18,844 18,844 share calculation, diluted The following table presents the impact of the restatement adjustments on the statement of operations for each of the quarterly periods in fiscal year 2002 (in thousands, except per share data):
Quarter Ended ------------------------------------------------------ March 31 March 31 June 30 June 30 -------- -------- ------- ------- As Previously As Previously Reported As Restated Reported As Restated ------------- ----------- ------------- ----------- 2002 - ---- Gross profit $ 5,942 $ 5,742 $ 7,798 $ 7,862 Net loss $ (5,651) $ (5,851) $ (4,132) $ (4,068) Net loss per share, basic and diluted $ (0.34) $ (0.35) $ (0.24) $ (0.24) Shares used in per 16,792 16,792 16,954 16,954 share calculation, basic and diluted
Quarter Ended ----------------------------------------------------------- September 30 September 30 December 31 December 31 ------------ ------------ ----------- ----------- As Previously As Previously Reported As Restated Reported As Restated ------------- ----------- ------------- ------------ 2002 - ---- Gross profit $ 6,676 $ 6,736 $ 7,769 $ 7,845 Net income (loss) $ (724) $ (664) $ 854 $ 930 Net income (loss) per share, basic $ (0.04) $ (0.04) $ 0.05 $ 0.05 Net income (loss) per share, diluted $ (0.04) $ (0.04) $ 0.05 $ 0.05 Shares used in per share calculation, basic 17,028 17,028 17,060 17,060 Shares used in per share calculation, diluted 17,028 17,028 17,488 17,488
EX-99.4 4 lhexh99_4.txt UNAUDITED CON. FIN. STATEMENTS OF MKTW EXHIBIT 99.4 MARKETWATCH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------ ----------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 56,383 $ 48,079 Restricted cash 920 -- Accounts receivable, net 12,687 7,022 Prepaid expenses 2,298 685 --------------- --------------- Total current assets 72,288 55,786 Property and equipment, net 3,844 4,387 Goodwill 88,389 22,429 Intangibles, net 6,973 -- Prepaid acquisition costs -- 2,498 Restricted cash, net of current portion 175 -- Other assets 1,165 128 --------------- --------------- Total assets $ 172,834 $ 85,228 =============== =============== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 4,590 $ 1,216 Accrued expenses 11,535 6,605 Capital lease obligations 487 -- Deferred revenue 7,058 1,377 --------------- --------------- Total current liabilities 23,670 9,198 Other liabilities 1,095 865 --------------- --------------- Total liabilities 24,765 10,063 --------------- --------------- Stockholders' equity: Preferred stock -- -- Common stock 254 180 Additional paid-in capital 394,276 323,141 Deferred stock-based compensation (37) -- Accumulated comprehensive loss (15) -- Accumulated deficit (246,409) (248,156) --------------- --------------- Total stockholders' equity 148,069 75,165 --------------- --------------- Total liabilities and stockholders' equity $ 172,834 $ 85,228 =============== =============== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MARKETWATCH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 2004 2003 2004 2003 -------- -------- --------- --------- Net revenues: Advertising $ 7,145 $ 5,907 $ 22,812 $ 16,481 Licensing 12,113 5,214 33,578 16,176 Subscription 516 455 1,389 1,137 -------- -------- ---------- ---------- Total net revenues 19,774 11,576 57,779 33,794 Cost of net revenues 6,247 4,508 17,958 13,137 -------- -------- ---------- ---------- Gross profit 13,527 7,068 39,821 20,657 -------- -------- ---------- ---------- Operating expenses: Product development 4,498 1,444 13,485 5,040 General and administrative 4,416 2,812 12,897 8,542 Sales and marketing 3,641 2,534 11,292 7,439 Amortization of intangibles 148 -- 709 -- -------- -------- ---------- ---------- Total operating expenses 12,703 6,790 38,383 21,021 -------- -------- ---------- ---------- Income (loss) from operations 824 278 1,438 (364) Interest income, net of expense 154 115 363 384 Provision for income taxes (29) -- (54) (3) -------- -------- ---------- ---------- Net income $ 949 $ 393 $ 1,747 $ 17 ======== ======== ========== ========== Basic net income per share $ 0.04 $ 0.02 $ 0.07 $ 0.00 ======== ======== ========== ========== Diluted net income per share $ 0.04 $ 0.02 $ 0.07 $ 0.00 ======== ======== ========== ========== Shares used in the calculation of basic net income per share 25,190 17,382 24,427 17,267 ======== ======== ========== ========== Shares used in the calculation of diluted net income per share 26,833 18,754 26,468 18,503 ======== ======== ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MARKETWATCH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 2004 2003 --------- ---------- Cash flows from operating activities: Net income $ 1,747 $ 17 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (recovery of) doubtful accounts 282 (66) Depreciation and amortization 3,669 2,883 Non-cash charges from stockholder -- 56 Amortization of deferred stock compensation 17 -- Loss on disposal of equipment 2 -- Changes in operating assets and liabilities, net of acquired amounts: Accounts receivable (5,422) (374) Prepaid expenses and other assets (776) (540) Accounts payable and accrued expenses 4,246 1,571 Deferred revenue 586 547 ---------- --------- Net cash provided by operating activities 4,351 4,094 ---------- --------- Cash flows used in investing activities: Purchase of property and equipment (513) (778) Decrease in restricted cash 850 -- Acquisition of business, net of cash acquired (5,950) (313) ---------- --------- Net cash used in investing activities (5,613) (1,091) ---------- --------- Cash flows provided by financing activities: Principal payments under capital lease obligations (586) -- Issuance of common stock 10,167 1,524 ---------- --------- Net cash provided by financing activities 9,581 1,524 ---------- --------- Effect of exchange rate changes on cash and cash equivalents (15) -- ---------- --------- Net change in cash and cash equivalents 8,304 4,527 Cash and cash equivalents at the beginning of the period 48,079 43,328 ---------- --------- Cash and cash equivalents at the end of the period $ 56,383 $ 47,855 ========== ========= Supplemental disclosure of non-cash investing activity: Acquisition cost for Pinnacor included in prepaid expenses and accounts payable $ -- $ 686 ========== ========= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MARKETWATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS