<PAGE>
Rule No. 424(b)(1)
Registration No. 33-94054
2,000,000 Shares
[LOGO OF DESKTOP DATA, Desktop Data, Inc.
INC. APPEARS HERE]
Common Stock
------------
Of the 2,000,000 shares of Common Stock offered hereby, 1,677,000 shares are
being sold by Desktop Data, Inc. ("Desktop Data" or the "Company") and 323,000
shares are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. Prior to this offering, there has been no
public market for the Common Stock of the Company. See "Underwriting" for the
factors considered in determining the initial public offering price. The
Common Stock has been approved for quotation on The Nasdaq National Market
under the symbol "DTOP."
Upon the completion of this offering, the Company's directors and executive
officers, together with entities and persons affiliated with them, will
beneficially own approximately 58.4% of the outstanding Common Stock of the
Company (assuming no exercise of the Underwriters' overallotment option). See
"Risk Factors--Control by Executive Officers and Directors."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 6 HEREOF.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $15.00 $1.05 $13.95 $13.95
- --------------------------------------------------------------------------------
Total(3)................... $30,000,000 $2,100,000 $23,394,150 $4,505,850
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting estimated expenses of $600,000, all of which will be
payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 300,000 additional shares of the Common Stock solely to
cover over-allotments, if any. If such option is exercised in full, the
Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Stockholders will be $34,500,000,
$2,415,000, $27,579,150 and $4,505,850, respectively. See "Underwriting."
------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
August 16, 1995.
Alex. Brown & Sons Volpe, Welty & Company
INCORPORATED
THE DATE OF THIS PROSPECTUS IS AUGUST 11, 1995.
<PAGE>
[ARTWORK APPEARS HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the consolidated financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus.
THE COMPANY
Desktop Data is the leading independent provider of customized, real-time
news and information delivered to knowledge workers over their organizations'
local area networks. The Company's NewsEDGE service currently delivers up to
488 news and information sources in real time to users' personal computers,
automatically monitors and filters the news according to pre-established
personal interest profiles, and alerts users to stories matching their
profiles. The NewsEDGE service is used by executives, salespeople, marketers,
lawyers, accountants, consultants, bankers and financial professionals
throughout customer organizations. As of June 30, 1995, NewsEDGE was installed
by 297 customers, representing approximately 60,000 authorized users.
News and information sources currently available on NewsEDGE include
newswires from AFP/Extel News Limited, The Associated Press, Inc., Dow Jones &
Company, Inc., Knight-Ridder/Tribune Information Services, L.P., Nihon Shimbun
America, Inc. (English language Japanese news) and Reuters America, Inc. and
the text of stories in The Financial Post (Toronto), Financial Times (London),
The New York Times News Service, USA Today and The Wall Street Journal. Also
available on NewsEDGE are the business sections of over 100 North American
newspapers, periodicals such as Forbes, Fortune, InfoWorld, MacWeek and PC Week
and newsletters such as those distributed by American Banker and Phillips
Business Information Services, Inc.
Desktop Data's objective is to capitalize on the growing demand for
enterprise-wide information and the significant investments by businesses and
organizations in local area networks ("LANs") by enhancing its position as a
leading provider of customized, real-time news and information to knowledge
workers who need timely access to information. There can be no assurance that
this objective will be achieved. The Company seeks to continually improve and
expand NewsEDGE by adding newswires and other information sources, improving
the software's database, archiving and search capabilities, and assuring
NewsEDGE's compatibility with a wide range of personal computer ("PC") hardware
and software and LAN architectures. Desktop Data has established and maintains
relationships with major content providers and with major providers of LAN-
based software systems, including relationships pursuant to written agreements
with Microsoft Corporation, Lotus Development Corporation and Teknekron
Software Systems, Inc. See "Business--Sales and Marketing." The Company targets
large organizations and offers subscription-based pricing options that include
significant volume discounts to encourage widespread adoption of NewsEDGE
within customer organizations.
Unlike the information offerings of individual news providers, NewsEDGE
integrates newswires from a number of competitive sources into a single,
comprehensive service offering. While on-line services require users to dial
out and pull in searched stories on a variable cost basis, NewsEDGE profiles
and pushes the news to all LAN users 24 hours per day at a fixed, predictable
cost. Its point-and-click graphical user interface makes NewsEDGE an easy to
use monitoring and alerting resource for diverse knowledge workers rather than
a research tool designed for information specialists. The NewsEDGE software
profiles the full text of all stories, enabling users to automatically monitor
news concerning people, products and events as well as companies. In addition,
NewsEDGE's open architecture leverages LAN and PC investments by integrating
with customer groupware, E-mail and in-house applications rather than requiring
proprietary, stand-alone hardware and software.
Desktop Data's customers include AT&T Corporation, Citibank, N.A., Compaq
Computer Corporation, FMR Corp. (Fidelity Investments), Hewlett-Packard Co.,
Microsoft Corporation, Pfizer, Inc., Unilever United States, Inc. and the
Executive Office of the President of the United States. No customer accounted
for over 5% of the Company's revenues in any of the last three years. From
December 31, 1991 to December 31, 1994, the average per day, per user cost of
NewsEDGE for the Company's customers decreased from $1.82 to $0.95, and the
average number of NewsEDGE users per customer increased from 30 to 165. At the
same time, the average revenues per customer for these years increased from
$19,686 to $57,445. The Company's experienced direct sales force and
significant investments in development and customer support have resulted in
annual customer renewal rates of at least 90% for each of the last four years.
