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