The Company MarketWatch, Inc. (the "Company"), is a leading multi-media publisher of business and financial news and provider of information and analytical tools. It was formed on October 29, 1997 in the state of Delaware as a limited liability company and was jointly owned by Data Broadcasting Corporation ("DBC"), now known as Interactive Data Corporation ("IDC"), and CBS Broadcasting Inc. ("CBS"), with each member owning a 50% interest in the Company. In January 1999, the Company reorganized as a corporation and completed an initial public offering of 3,162,500 shares of common stock. After the initial public offering, CBS and IDC each owned approximately 38% of the Company. In January 2001, an affiliate of Pearson plc ("Pearson") acquired IDC's complete stake in the Company. On January 16, 2004, the Company completed the acquisition of Pinnacor Inc. ("Pinnacor"), formerly known as ScreamingMedia, a provider of information services and analytical applications to financial services companies and global corporations. After the acquisition, CBS and Pearson each owned approximately 24% of the Company. On August 4, 2004, the Company changed its name from MarketWatch.com, Inc. to MarketWatch, Inc. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or for any future period. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. During the nine months ended September 30, 2004 the Company re-classified certain liabilities previously disclosed as short term liabilities and liabilities previously disclosed in accounts payable into other liabilities and accrued expenses, respectively. Prior periods have been adjusted to be comparable with the current period presentation. NOTE 2 - 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 its related interpretations, and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123." In accounting for stock-based transactions with non-employees, the Company records compensation expense in accordance with SFAS No. 123 and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." The following table illustrates the effect on income and earnings per share if the Company had applied the fair-value recognition provisions of SFAS No. 123 to stock-based employee compensation. The estimated fair value of each Company option is calculated using the Black-Scholes option-pricing model.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 2004 2003 2004 2003 -------- -------- --------- --------- Net income: As reported $ 949 $ 393 $ 1,747 $ 17 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 5 -- 17 -- Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects (868) (646) (2,302) (2,091) -------- -------- ---------- -------- Pro forma net income (loss) $ 86 $ (253) $ (538) $ (2,074) ======== ======== ========== ======== Net income (loss) per share: As reported, basic $ 0.04 $ 0.02 $ 0.07 $ 0.00 ======== ======== ========== ======== As reported, diluted $ 0.04 $ 0.02 $ 0.07 $ 0.00 ======== ======== ========== ======== Pro forma net income (loss) per share, basic $ 0.00 $ (0.01) $ (0.02) $ (0.12) ======== ======== ========== ======== Pro forma net income (loss) per share, diluted $ 0.00 $ (0.01) $ (0.02) $ (0.12) ======== ======== ========== ========
The Company calculated the fair value compensation expense associated with its stock-based employee compensation plans using the Black-Scholes model. The following weighted average assumptions were used related to option grants:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 2004 2003 2004 2003 -------- -------- --------- --------- Stock Options - ------------- Expected dividend 0% 0% 0% 0% Risk-free interest rate 3.1% 1.9% 2.8% 2.3% Expected volatility 54% 55% 52% 73% Expected life (in years) 4 4 4 4 Employee Stock Purchase Plan - ---------------------------- Expected dividend 0% 0% 0% 0% Risk-free interest rate 1.8% 1.2% 1.4% 1.4% Expected volatility 58% 60% 51% 76% Expected life (in months) 6 6 6 6
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes with respect to the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Because additional stock options are expected to be granted each year, the above pro forma disclosures are not representative of pro forma effects on reported financial results for future periods. NOTE 3 - NET INCOME PER SHARE The Company computes net income per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Under the provisions of SFAS No. 128, basic net income per common share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents. Common equivalent shares of 1,637,406 and 1,372,061 were included in the computation of diluted net income per share for the three months ended September 30, 2004 and 2003, respectively, and 2,040,932 and 1,236,108 were included in the computation of diluted net income per share for the nine months ended September 30, 2004 and 2003, respectively. The common equivalent shares were related to shares issuable upon the exercise of stock options. Options to purchase 522,486 and 407,671 shares of common stock were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2004, respectively, as the inclusion would have been anti-dilutive. NOTE 4 - ACQUISITIONS On January 16, 2004, the Company completed the acquisition of Pinnacor Inc. Under the terms of the agreement, a new company ("Holdco") with two wholly-owned subsidiaries, Pine Merger Sub, Inc. ("Pine Merger Sub") and Maple Merger Sub, Inc. ("Maple Merger Sub"), were formed to combine the businesses of the Company and Pinnacor. Each Company stockholder received one share of Holdco common stock for each share of the Company common stock held by such stockholder. Each Pinnacor stockholder received either $2.42 in cash or 0.2659 of a share of Holdco common stock for each share of Pinnacor common stock held by such stockholder, subject to proration. Upon closing of the acquisition, Maple Merger Sub merged with and into MarketWatch, which was the surviving corporation, and Pine Merger Sub merged with and into Pinnacor, which was the surviving corporation. MarketWatch and Pinnacor became a wholly-owned subsidiary of Holdco, which was renamed "MarketWatch.com, Inc." MarketWatch, one of Holdco's operating subsidiaries after the merger, was renamed "MarketWatch Media, Inc." and Pinnacor, the other Holdco operating subsidiary after