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3
<PAGE>
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.. 1,677,000 shares
Common Stock offered by the Selling
Stockholders........................ 323,000 shares
Common Stock to be outstanding after
the offering........................ 8,192,937 shares(1)(2)
Use of proceeds by the Company....... For general corporate purposes, including
working capital, and to pay accrued
dividends on the Company's Series A
Convertible Preferred Stock and Series B
Redeemable Preferred Stock
Nasdaq National Market symbol........ DTOP
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Subscription and
royalty revenues...... $ 529 $ 1,575 $ 3,441 $ 6,764 $12,925 $ 5,530 $ 9,821
Total revenues......... 537 2,006 4,207 7,660 14,358 6,248 10,499
Income (loss) from
operations............ (2,627) (1,850) (1,425) (1,296) (384) (455) 478
Net income (loss)...... (2,545) (1,818) (1,434) (1,262) (287) (425) 603
Pro forma net income
(loss) per common and
common equivalent
share(3).............. $ (.06) $ (.07) $ .08
Pro forma weighted
average number of
common and common
equivalent shares
outstanding(3)........ 6,670 6,648 6,922
OTHER OPERATING DATA:
Installed customers at
end of period......... 59 101 139 195 255 239 297
Authorized users at end
of period(4).......... 264 4,480 8,366 22,732 51,548 32,675 60,562
Average users per
customer(5)........... 4 30 54 93 165 128 203
Average revenues per
customer(6)........... $17,933 $19,686 $28,671 $40,503 $57,445 $25,484 $35,581
Annual renewal rate(7). N/A 90% 94% 99% 94% N/A N/A
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------
PRO PRO FORMA
ACTUAL FORMA (2) AS ADJUSTED (2)(8)
------- --------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................ $(4,545) $(6,295) $15,886
Total assets............................. 12,630 12,630 32,706
Redeemable preferred stock............... 4,720 1,963 1,963
Total stockholders' equity (deficit)..... (5,606) (4,818) 17,363
</TABLE>
- --------
(1) Based upon the number of shares outstanding as of June 30, 1995. Excludes
275,102 shares of Common Stock issuable upon the exercise of options
outstanding on that date, of which options to purchase 99,111 shares were
then exercisable at a weighted average exercise price of $1.22. See
"Management--Stock Plans."
(2) Gives effect to the conversion of all outstanding shares of the Company's
Series A Convertible Preferred Stock, Series C Convertible Preferred Stock
and Series D Redeemable Convertible Preferred Stock (collectively, the
"Convertible Preferred Stock") into an aggregate of 3,847,123 shares of
Common Stock upon the closing of this offering. See Notes 3 and 4 of Notes
to Consolidated Financial Statements.
(3) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(4) Number of users authorized pursuant to contracts with installed customers.
- --------------------------------------------------------------------------------
4
<PAGE>
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(5) Calculated by dividing (i) the average of the number of authorized users at
the end of the previous year and at the end of the current period, by (ii)
the average of the number of installed customers at the end of the previous
year and at the end of the current period.
(6) Calculated by dividing (i) subscription and royalty revenues for the
current period, by (ii) the average of the number of installed customers at
the end of the previous year and at the end of the current period.
(7) Total annualized amount due under subscription agreements in effect at the
end of the previous year for installed customers who renew their
subscriptions during the current year, as a percentage of the total
annualized amount due under all subscriptions for installed customers in
effect at the end of the previous year.
(8) Adjusted to give effect to the sale of 1,677,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom at the closing of this offering after deducting
underwriting discounts and commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
----------------
Except as otherwise noted, all information contained in this Prospectus (i)
reflects a 2.25 into 1 reverse stock split of the Company's Common Stock
effected as of June 26, 1995; (ii) reflects the conversion of all outstanding
shares of Convertible Preferred Stock into an aggregate of 3,847,123 shares of
Common Stock upon the closing of this offering; (iii) reflects an amendment to
the Company's Certificate of Incorporation, to be filed upon the closing of
this offering, to remove the Company's existing series of Convertible Preferred
Stock and to create a class of authorized but undesignated preferred stock; and
(iv) assumes no exercise of the Underwriters' over-allotment option. See "Use
of Proceeds," "Description of Capital Stock," "Underwriting" and Notes 3, 4 and
9 of Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, the
following factors should be considered carefully in evaluating an investment
in the Common Stock offered by this Prospectus.
Operating Losses. The Company has not been profitable for any year since its
inception, although it earned profits in each of the last four quarters. As of
June 30, 1995, the Company had an accumulated deficit of $8.0 million. There
can be no assurance that the Company will be profitable on either a quarterly
or annual basis in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Competition. The business information services industry is intensely
competitive and is characterized by rapid technological change and the entry
into the field of extremely large and well-capitalized companies as well as
smaller competitors. The Company competes or may compete directly or
indirectly with the following categories of companies: (i) large, well-
established news and information providers such as Knight-Ridder Information
Services, Inc. ("Dialog"), Dow Jones & Company, Inc. ("Dow Jones"), Reed
Elsevier PLC ("Lexis/Nexis"), Pearson PLC ("Pearson"), Reuters America, Inc.
("Reuters") and Thomson Financial Networks, Inc. ("Thomson"); (ii) market data
services companies such as Automatic Data Processing, Inc. ("ADP"), Bloomberg
L.P. ("Bloomberg"), Quotron Systems, Inc. ("Quotron") and Dow Jones Telerate
Inc. ("Telerate"); (iii) traditional print media companies that are
increasingly searching for opportunities for on-line provision of news,
including through the establishment of World Wide Web sites on the Internet;
(iv) large providers of LAN-based software systems such as Lotus Development
Corporation ("Lotus") and Microsoft Corporation ("Microsoft"), which could, in
the future, ally with competing news and information providers; and (v) to a
lesser degree, consumer-oriented commercial on-line services and Internet
access providers. Many of these companies and market participants not named
above have substantially greater financial, technical and marketing resources
than the Company. The Company believes that NewsEDGE is differentiated from
the news and system products offered by the large news and systems providers
because of the Company's ability to deliver news from many different,
competing providers on an enterprise-wide basis, directly to LAN-connected
personal computers, customized to meet the needs of each individual user, at a
relatively low cost per user.
In addition, several smaller companies offer directly competitive products
or services that provide news to enterprises through the customer's computer
network. The Company believes that NewsEDGE offers advantages over each of
these competing products. For example, each of the competing services offers
substantially fewer real-time news sources than does NewsEDGE. Furthermore,
unlike NewsEDGE, certain competitors do not offer real-time scrolling of news
stories, while others do not support Lotus Notes or other groupware
applications. In addition, many competitors rely on database engines developed
by third parties, and as a result the Company believes these services are not
as readily adaptable to evolving customer or information provider needs as is
NewsEDGE. Finally, each of these smaller competitors is owned by a larger
organization, which the Company believes restricts their ability to attract a
large variety of news sources and makes it difficult for them to provide the
same level and focus of sales, development and customer support as can be
provided by Desktop Data.
Increased competition, on the basis of price or otherwise, may require price
reductions or increased spending on marketing or software development, which
could have a material adverse effect on the Company's business and results of
operations. See "Business--Competition."
Dependence on NewsEDGE Service. The Company currently derives substantially
all of its revenues from NewsEDGE service subscriptions and related royalties.
Although the Company intends to increase the number of news and other
information sources available through NewsEDGE and to otherwise enhance
NewsEDGE, the Company's strategy is to continue to focus on providing the
NewsEDGE service
6
<PAGE>
as its sole line of business. In addition, there can be no assurance that the
Company will be able to increase the number of news sources or otherwise
enhance NewsEDGE. As a result, any factor adversely affecting sales of
NewsEDGE would have a material adverse effect on the Company. The Company's
future financial performance will depend principally on the market's
acceptance of NewsEDGE and the Company's ability to sell NewsEDGE to
additional customers and to increase revenue derived from existing customers
by increasing the number of users within each customer, adding additional
newswires or adding additional NewsEDGE servers. There can be no assurance
that the Company will be able to continue to successfully market NewsEDGE or
to increase its revenues per customer. See "Business--The NewsEDGE Service."
Dependence on News Providers. The Company currently makes 488 news and
information sources available through NewsEDGE, pursuant to agreements between
the Company and over 50 different news providers. A significant percentage of
the Company's customers subscribe to services provided by one or more of Press
Association Inc., a subsidiary of The Associated Press ("The Associated
Press"), Dow Jones, The Financial Times, Reuters and Thomson. The Company's
agreements with news providers are generally for a term of one year, with
automatic renewal unless notice of termination is provided before the end of
the term by either party. These agreements may also be terminated by the
provider if Desktop Data fails to fulfill its obligations under the agreement
and, under some of the agreements, upon the occurence of a change in control
of the Company. Many of these news and information providers compete with one
another and, to some extent, with the Company. Termination of one or more
significant news provider agreements would decrease the news and information
which the Company can offer its customers and would have a material adverse
effect on the Company's business and results of operations. See "Business--The
NewsEDGE Service."
Dependence on News Transmission Sources. NewsEDGE news and information is
transmitted using one or more of three methods: leased telephone lines,
satellites or FM radio transmission. None of these methods of news
transmission is within the control of the Company, and the loss or significant
disruption of any of them could have a material adverse effect on the
Company's business. Many newswire providers have established their own
broadcast communications networks using one or more of these three vehicles.
In these cases, Desktop Data's role is to arrange communications between the
news provider and the NewsEDGE customer's server. For sources which do not
have their own broadcast communications capability, news and information is
delivered to the Company's news consolidation facility, where it is
reformatted for broadcast to NewsEDGE servers and retransmitted to customers
through an arrangement between the Company and Mainstream Data, Inc.
("Mainstream"), a common carrier communications vendor. Mainstream is also the
communications provider for many newswires offered by the Company through
NewsEDGE. The Company's agreement with Mainstream expires on December 31, 1996
and can be terminated earlier in the event of a material breach by the Company
of the agreement. If the agreement with Mainstream were terminated on short
notice, or if Mainstream were to encounter technical or financial difficulties
adversely affecting its ability to continue to perform under the agreement or
otherwise, the Company's business would be materially and adversely affected.
Mainstream is a privately-held company and, therefore, Desktop Data does not
have access to information concerning Maintstream's financial condition.
However, the Company has no reason to believe that Mainstream has any
financial difficulty that would cause it to be unable to fulfill its
obligations under its agreement with Desktop Data. Moreover, the Company
believes that if Mainstream were unable to fulfill those obligations, other
sources of retransmission would be available to the Company, although the
transition from Mainstream to those sources could result in delays or
interuptions of service that could have a material adverse affect on the
Company's business. See "Business--The NewsEDGE Service."
Rapid Technological Change. The business information services, software and
communications industries are subject to rapid technological change, which may
render existing products and services obsolete or require significant
unanticipated investments in research and development. The Company's future
success will depend, in part, upon its ability to enhance NewsEDGE and keep
pace with
7
<PAGE>
technological developments. There can be no assurance that the Company will
not experience difficulties that could delay or prevent the successful
enhancement and continued development of its services or that new or enhanced
services, once developed, will meet with market acceptance. See "Business--The
NewsEDGE Service" and "--Development."
Dependence on Proprietary Technology. The Company's success is heavily
dependent upon proprietary technology. The Company's NewsEDGE software is
licensed to customers under license agreements containing provisions
prohibiting the unauthorized use, copying and transfer of the licensed
program. In addition, the Company relies on a combination of trade secret,
copyright and trademark laws and non-disclosure agreements to protect its
proprietary rights in its software and technology. There can be no assurance
that such measures are or will be adequate to protect the Company's
proprietary technology. In addition, there can be no assurance that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. See
"Business--Intellectual Property and Proprietary Rights."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management, sales and technical personnel, and on its ability to continue to
attract, retain and motivate qualified personnel. The competition for such
employees is intense. The Company has no long-term employment contracts with
any of its employees, and, with the exception of the Company's executive
officers, none of its employees is bound by a non-competition agreement. The
loss of the services of one or more of the Company's executive officers, sales
people, design engineers or other key personnel or the Company's inability to
recruit replacements for such personnel or to otherwise attract, retain and
motivate qualified personnel could have a material adverse effect on the
Company's business and results of operations. The Company maintains $3 million
of key-man life insurance on Donald L. McLagan, the Company's Chairman,
President and Chief Executive Officer. See "Business--Employees" and
"Management--Executive Officers and Directors."