the merger, continued to be named "Pinnacor Inc." Shortly after the acquisition, each of MarketWatch Media, Inc. and Pinnacor Inc. merged into MarketWatch.com, Inc. On August 4, 2004, the Company changed its name from MarketWatch.com, Inc. to MarketWatch, Inc. The purchase price of $107.7 million was determined as follows (in thousands): Fair value of common stock $ 53,676 Fair value of options and warrants 6,718 Cash 44,002 Direct transaction costs 3,342 ---------- $ 107,738 ========== The fair value of the common stock was determined based on 6,141,435 shares of the Company common stock issued and priced using the average market price of the common stock over the five-day period surrounding the date the acquisition was announced in July 2003. The fair value of the Company's stock options and warrants issued was determined using the Black-Scholes option-pricing model. The following assumptions were used to perform the calculations: expected life of 48 months for options and a remaining contractual life of eight to ten months for warrants, risk-free interest rate of 1.51%, expected volatility of 60% and no expected dividend yield. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands): Cash acquired $ 41,270 Other tangible assets acquired 6,661 Amortizable intangible assets: Developed technology 4,050 Acquired customer base 3,750 In-process research and development 300 Goodwill 65,960 ---------- 121,991 Liabilities assumed (14,307) Deferred stock-based compensation 54 ---------- Total $ 107,738 ========== The assets will be amortized over a period of years shown on the following table: Developed technology 4 years Acquired customer base 7 years Fixed assets acquired 1 to 5 years A preliminary estimate of $65.4 million has been allocated to goodwill and adjustments made to goodwill at September 30, 2004 increased the balance to $66.0 million (See Note 5). Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not deductible for tax purposes. Goodwill will not be amortized and will be tested for impairment, at least annually. The purchase price allocation for Pinnacor is subject to revision as more detailed analysis is completed and additional information on the fair value of Pinnacor's assets and liabilities becomes available. Any change in the fair value of the net assets of Pinnacor will change the amount of the purchase price allocable to goodwill. The following attributes of the combination of the two businesses were considered significant factors to the establishment of the purchase price, resulting in the recognition of goodwill: o Pinnacor's acquired technology included certain additional products that would allow the combined company to develop more comprehensive products and pursue expanded market opportunities. o The ability to hire the Pinnacor workforce, which included a significant number of experienced engineering, development and technical staff with specialized knowledge of the sector in which the combined company operates. o Potential operating synergies are anticipated to arise, including cost savings from the elimination of redundant data content provision, data center operations and expenses associated with operating as a public company and limited reductions in overlapping staffing positions and general facility costs. The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of Pinnacor occurred on January 1, 2003, respectively (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 2004 2003 2004 2003 --------- -------- --------- --------- Net revenues $ 19,774 $ 19,922 $ 58,646 $ 58,922 ======== ======== ========= ======== Net income (loss) $ 949 $ (590) $ 1,719 $ (1,809) ======== ======== ========= ======== Net income (loss) per share: Basic $ 0.04 $ (0.03) $ 0.07 $ (0.08) ======== ======== ========= ======== Diluted $ 0.04 $ (0.03) $ 0.06 $ (0.08) ======== ======== ========= ========
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS Intangible Assets Intangible assets consisted of the following (in thousands):
SEPTEMBER 30, 2004 ----------------------------------------------------- GROSS NET CARRYING ACCUMULATED INTANGIBLE AMOUNT AMORTIZATION ASSETS ------------ --------------- -------------- Developed technology $ 4,214 $ 747 $ 3,467 Acquired customer base 3,915 409 3,506 --------- -------- ---------- $ 8,129 $ 1,156 $ 6,973 ========= ======== =========
The fair value underlying the $300,000 assigned to in-process research and development ("IPR&D") from the Pinnacor acquisition was expensed immediately during the quarter ended March 31, 2004 as amortization of intangibles and was determined by identifying the research projects in areas which technological feasibility had not been established and there was no alternative future use. Intangibles for developed technology and acquired customer base are being amortized over a period of 4 to 7 years, respectively. The amortization expense related to identifiable intangible assets is expected to be $1.9 million for the year ending December 31, 2004 and $1.7 million, $1.7 million, $1.6 million and $578,000 for the years ending December 31, 2005, 2006, 2007 and 2008, respectively and $1.0 million thereafter. The weighted average amortization period is 4 and 6.8 years for developed technology and acquired customer base, respectively. Goodwill Goodwill consisted of the following (in thousands): Balance at December 31, 2003 $ 22,429 Goodwill acquired during period 65,425 Goodwill adjustments pertaining to preliminary purchase price allocation 535 ---------- Balance at September 30, 2004 $ 88,389 ========== The increase in goodwill at September 30, 2004 was due to the acquisition of Pinnacor on January 16, 2004 (See Note 4). The goodwill adjustments were primarily related to the recognition of additional liabilities, offset by an increase in the estimated value of a marketable security, both as a result of the Pinnacor acquisition. NOTE 6 - RELATED PARTY TRANSACTIONS Under its license agreement with CBS, the Company expensed $810,000 and $746,000 for the three months ended September 30, 2004 and 2003, respectively, and $1.8 million and $2.2 million for the nine months ended September 30, 2004 and 2003, respectively, related to the licensing of CBS news content and trademarks. In addition, the Company recorded advertising expenses of $0 at rate card value for the three