Potential Fluctuations in Quarterly Results. The Company has generally
increased operating expenses in each successive quarter to generate and
support higher revenue levels and development efforts and, in part, based on
its expectations regarding future revenue levels. Particularly when viewed on
a quarterly basis, the addition of new development engineers and new sales
people represent investments which may negatively affect the Company's
operating income until those new people become productive. If revenue levels
in any quarter are below expectations, operating results are likely to be
adversely affected. Net income may be disproportionately affected by a
reduction in revenues because a proportionately smaller amount of the
Company's expenses varies with its revenues. As a result, the Company believes
that quarter-to-quarter comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to the foregoing factors, it is possible that in some future
quarter the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Operating Results."
Control by Executive Officers and Directors. Upon the closing of this
offering, the Company's directors and executive officers, together with
entities and persons affiliated with them, will beneficially own approximately
58.4% of the outstanding Common Stock (56.3% if the Underwriters' over-
allotment option is exercised in full). Accordingly, such persons, if acting
together, would have sufficient voting power to control the outcome of matters
(including the election of a majority of the Board of Directors, and any
merger, consolidation or sale of all or substantially all of the Company's
assets) submitted to the stockholders for approval and also to have control
over the management and affairs of the Company. As a result of such control,
certain transactions may not be possible without the approval of such
stockholders. These transactions include proxy contests, mergers involving the
Company, tender offers, open-market purchase programs or other purchases of
Common Stock that could give stockholders of the Company
8
<PAGE>
the opportunity to realize a premium over the then-prevailing market price for
their shares of Common Stock. See "Principal and Selling Stockholders" and
"Description of Capital Stock--Delaware Law and Certain Charter and By-law
Provisions; Anti-Takeover Effects."
Absence of Public Market and Possible Volatility of Stock Price. Prior to
this offering, there has been no public market for the Common Stock of the
Company. The Common Stock has been approved for quotation on The Nasdaq
National Market. However, there can be no assurance that, following this
offering, an active trading market for the Common Stock will develop or be
sustained or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price has been
determined by negotiations among the Company, representatives of the Selling
Stockholders, and the Representatives of the Underwriters and will not
necessarily reflect the market price of the Common Stock after this offering.
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price. The stock market in recent years has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many technology companies and that have often
been unrelated or disproportionate to the operating performance of such
companies. The market price of the Common Stock could also be subject to
significant fluctuations in response to, and may be adversely affected by,
variations in quarterly operating results, changes in earnings estimates by
analysts and adverse earnings or other financial announcements of the
Company's customers as well as other factors.
Unspecified Use of Proceeds. The principal purposes of this offering are to
increase the Company's equity capital and to create a public market for the
Company's Common Stock, which will facilitate future access by the Company to
public equity markets and enhance the ability of the Company to use its Common
Stock as consideration for acquisitions and as a means for attracting and
retaining key employees. The Company intends to use the proceeds of this
offering primarily for general corporate purposes, including working capital.
The Company has not as yet identified specific uses of a majority of the net
proceeds to be received by it from this offering, and, pending such uses, the
Company expects that it will invest such net proceeds in short-term, interest-
bearing investment grade securities. Accordingly, the Company's management
will have broad discretion as to the use of such proceeds without any action
or approval of the Company's stockholders. See "Use of Proceeds."
Payments to Affiliates. In connection with the Company's payment upon the
closing of this offering of all accrued and unpaid dividends on the Series A
Convertible Preferred Stock, Messrs. Cass, Homans, McLagan and Semmel,
together with their respective affiliates, will receive an estimated $255,000,
$12,000, $435,000 and $168,000, respectively, in their capacities as holders
of Series A Convertible Preferred Stock of the Company. In connection with the
Company's payment upon the closing of this offering of all accrued and unpaid
dividends on the Series B Redeemable Preferred Stock, Messrs. Cass, McLagan
and Semmel, together with their respective affiliates, will receive an
estimated $12,000, $30,000 and $11,000, respectively, in their capacities as
holders of Series B Redeemable Preferred Stock, and William Blair Venture
Partners III ("Blair") will receive an estimated $530,000. The Company may use
a portion of the proceeds of this offering to redeem the Series B Redeemable
Preferred Stock. See "Use of Proceeds" and "Certain Transactions."
Shares Eligible For Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the
prevailing market price of the Common Stock. In addition to the 2,000,000
shares of Common Stock offered hereby (assuming no exercise of the
Underwriters' over-allotment option), as of the date of this Prospectus (the
"Effective Date"), based upon shares outstanding as of June 30, 1995, there
will be 6,192,937 shares of Common Stock outstanding, all of which are
"restricted" shares (the "Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"). Approximately 111,162 Restricted
Shares will be eligible for sale immediately following the Effective Date in
reliance on Rule 144(k) promulgated under the Securities Act. Beginning 90
days and 180 days after the Effective Date, an additional 41,191 and 5,875,305
Restricted Shares, respectively, will
9
<PAGE>
first become eligible for sale in the public market pursuant to Rules 144 and
701 promulgated under the Securities Act, upon the expiration of certain lock-
up agreements with the Underwriters, or as a result of a combination of the
foregoing. Of the Restricted Shares that will first become eligible for sale
in the public market 180 days after the Effective Date, approximately
4,452,751 shares will be subject to certain volume and other resale
restrictions pursuant to Rule 144. The Securities and Exchange Commission has
proposed an amendment to Rule 144 which would reduce the holding period
required for shares subject to Rule 144 to become eligible for sale in the
public market. If this proposal is adopted, an additional 31,950 shares will
become eligible for sale to the public 180 days after the Effective Date. In
addition, upon the expiration of lock-up agreements with the Underwriters and
pursuant to a registration statement on Form S-8, which the Company intends to
file with the Securities and Exchange Commission 90 days following the
Effective Date, an aggregate of approximately 1,796 and 146,770 shares
issuable upon exercise of stock options will first become eligible for sale in
the public market 90 and 180 days following the Effective Date, respectively.
See "Principal and Selling Stockholders" and "Shares Eligible for Future
Sale."
Effect of Anti-Takeover Provisions. Upon the closing of this offering, the
Company's Board of Directors will have the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Amended and Restated Certificate of Incorporation, which will be
filed upon the closing of this offering (the "Amended and Restated
Certificate"), will provide for a classified Board of Directors, and members
of the Board of Directors may be removed only for cause upon the affirmative
vote of holders of at least a majority, or without cause, upon the affirmative
vote of at least 75% of the shares of capital stock of the Company entitled to
vote. Furthermore, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person first becomes an "interested stockholder," unless the
business combination is approved in a prescribed manner. The application of
Section 203 could also have the effect of delaying or preventing a change of
control of the Company. Certain other provisions of the Amended and Restated
Certificate may have the effect of delaying or preventing changes of control
or management of the Company, which could adversely affect the market price of
the Company's Common Stock. See "Description of Capital Stock--Delaware Law
and Certain Charter and By-law Provisions; Anti-Takeover Effects."
Dividend Policy. In connection with the conversion of the Company's
outstanding Series A Convertible Preferred Stock on the closing of this
offering, the Company will pay the holders of such stock dividends accruing at
the rate of $.0656 per share per annum ($350,000 per annum in the aggregate).
As of June 30, 1995, the amount accrued for such dividends was $2.0 million.
Upon closing of this offering, the Company will pay to the holders of the
Company's outstanding Series B Redeemable Preferred Stock dividends accruing
at the rate of $10.00 per share per annum ($135,000 per annum in the
aggregate). As of June 30, 1995, the amount accrued for such dividends was
$613,000. Donald L. McLagan, the Company's Chairman, Chief Executive Officer
and President, as well as A. Baron Cass III, Peter P. Homans and David R.
Semmel, each of whom is a director of the Company, are holders of Series A
Convertible Preferred Stock. Messrs. McLagan, Cass and Semmel are also holders
of Series B Redeemable Preferred Stock, and Ellen Carnahan, a director of the
Company, is a general partner of Blair, which is a holder of Series B
Redeemable Preferred Stock. Except for the payment of these dividends, the
Company has never
10
<PAGE>
declared or paid cash dividends on its capital stock and the Company does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The terms of the Series B Redeemable Preferred Stock, which will
remain outstanding following this offering, prohibit payment of dividends on
the Company's Common Stock while the Series B Redeemable Preferred Stock
remains outstanding. See "Use of Proceeds," "Dividend Policy," "Description of
Capital Stock--Series B Redeemable Preferred Stock" and "Certain
Transactions."
Immediate and Substantial Dilution. Purchasers of Common Stock offered
hereby will suffer an immediate and substantial dilution in the net tangible
book value of the Common Stock from the initial public offering price. See
"Dilution."
THE COMPANY
The Company was incorporated in the State of Delaware in July 1988. The
Company's principal executive offices are located at 1601 Trapelo Road,
Waltham, Massachusetts 02154, and its telephone number is (617) 672-2400.
References herein to "Desktop Data" and the "Company" include Desktop Data,
Inc. and its wholly-owned subsidiary, Desktop Data Canada, Inc.
NewsEDGE (R) is a registered trademark and Desktop Data and the NewsEDGE
logo are trademarks of the Company. All other trademarks and tradenames
referred to in this Prospectus are the property of their respective owners.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,677,000 shares of
Common Stock offered by the Company hereby are estimated to be $22.8 million
($27.0 million if the Underwriters' over-allotment option is exercised in
full), after deducting underwriting discounts and commissions and estimated
offering expenses. The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The principal purposes of this offering are to increase the Company's equity
capital and to create a public market for the Company's Common Stock, which
will facilitate future access by the Company to public equity markets and
enhance the ability of the Company to use its Common Stock as consideration
for acquisitions and as a means for attracting and retaining key employees.
The Company intends to use the proceeds of this offering primarily for general
corporate purposes, including working capital.
The Company also expects to use approximately $2.0 million of the net
proceeds to pay accrued dividends on the Company's Series A Convertible
Preferred Stock, which are due upon the conversion of such Series A Preferred
Stock on the closing of this offering. Dividends accrue on the Series A
Convertible Preferred Stock at a rate of $350,000 per annum ($2.0 million as
of June 30, 1995).
In connection with the Company's payment upon the closing of this offering
of all accrued and unpaid dividends on the Series A Convertible Preferred
Stock, Messrs. Cass, Homans, McLagan and Semmel, together with their
respective affiliates, will receive an estimated $255,000, $12,000, $435,000
and $168,000, respectively, in their capacities as holders of Series A
Convertible Preferred Stock.
The Company will use approximately $640,000 of the net proceeds to pay
accrued dividends on the Series B Redeemable Preferred Stock. There are
currently outstanding 13,500 shares of Series B Redeemable Preferred Stock,
with an aggregate redemption price of $1,350,000 plus accrued dividends.
Dividends accrue on the Series B Redeemable Preferred Stock at a rate of
$135,000 per annum ($613,000 as of June 30, 1995). The Company may use a
portion of the proceeds of this offering to redeem the Series
11
<PAGE>
B Redeemable Preferred Stock. See "Description of Capital Stock--Series B
Redeemable Preferred Stock." Messrs. Cass, McLagan and Semmel are the holders
of 261, 641.25 and 225 shares of Series B Redeemable Preferred Stock,
respectively, and Blair is the holder of 11,250 shares of Series B Redeemable
Preferred Stock.