months ended September 30, 2004 and 2003, and $0 and $56,000 for the nine months ended September 30 2004 and 2003, respectively, for in-kind advertising and promotion provided by CBS. Rental payments to CBS for leasing of certain facilities were $315,000 and $320,000 for the three months ended September 30, 2004 and 2003, respectively, and $937,000 and $949,000 for the nine months ended September 30, 2004 and 2003, respectively. Licensing revenues from FT.com and Financial Times, subsidiaries of Pearson plc, were $329,000 and $367,000 for the three months ended September 30, 2004 and 2003, respectively, and $1.1 million and $1.2 million for the nine months ended September 30, 2004 and 2003, respectively. The Company recognized costs to IDC of $136,000 and $119,000 for the three months ended September 30, 2004 and 2003, respectively, and $484,000 and $516,000 for the nine months ended September 30, 2004 and 2003, respectively, for data feeds. In March 2003, IDC purchased Comstock, Inc. and the Company expensed $491,000 for the three months ended September 30, 2004 and $1.4 million for the nine months ended September 30, 2004 for data feeds from Comstock, Inc. Direct charges for subscription revenues for certain IDC data feeds were $5,000 and $9,000 for the three months ended September 30, 2004 and 2003, respectively, and $18,000 and $30,000 for the nine months ended September 30, 2004 and 2003, respectively. In addition, the Company recognized revenues of $602,000 and $610,000 for the three months ended September 30, 2004 and 2003, respectively, and $1.9 million for the nine months ended September 30, 2004 and 2003 from television and radio programming on CBS stations. The Company recognized costs to CBS of $333,000 and $337,000 for the three months ended September 30, 2004 and 2003, respectively, and $1.0 million and $923,000 for the nine months ended September 30, 2004 and 2003, respectively, for production of television and radio programming. At September 30, 2004 and December 31, 2003, $7,000 and $453,000, respectively, were included in accounts receivable for radio and television revenue due from CBS. In addition, $7,000 and $11,000, respectively, were included in the Company's accounts receivable related to licensing and subscription revenues due from IDC, and $102,000 and $92,000, respectively, were included in the Company's accounts receivable related to licensing revenues due from FT.com and Financial Times, subsidiaries of Pearson plc. At September 30, 2004 and December 31, 2003, the Company had a liability of $1.0 million and $972,000, respectively, recorded for CBS royalty fees, a liability of $286,000 and $266,000, respectively, owed to CBS for television production and facilities costs, and a liability of $654,000 and $203,000, respectively, to IDC and Comstock, Inc. for data feeds. NOTE 7 - SEGMENT REPORTING The Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for reporting information about operating segments in a company's financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company operates in one reportable segment. NOTE 8 - LITIGATION AND ASSERTED CLAIMS In 2001, several plaintiffs filed class action lawsuits in federal court against the Company, certain of its current and former officers and directors and its underwriters in connection with its January 1999 initial public offering. The complaints generally assert claims under the Securities Act, the Exchange Act and rules promulgated by the Securities and Exchange Commission. The complaints seek class action certification, unspecified damages in an amount to be determined at trial, and costs associated with the litigation, including attorneys' fees. The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On June 25, 2003, a committee of the Company's board of directors approved a Memorandum of Understanding ("MOU"), which has now been memorialized in a settlement agreement and related agreements that set forth the terms of a settlement between the Company, the plaintiff class and a vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of the Company and the individual defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign, not assert, or release certain potential claims the Company may have against its underwriters. No estimate can be made of the possible loss or possible range of losses associated with the resolution of this matter and it is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any material payment by the Company and no liability associated with these lawsuits has been recorded at September 30, 2004. The settlement agreement has been submitted to the Court for approval. Approval by the Court cannot be assured. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Company's case. On June 7, 2002, an action was commenced against Pinnacor alleging a breach of contract claim and, as amended, sought damages in the amount of $290,280. On February 7, 2003, Pinnacor filed counterclaims against the plaintiff for breach of contract, breach of warranty and misrepresentation. Motions for summary judgment were filed in early 2003. These motions are still pending. The Company has established an appropriate accrual based on the expected outcome of the legal proceeding and does not expect the ultimate resolution of the claim to have a material impact on the balance sheet, results of operations and cash flows. On July 24, 2003, a shareholder class action lawsuit was filed against Pinnacor, Pinnacor's then-current directors, a then-current Pinnacor officer, and the Company in the Delaware Court of Chancery. The lawsuit alleged that Pinnacor's directors breached their fiduciary duties in proceeding with the acquisition by agreeing to an inadequate proposed purchase price and alleged that the Company aided and abetted these breaches of fiduciary duty in some unspecified way. The parties have settled the action, pursuant to which the Company has paid plaintiff's counsel $300,000 in attorney's fees and $15,000 in actual costs. The action has been dismissed with prejudice and all defendants have been released from liability. The Company has accrued the costs associated with this matter as of September 30, 2004 and the fees were paid in October 2004. On September 8, 2003, an action was commenced in the Supreme Court of the State of New York against