In connection with the Company's payment upon the closing of this offering
of all accrued and unpaid dividends on the Series B Redeemable Preferred
Stock, Messrs. Cass, McLagan and Semmel, together with their respective
affiliates, will receive an estimated $12,000, $30,000 and $11,000,
respectively, in their capacities as holders of Series B Redeemable Preferred
Stock, and Blair will receive an estimated $530,000.
A portion of the net proceeds of this offering may also be used for
investments in or acquisitions of complementary businesses, products or
technologies, although the Company has not entered into any commitments or
negotiations with respect to any such transactions. Pending such uses, the
Company expects to invest the net proceeds in short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
In connection with the conversion of the Company's outstanding Series A
Convertible Preferred Stock at the closing of this offering, the Company will
pay the holders of such stock dividends accruing at the rate of $.0656 per
share per annum ($350,000 per annum in the aggregate). As of June 30, 1995,
the amount accrued for such dividends was $2.0 million. In addition, dividends
at the rate of $10.00 per share per annum ($135,000 per annum in the
aggregate) accrue on the Company's Series B Redeemable Preferred Stock. Such
dividends will be paid at the closing of this offering. As of June 30, 1995,
the amount accrued for such dividends was $613,000. Dividends will continue to
accrue on the Series B Redeemable Preferred Stock until it is redeemed, and
will be payable upon redemption and certain other circumstances. See
"Description of Capital Stock--Series B Redeemable Preferred Stock."
Except for such payments, the Company has never declared or paid any cash
dividends on its capital stock, and does not intend to pay any cash dividends
on its Common Stock in the foreseeable future. Payment of future dividends, if
any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs and plans for
expansion
The terms of the Series B Redeemable Preferred Stock prohibit payment of
dividends on the Company's Common Stock while the Series B Redeemable
Preferred Stock remains outstanding. See "Description of Capital Stock--Series
B Redeemable Preferred Stock."
12
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1995 (i) the actual
capitalization of the Company, (ii) the capitalization of the Company on a pro
forma basis to reflect the conversion of all outstanding shares of Convertible
Preferred Stock into an aggregate of 3,847,123 shares of Common Stock upon the
closing of this offering, and (iii) the pro forma capitalization of the
Company as adjusted to reflect the sale of the 1,677,000 shares of Common
Stock offered by the Company hereby, after deducting the underwriting
discounts and commissions and estimated offering expenses, and the application
of the estimated net proceeds therefrom as set forth in "Use of Proceeds."
This table should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(1)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Series B Redeemable Preferred Stock......... $ 1,963 $ 1,963 $ 1,963
Series C Convertible Preferred Stock........ 218 -- --
Series D Convertible Redeemable Preferred
Stock...................................... 2,539 -- --
Stockholders' equity (deficit)(2):
Series A Convertible Preferred Stock, $.01
par value; 5,335,410 shares authorized,
issued and outstanding (actual); no
shares authorized, issued or outstanding
(pro forma and pro forma as adjusted).... 53 -- --
Preferred Stock, $.01 par value; no shares
authorized, issued or outstanding
(actual); 1,000,000 shares authorized, no
shares issued or outstanding (pro forma
and pro forma as adjusted)............... -- -- --
Common Stock, $.01 par value; 15,000,000
shares authorized, 2,668,814 shares
issued and outstanding (actual);
15,000,000 shares authorized, 6,515,937
shares issued and outstanding
(pro forma); 15,000,000 shares
authorized, 8,192,937 shares issued and
outstanding (pro forma as adjusted)(2)... 27 65 82
Additional paid-in capital................ 2,317 3,120 25,284
Accumulated deficit....................... (8,003) (8,003) (8,003)
------- --------- -------
Total stockholders' equity (deficit).... (5,606) (4,818) 17,363
------- --------- -------
Total capitalization.................. $ (886) $ (2,855) $19,326
======= ========= =======
</TABLE>
- --------
(1) Gives effect to (i) the conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock upon the closing of this
offering, and (ii) the Amended and Restated Certificate of Incorporation
to be filed upon the closing of this offering removing the Company's
existing series of Convertible Preferred Stock and creating a class of
authorized but undesignated preferred stock. See Notes 3, 4 and 9 of Notes
to Consolidated Financial Statements.
(2) Excludes an aggregate of 275,102 shares of Common Stock issuable upon the
exercise of stock options outstanding as of June 30, 1995 (of which
options to purchase 99,111 shares were then exercisable at a weighted
average exercise price of $1.22). See "Management--Stock Plans" and Note 5
of Notes to Consolidated Financial Statements.
13
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1995 was
a deficit of $4,954,000 or $0.74 per share. Pro forma net tangible book value
per share represents the amount of total tangible assets of the Company less
its total liabilities, divided by the number of shares of Common Stock
outstanding, assuming (i) the conversion of all outstanding shares of
Convertible Preferred Stock into 3,847,123 shares of Common Stock and (ii) the
issuance of 190,876 shares of Common Stock in the offering to generate
proceeds for the payment of $2.7 million of dividends on the Series A
Convertible Preferred Stock and Series B Redeemable Preferred Stock to be paid
upon consummation of this offering. After giving effect to the sale by the
Company of the 1,677,000 shares of Common Stock offered by the Company hereby
and after deducting the underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of the Company as of June 30, 1995 would
have been $17,363,000 or $2.12 per share. This represents an immediate
increase in pro forma net tangible book value of $2.86 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$12.88 per share to purchasers of Common Stock in this offering. The following
table illustrates the dilution in pro forma net tangible book value per share
to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $15.00
Pro forma net tangible book value per share as of June 30,
1995.......................................................... $(.74)
Increase per share attributable to new investors............... 2.86
-----
Pro forma net tangible book value per share after the offer-
ing(1).......................................................... 2.12
------
Dilution per share to new investors(1)....................... $12.88
======
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value after this offering would be approximately
$2.54 per share, resulting in dilution to new investors in this offering
of $12.46 per share. See "Underwriting."
The following table sets forth on a pro forma basis as of June 30, 1995,
after giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock into 3,847,123 shares of Common Stock upon the closing of this
offering, the number of shares of Common Stock purchased from the Company, the
total cash paid to the Company, and the average price paid per share by
existing stockholders and to be paid by purchasers of the shares offered by
the Company hereby (before deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 6,515,937 79.5% $ 6,652,371 20.9% $ 1.02
New investors................... 1,677,000 20.5 25,155,000 79.1 $15.00
--------- ----- ----------- -----
Total......................... 8,192,937 100.0% $31,807,371 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will cause the number
of shares held by existing stockholders to be reduced to 6,192,937 shares
or 75.6% of the total number of shares of Common Stock outstanding after
this offering, and will increase the number of shares held by new
investors to 2,000,000 or 24.4% of the total number of shares of Common
Stock outstanding after this offering. See "Principal and Selling
Stockholders."
As of June 30, 1995, there were 275,102 shares of Common Stock issuable upon
the exercise of outstanding options at a weighted average exercise price of
$2.63 per share. The issuance of shares upon exercise of these options is not
reflected in the preceding tables.
If all of the options outstanding as of June 30, 1995 were exercised in
full, the dilution per share to new investors would be $12.86. Such exercises
would increase the number of shares held by existing stockholders to 6,791,039
shares, or 80.2% of the total number of shares of Common Stock to be
outstanding after the offering, and would (i) decrease the number of shares
held by the new investors to 19.8% of the total number of shares of Common
Stock to be outstanding after the offering, (ii) increase the total
consideration paid to the Company by existing stockholders to $7,374,750, or
22.7% of the total consideration paid to the Company, and (iii) increase the
average price per share paid by existing stockholders to $1.09.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1992, 1993 and
1994 and the consolidated balance sheet data as of December 31, 1993 and 1994
presented below are derived from the Consolidated Financial Statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants, and together with their report thereon are included elsewhere in
this Prospectus. The consolidated statement of operations data for the years
ended December 31, 1990 and 1991 and the consolidated balance sheet data as of
December 31, 1990, 1991 and 1992 are derived from the Company's audited
Consolidated Financial Statements, which are not included herein, all of which
have been audited by Arthur Andersen LLP, independent public accountants. The
consolidated statement of operations data for the six months ended June 30,
1994 and 1995 and the consolidated balance sheet data as of June 30, 1995 are
derived from the Company's unaudited Consolidated Financial Statements that
are included elsewhere in this Prospectus and include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
results of operations for the six months ended June 30, 1995 are not
necessarily indicative of future results.
15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ----------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- --------- ------------
(IN THOUSANDS, EXPECT PER SHARE DATA AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Subscription and
royalty revenues...... $ 529 $ 1,575 $ 3,441 $ 6,764 $ 12,925 $ 5,530 $ 9,821
Other revenues......... 8 431 766 896 1,433 718 678
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 537 2,006 4,207 7,660 14,358 6,248 10,499
Cost of revenues....... 239 494 968 2,010 3,879 1,742 2,903
Customer support ex-
penses................ 69 254 412 719 1,908 786 1,130
Development expenses... 927 1,059 1,172 1,654 1,902 897 1,289
Sales and marketing ex-
penses................ 1,421 1,523 2,488 3,898 6,153 2,864 4,145
General and administra-
tive
expenses.............. 508 526 592 675 900 414 554
-------- -------- -------- -------- -------- -------- --------
Total costs and ex-
penses................ 3,164 3,856 5,632 8,956 14,742 6,703 10,021
-------- -------- -------- -------- -------- -------- --------
Income (loss) from op-
erations.............. (2,627) (1,850) (1,425) (1,296) (384) (455) 478
Interest income (ex-
pense), net........... 82 32 (9) 34 97 30 157
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes................. (2,545) (1,818) (1,434) (1,262) (287) (425) 635
Provision for income
taxes................. -- -- -- -- -- -- 32
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ (2,545) $ (1,818) $ (1,434) $ (1,262) $ (287) $ (425) $ 603
======== ======== ======== ======== ======== ======== ========
Pro forma net income
(loss) per common and
common equivalent
share(1).............. $ (.06) $ (.07) $ .08
======== ======== ========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding(1)........ 6,670 6,648 6,922
======== ======== ========
OTHER OPERATING DATA:
Installed customers at
end of
period................ 59 101 139 195 255 239 297
Authorized users at end
of
period(2)............. 264 4,480 8,366 22,732 51,548 32,675 60,562
Average users per cus-
tomer(3).............. 4 30 54 93 165 128 203
Average revenues per
customer(4)........... $ 17,933 $ 19,686 $ 28,671 $ 40,503 $ 57,445 $ 25,484 $ 35,581
Annual renewal rate(5). N/A 90% 94% 99% 94% N/A N/A
<CAPTION>
DECEMBER 31, JUNE 30, 1995
------------------------------------------------ ----------------------
PRO
1990 1991 1992 1993 1994 ACTUAL FORMA (6)
-------- -------- -------- -------- -------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (defi-
cit).................. $ 977 $ (925) $ (506) $ (1,967) $ (4,664) $ (4,545) $ (6,295)
Total assets........... 2,143 1,967 3,706 4,875 8,220 12,630 12,630
Redeemable preferred
stock................. 1,506 1,656 3,845 4,195 4,545 4,720 1,963
Total stockholders'
deficit............... (213) (2,181) (3,841) (5,464) (6,077) (5,606) (4,818)
</TABLE>
- --------
(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(2) Number of users authorized pursuant to contracts with installed customers.
(3) Calculated by dividing (i) the average of the number of authorized users
at the end of the previous year and at the end of the current period, by
(ii) the average of the number of installed customers at the end of the
previous year and at the end of the current period.
(4) Calculated by dividing (i) subscription and royalty revenues for the
current period, by (ii) the average of the number of installed customers
at the end of the previous year and at the end of the current period.