Tendagio, Inc. (formerly Inlumen, Inc.), Pinnacor and several unnamed defendants. The lawsuit alleged a breach of contract claim and a fraudulent conveyance claim. In April 2004, the Company served upon the plaintiff its cross motion for summary judgment seeking dismissal of the complaint with prejudice. In May 2004, the Company was served with plaintiff's cross motion seeking dismissal of the action in its entirety, without prejudice, or alternatively, additional time to respond to defendants' summary judgment motions. In July 2004, the parties settled the action, pursuant to which the action has been dismissed with prejudice, all defendants have been released from liability and the Company has no financial obligation to the plaintiff. On October 18, 2004, an action was commenced in the United States District Court for the Southern District of New York against the Company. The lawsuit alleges a breach of contract claim in the amount of $400,000. The Company is currently drafting an answer to the complaint. No estimate can be made of the possible loss or possible range of losses associated with the resolution of this matter. As a result, no losses have been accrued in the Company's financial statements as of September 30, 2004. Accordingly, the result of this lawsuit could have a material impact on the balance sheet, results of operations and cash flows. On or about November 2, 2004, a former employee of Pinnacor Inc. filed a demand for arbitration before Judicial Arbitration and Mediation Services seeking compensation related to the termination agreement he entered into with the Company. The former employee claims he is entitled to lost wages of $284,375 plus certain additional fees and damages. The Company's management has not had an opportunity to review and evaluate this claim. The Company has established an appropriate accrual based on the expected outcome of the legal proceeding and does not expect the ultimate resolution of the claim to have a material impact on the balance sheet, results of operations and cash flows. On or about November 5, 2004, a shareholder class action lawsuit was filed against the Company, the Company's directors, and Viacom, Inc. ("Viacom") in the Delaware Court of Chancery in connection with an amendment to a Schedule 13D filed by Viacom. The lawsuit alleges, among other things, that the Company's directors breached their fiduciary duties. The Complaint seeks, among other things, a court order, an injunction and unspecified damages. The Company's management has not had an opportunity to review and evaluate this claim. As a result, no losses have been accrued in the Company's financial statements as of September 30, 2004. Accordingly, the result of this lawsuit could have a material impact on the balance sheet, results of operations and cash flows. On November 5, 2004, the Company received a preliminary report from a third party auditor representing a data provider. The audit was routine in nature and intended to ensure the Company's compliance with the data vendor's contractual obligations. Although the Company has not yet received any formal notification from the data provider, the preliminary report reflects a potential exposure of approximately $7.4 million, with a possible additional liability for retroactive payment of 8% thereon. Until the Company receives a formal demand letter, the Company's management cannot fully review and evaluate the claim and no estimate can be made of the possible loss or possible range of losses associated with the resolution of this matter. As a result, no losses have been accrued in the Company's financial statements as of September 30, 2004. The result of this audit resolution could have a material impact on the balance sheet, results of operations and cash flow. In addition, the Company from time to time is subject to legal proceedings and claims in the ordinary course of business. The Company is not currently aware of any other legal proceedings or claims that will have a material adverse effect on its financial position or results of operations. NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the FASB issued a proposed Statement, "Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95," that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using the intrinsic method that the Company currently uses and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of operations. In October 2004, the FASB decided to defer the effective date for public companies to interim and annual periods beginning after June 15, 2005. It is expected that the final standard will be issued before December 31, 2004 and should it be finalized in its current form, it will have a significant impact on the consolidated statement of operations as the Company will be required to expense the fair value of stock option grants and stock purchases under employee stock purchase plan. In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed statement. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost method. The Company is currently evaluating the effect of this proposed statement on its financial position and results of operations. EX-99.5 5 lhexh99_5.txt UNAUDITED PRO FORMA COND. COMB. FIN. STATEMENTS EXHIBIT 99.5 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS On January 21, 2005, Dow Jones completed its merger with MarketWatch and combined their operations (the "Merger"). The following unaudited pro forma condensed combined balance sheet at September 30, 2004 and the unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2004 and for the year ended December 31, 2003, and the accompanying notes thereto, have been prepared to illustrate the effects of the Merger on the historical financial position and results of operations of Dow Jones and MarketWatch. However, the pro forma condensed combined financial statements and related notes do not give effect to any refinancing of the commercial paper borrowings incurred in connection with the Merger. The unaudited pro forma condensed combined statements of income combine the historical consolidated statements of income of Dow Jones and MarketWatch as if the Merger occurred on January 1, 2003. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of Dow Jones and MarketWatch as if the Merger occurred on September 30, 2004. The assumptions and adjustments, using the purchase method of accounting, are described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements and related notes are presented for informational purposes only. The pro forma data is not necessarily indicative of what our financial position or results of operations actually would have been had we completed the Merger at the respective dates indicated and do not include or reflect potential cost savings from operating efficiencies or synergies that may result from the Merger. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company. The historical consolidated financial statements have been adjusted to give effect to pro forma events that are (1) directly attributable to the Merger; (2) factually supportable; and (3) as they relate to the statements of income, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements and the respective historical financial information from which it has been derived, which includes: o separate historical audited financial statements of Dow Jones and MarketWatch, including notes thereto, for the year ended December 31, 2003 included in Dow Jones' Annual Report on Form 10-K for the year then ended and MarketWatch's amended Annual Report on Form 10-K/A for the year then ended; and o separate historical unaudited financial statements of Dow Jones and MarketWatch, including notes thereto, as of and for the nine months ended September 30, 2004 included in Dow Jones' Quarterly Report on Form 10-Q for the period then ended and MarketWatch's Quarterly Report on Form 10-Q for the period then ended. The unaudited pro forma condensed combined financial statements have been prepared using the purchase method of accounting with Dow Jones treated as the acquirer. Accordingly, Dow Jones' estimated cost to acquire MarketWatch of approximately $538 million (including transaction costs) has been preliminarily allocated to the assets acquired and the liabilities assumed according to their respective estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. Management, with the assistance of independent valuation specialists, is currently determining the estimated fair values of a significant portion of these net assets. The final determination of the estimated fair value of the acquired net assets will be completed as soon as possible, but no later than one year from the January 21, 2005 acquisition date. The final valuation will be based on the actual assets acquired and liabilities assumed at the acquisition date and management's consideration of the independent valuation work. Although the final determination may result in asset and liability fair values that are different than the preliminary estimates of these amounts included herein, it is not expected that those differences will be material to an understanding of the impact of this transaction to Dow Jones. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AT SEPTEMBER 30, 2004 (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA -------------------------- -------------------------- DOW JONES MARKETWATCH ADJUSTMENTS COMBINED -------------------------- -------------------------- ASSETS ------ Current assets: Cash and cash equivalents $ 21,006 $ 56,383 $ (69,039)(a)$ 8,350 Restricted cash -- 920 -- 920 Accounts receivable -- trade, net 160,596 12,687 -- 173,283 Accounts receivable -- other 27,569 -- -- 27,569 Newsprint inventory 12,047 -- -- 12,047 Prepaid expenses 18,117 2,298 -- 20,415 Deferred income taxes 14,290 -- -- 14,290 ---------- ----------- ------------ ----------- Total current assets 253,625 72,288 (69,039) 256,874 ---------- ----------- ------------ ----------- Investments in associated companies, at equity 83,786 -- -- 83,786 Other investments 13,969 -- -- 13,969 Plant, property and equipment, at cost 1,763,076 22,793 -- 1,785,869 Less, accumulated depreciation 1,110,016 18,949 -- 1,128,965 ---------- ----------- ------------ ----------- Plant, property and equipment, net 653,060 3,844 -- 656,904 Goodwill 242,259 88,389 315,862 (b) 646,510 Other intangible assets 86,974 6,973 53,027 (b) 146,974 Deferred income taxes 15,786 -- 29,881 (c) 45,667 Restricted cash -- 175 -- 175 Other assets 30,100 1,165 -- 31,265 ---------- ----------- ------------ ----------- Total assets $1,379,559 $ 172,834 $ 329,731 $ 1,882,124 ========== =========== ============ =========== LIABILITIES ----------- Current liabilities: Short-term borrowings $ -- $ -- $ 438,700 (a)$ 438,700 Accounts payable and accrued expenses 116,839 16,125 14,100 (d) 147,064 Retirement plan contributions payable 19,483 -- -- 19,483 Other payables 65,684 487 -- 66,171 Dividend payable 20,486 -- -- 20,486 Contract guarantee obligation 205,402 -- -- 205,402 Income tax payable 56,315 -- -- 56,315 Unearned revenue 199,380 7,058 -- 206,438 ---------- ----------- ------------ ----------- Total current liabilities 683,589 23,670 452,800 1,160,059 ---------- ----------- ------------ ----------- Long-term debt 196,553 -- -- 196,553 Deferred compensation, principally postretirement 302,395 -- -- 302,395 Contract guarantee obligation 53,779 -- -- 53,779 Other noncurrent liabilities 18,079 1,095 -- 19,174 ---------- ----------- ------------ ----------- Total liabilities 1,254,395 24,765 452,800 1,731,960 ---------- ----------- ------------ ----------- Minority interests in subsidiaries 3,310 -- -- 3,310 STOCKHOLDERS' EQUITY -------------------- Common stock 102,181 254 (254)(e) 102,181 Additional paid-in capital 124,687 394,239 (394,239)(e) 124,687 25,000 (f) 25,000 Retained earnings (accumulated deficit) 803,824 (246,409) 246,409 (e) 803,824 Accumulated other comprehensive income (loss), net 8,960 (15) 15 (e) 8,960 ---------- ----------- ------------ ----------- 1,039,652 148,069 (123,069) 1,064,652 Less, treasury stock, at cost 917,798 -- -- 917,798 ---------- ----------- ------------ ----------- Total stockholders' equity 121,854 148,069 (123,069) 146,854 ---------- ----------- ------------ ----------- Total liabilities and stockholders' equity $1,379,559 $ 172,834 $ 329,731 $ 1,882,124 ========== =========== ============ =========== The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA -------------------------- -------------------------- DOW JONES MARKETWATCH ADJUSTMENTS COMBINED -------------------------- -------------------------- REVENUES: Advertising $ 694,683 $ 22,812 $ -- $ 717,495 Information services 242,251 33,578 (225)(g) 275,604 Circulation and other 297,369 1,389 -- 298,758 ---------- ----------- ---------- ----------- Total revenues 1,234,303 57,779 (225) 1,291,857 EXPENSES: News, production and technology 386,665 29,769 -- 416,434 Selling, administrative and general 434,026 22,902 (225)(g) 456,703 Newsprint 84,960 -- -- 84,960 Print delivery costs 141,285 -- -- 141,285 Depreciation and amortization 79,651 3,670 3,640 (b) 86,961 Restructuring charges and September 11-related items, net (2,761) -- -- (2,761) ---------- ----------- ---------- ----------- Operating expenses 1,123,826 56,341 3,415 1,183,582 Operating income 110,477 1,438 (3,640) 108,275 OTHER INCOME (DEDUCTIONS): Interest income (expense), net (2,080) 363 (8,384)(a) (10,101) Equity in earnings of associated companies 1,386 -- -- 1,386 Gain on disposition of investment 3,260 -- -- 3,260 Contract guarantee, net (5,455) -- -- (5,455) Other, net (506) -- -- (506) ---------- ----------- ---------- ----------- Income before income taxes and minority interests 107,082 1,801 (12,024) 96,859 Income taxes 44,694 54 (4,143)(c) 40,605 ---------- ----------- ---------- ----------- Income before minority interests 62,388 1,747 (7,881) 56,254 Minority interests in losses of 1,536 -- -- 1,536 subsidiaries ---------- ----------- ---------- ----------- NET INCOME $ 63,924 $ 1,747 $ (7,881) $ 57,790 ========== =========== ========== =========== PER SHARE: Net income: Basic $ 0.78 $ 0.07 -- $ 0.71 Diluted 0.78 0.07 -- 0.70 Weighted-average shares outstanding: Basic 81,825 24,427 -- 81,825 Diluted 82,239 26,468 -- 82,601 The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA -------------------------- -------------------------- DOW JONES MARKETWATCH ADJUSTMENTS COMBINED -------------------------- -------------------------- REVENUES: Advertising $ 871,817 $ 24,084 $ -- $ 895,901 Information services 286,863 21,281 (164)(g) 307,980 Circulation and other 389,805 1,808 -- 391,613 ---------- ----------- ---------- ----------- Total revenues 1,548,485 47,173 (164) 1,595,494 EXPENSES: News, production and technology 483,709 22,519 -- 506,228 Selling, administrative and general 540,529 18,596 (164)(g) 558,961 Newsprint 105,066 -- -- 105,066 Print delivery costs 188,662 -- -- 188,662 Depreciation and amortization 106,014 3,755 6,794 (b) 116,563 Restructuring charges and September 11-related items, net (18,408) -- -- (18,408) ---------- ----------- ---------- ----------- Operating expenses 1,405,572 44,870 6,630 1,457,072 Operating income 142,913 2,303 (6,794) 138,422 OTHER INCOME (DEDUCTIONS): Interest income (expense), net 4,941 502 (11,178)(a) (5,735) Equity in earnings of associated companies 2,869 -- -- 2,869 Gain on non-monetary exchange of equity holdings 18,699 -- -- 18,699 Gain on resolution of Telerate sale loss contingencies 59,821 -- -- 59,821 Contract guarantee, net (9,523) -- -- (9,523) Other, net 1,138 -- -- 1,138 ---------- ----------- ---------- ----------- Income before income taxes and minority interests 220,858 2,805 (17,972) 205,691 Income taxes 51,704 150 (6,217)(c) 45,637 ---------- ----------- ---------- ----------- Income before minority interests 169,154 2,655 (11,755) 160,054 Minority interests in losses of subsidiaries 1,445 -- -- 1,445 ---------- ----------- ---------- ----------- NET INCOME $ 170,599 $ 2,655 $ (11,755) $ 161,499 ========== =========== ========== =========== PER SHARE: Net income: Basic $ 2.09 $ 0.15 -- $ 1.98 Diluted 2.08 0.14 -- 1.96 Weighted-average shares outstanding: Basic 81,593 17,317 -- 81,593 Diluted 81,950 18,594 -- 82,293 The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. Basis of Pro Forma Presentation On January 21, 2005, Dow Jones acquired MarketWatch for a purchase price of $18 per share in cash for each share of MarketWatch common stock outstanding on the effective date of the Merger. Each outstanding option to purchase shares of MarketWatch common stock has been assumed using an exchange ratio based on the five day trading average of Dow Jones common stock immediately preceding and excluding the effective date of the Merger using a $18 value. Based on the number of shares of MarketWatch common stock and options outstanding as of the acquisition date, Dow Jones made a payment of approximately $507.7 million and issued options to purchase approximately 1.2 million shares of Dow Jones common stock. The estimated fair value of the Dow Jones common stock options issued to replace the outstanding MarketWatch common stock options, approximately $25 million, was determined using the Black-Scholes model. The estimated total purchase price for the MarketWatch acquisition is as follows (in thousands): Cash $ 507,739 Fair value of Dow Jones options to be issued 25,000 Estimated direct Merger costs 5,100 ----------- Total estimated purchase price $ 537,839 =========== The unaudited pro forma condensed combined statements of income combine the historical consolidated statements of income of Dow Jones and MarketWatch as if the transaction occurred on January 1, 2003. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of Dow Jones and MarketWatch as if the transaction occurred on September 30, 2004. The Merger has been accounted for as a purchase by Dow Jones under accounting principles generally accepted in the United States of America. Under the purchase method of accounting, the total estimated purchase price is allocated to MarketWatch's net tangible and intangible assets based upon their estimated fair value as of the date of completion of the Merger. Based upon the estimated purchase price and the preliminary valuation performed, the preliminary purchase price allocation, which is subject to change based on Dow Jones' final analysis, is as follows (in thousands): TANGIBLE ASSETS: Cash, cash equivalents and restricted cash $ 57,478 Accounts receivable and other current assets 14,985 Property, plant and equipment, net 3,844 Deferred tax assets, net 29,881 Other assets -- long term 1,165 ----------- Total tangible assets 107,353 ----------- INTANGIBLE ASSETS: Customer relationships 16,800 Developed technology 13,200 Trade name 30,000 Goodwill 404,251 ----------- Total intangible assets 464,251 ----------- LIABILITIES ASSUMED: Accounts payable and other accrued liabilities (25,612) Deferred revenue (7,058) Other liabilities -- long term (1,095) ----------- Total liabilities assumed (33,765) ----------- Net assets acquired $ 537,839 ----------- A preliminary estimate of $30 million has been allocated to amortizable intangible assets consisting of customer-related intangible assets and developed technology with useful lives between four and seven years. In addition, a preliminary estimate of $30 million has been allocated to indefinite lived intangible assets, principally trade names, which will not be amortized. A preliminary estimate of $404.3 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not deductible for tax purposes. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", goodwill and acquired indefinite-lived intangibles associated with the Merger will not be amortized and will be tested for impairment at least annually. The preliminary purchase price allocation for MarketWatch is subject to revision as more detailed analysis is completed and additional information concerning the fair values of MarketWatch's assets and liabilities becomes available. Any change in the fair value of the net assets of MarketWatch will change the amount of the purchase price allocable to goodwill. Final purchase accounting adjustments, which may differ materially from the pro forma adjustments presented here, will be completed no later than one year from the January 21, 2005 acquisition date. 2. Pro Forma Adjustments Certain reclassifications have been made to conform MarketWatch's historical amounts to Dow Jones' financial statement presentation. Dow Jones is currently reviewing accounting policies and financial statement classifications used by MarketWatch. As a result of this review, it may become necessary to make certain additional reclassifications to the combined financial statements. The accompanying unaudited pro forma condensed combined financial statements have been prepared as if the Merger was completed as of September 30, 2004 and January 1, 2003 for balance sheet and statements of operations purposes, respectively. The following pro forma adjustments are included: (a) To record the cash expended ($69 million) and debt incurred ($438.7 million) to purchase all outstanding shares of MarketWatch for the Merger. To record the corresponding interest expense ($8.4 million for the nine months ended September 30, 2004 and $11.2 million for the year ended December 31, 2003) related to the debt incurred. The debt initially incurred for the Merger was commercial paper which has a variable interest rate. The interest expense presented in these pro forma adjustments reflects the actual interest rate in effect for commercial paper at the Merger date which was approximately 2.52%. A variation in the actual interest rate of 1/8% would correspond to a change in the interest expense presented in these pro forma adjustments of approximately $0.4 million for the nine months ended September 30, 2004 and approximately $0.6 million for the year ended December 31, 2003. (b) To eliminate the historical goodwill ($88.4 million) and intangible assets ($7 million) and record the estimated acquired goodwill ($404.3 million) and other intangible assets ($60 million) as a result of the Merger. The weighted average life of amortizable intangible assets (approximately $30 million), customer relationships and developed technology, is between 4 and 7 years. To eliminate the historical amortization of the intangible assets of $1.5 million for the nine months ended September 30, 2004 and record amortization of the amortizable intangible assets ($5.1 million for the nine months ended September 30, 2004 and $6.8 million for the year ended December 31, 2003) related to the estimated fair value of identifiable intangible assets from the purchase price allocation. (c) To record a net deferred tax asset ($29.9 million), which consists primarily of (i) MarketWatch's federal and state net operating loss carryforwards ("NOLs") for which a full valuation allowance was recorded by MarketWatch due to the uncertainty of realization ($53.9 million) and (ii) deferred tax liabilities associated with the acquired identifiable definite-lived intangible assets ($24 million). The realization by Dow Jones of the MarketWatch NOLs is subject to certain limitations, both annually and in total, under Section 382 of the Internal Revenue Code. To adjust for income tax effects of pro forma adjustments and MarketWatch results at the estimated effective rate of 40% ($4.1 million for the nine months ended September 30, 2004 and $6.2 million for the year ended December 31, 2003). (d) To record estimated direct transaction costs for the Merger ($5.1 million and $9 million to be incurred by Dow Jones and MarketWatch, respectively). (e) To eliminate the historical MarketWatch (1) par value balance of Common stock ($0.3 million); (2) Additional paid in capital ($394.2 million); (3) Accumulated deficit ($246.4 million); and, (4) Other comprehensive loss ($0.02 million). (f) To record the estimated fair value, under the Black-Scholes model, of Dow Jones shares of common stock and options to be issued to holders of MarketWatch options, which fully vested in connection with the Merger ($25 million). (g) To eliminate transactions between Dow Jones and MarketWatch, which are primarily related to license fees. Upon completion of the Merger, transactions that occur in connection with these arrangements would be considered intercompany transactions. All significant balances and transactions related to these arrangements have been eliminated from the unaudited pro forma condensed combined financial statements. Eliminations primarily relate to revenue and expense between Dow Jones and MarketWatch ($0.2 million for the nine months ended September 30, 2004 and the year ended December 31, 2003). 3. Pro Forma Condensed Combined Net Income Per Share Unaudited pro forma condensed combined net income per basic share was computed using Dow Jones' weighted average shares outstanding during the respective periods. Unaudited pro forma condensed combined net income per diluted share was computed by adding approximately 1.2 million options (using the treasury stock method) assumed to be issued to Dow Jones' weighted average shares outstanding during the respective periods. -----END PRIVACY-ENHANCED MESSAGE-----