(5) Total annualized amount due under subscription agreements in effect at the
end of the previous year for installed customers who renew their
subscriptions during the current year, as a percentage of the total
annualized amount due under all subscriptions for installed customers in
effect at the end of the previous year.
(6) Gives effect to the conversion of all outstanding shares of the Company's
Convertible Preferred Stock into an aggregate of 3,847,123 shares of
Common Stock upon the closing of this offering. See Notes 3 and 4 of Notes
to Consolidated Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Desktop Data, through its NewsEDGE service and software, delivers a large
variety of news and information sources in real time to personal computers and
workstations installed on LANs, automatically monitors and filters the news,
and alerts users to stories of interest to them. The Company was organized in
1988 and installed the initial version of its software, NewsEDGE/PC, in 1990.
Later in 1990, the Company introduced its current, LAN-based service. The
number of customer organizations subscribing to NewsEDGE increased from 139 at
December 31, 1992 to 297 at June 30, 1995. The number of authorized users
within customer organizations increased from approximately 8,400 to
approximately 60,000 over the same period.
The Company's revenues consist primarily of NewsEDGE subscription fees and
related royalties received from news providers in connection with sales of
their newswires through NewsEDGE. Historically, royalties have constituted
less than 10% of this amount. The Company's other revenues consist principally
of NewsEDGE installation services and related computer hardware system sales,
and non-recurring custom development projects related to the Company's
software.
NewsEDGE subscriptions are generally for an initial term of twelve months,
payable in advance, and are automatically renewable for successive one year
periods unless the customer delivers notice of termination prior to the
expiration date of the then current agreement. NewsEDGE subscription revenues
are recognized ratably over the subscription term, beginning on installation
of the NewsEDGE service. Accordingly, a substantial portion of the Company's
revenues are recorded as deferred revenues until they are recognized over the
license term. The Company does not capitalize customer acquisition costs.
Customers renewing their NewsEDGE subscriptions in the three years ended
December 31, 1994 have accounted for 94%, 99% and 94%, respectively, of the
total annualized amounts due under subscription agreements in effect at the
end of each of the immediately preceding years. This calculation is referred
to elsewhere in this Prospectus as the "annual renewal rate." The Company's
experience has been that each year a substantial portion of customers renew
subscriptions for an equal or higher level of subscription fees.
Certain newswires offered by the Company through NewsEDGE are purchased by
the customer directly from the news provider and payments are made directly
from the NewsEDGE customer to the provider. For some of these newswires, the
Company receives ongoing royalties on payments made by the customer to the
news provider, and those royalties constitute part of the Company's
subscription and royalty revenues. For other newswires that are resold by
Desktop Data to the NewsEDGE customer, the Company includes a fee for the
newswire in the NewsEDGE subscription fee paid by the customer and pays a
royalty to the news provider. Such royalties are included in the Company's
cost of revenues.
The combination of quarter to quarter revenue growth, high customer
subscription renewal rates and payments in advance from customers has resulted
in positive cash flow from operations in each quarter commencing with the
quarter ended December 31, 1993. The Company first achieved profitability
during the quarter ended September 30, 1994 and has remained profitable for
each successive quarter.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- -----------------
1992 1993 1994 1994 1995
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Subscription and royalty revenues... 81.8% 88.3% 90.0% 88.5% 93.5%
Other revenues...................... 18.2 11.7 10.0 11.5 6.5
----- ----- ----- ------- -------
Total revenues.................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues.................... 23.0 26.2 27.0 27.9 27.7
Customer support expenses........... 9.8 9.4 13.3 12.6 10.7
Development expenses................ 27.9 21.6 13.2 14.3 12.3
Sales and marketing expenses........ 59.1 50.9 42.9 45.9 39.5
General and administrative expenses. 14.1 8.8 6.3 6.6 5.3
----- ----- ----- ------- -------
Total costs and expenses.......... 133.9 116.9 102.7 107.3 95.5
----- ----- ----- ------- -------
Income (loss) from operations....... (33.9) (16.9) (2.7) (7.3) 4.5
Interest income (expense), net...... (0.2) 0.4 0.7 0.5 1.5
----- ----- ----- ------- -------
Income (loss) before provision for
income taxes....................... (34.1) (16.5) (2.0) (6.8) 6.0
Provision for income taxes.......... 0.0 0.0 0.0 0.0 0.3
----- ----- ----- ------- -------
Net income (loss)................. (34.1)% (16.5)% (2.0)% (6.8)% 5.7%
===== ===== ===== ======= =======
</TABLE>
Years Ended December 31, 1992, 1993 and 1994
Revenues. Revenues consist of (i) subscription and royalty revenues and (ii)
other revenues which consist of revenues from NewsEDGE installation services
and other sources. Total revenues increased from $4.2 million in 1992 to $7.7
million in 1993 and $14.4 million in 1994, representing increases of 82% and
87%, respectively.
Subscription and royalty revenues increased from $3.4 million in 1992 to
$6.8 million in 1993 and $12.9 million in 1994, representing increases of 97%
and 91%, respectively. These increases were attributable to increased market
acceptance of the Company's NewsEDGE service, expansion of NewsEDGE offerings,
successful retention and growth of existing customers and growth in the
Company's sales, marketing and customer service organizations.
Other revenues, consisting of revenues from NewsEDGE installation services,
computer hardware system sales and non-recurring custom development projects,
increased from $766,000 in 1992 to $896,000 in 1993 and $1.4 million in 1994,
representing increases of 17% and 60%, respectively. The increase from 1993 to
1994 was due primarily to an increase in revenues derived from non-recurring
custom development projects. The Company does not solicit hardware sales, and
expects revenues from hardware sales to continue to decline as a percentage of
total revenues.
The following tables set forth, for the years indicated, the dollar amounts
of the components of other revenues and such components as a percentage of
total revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1992 1993 1994
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Installation services.......................................... $233 $413 $ 497
Hardware sales................................................. 194 351 262
Development projects........................................... 339 132 673
---- ---- ------
Total other revenues......................................... $766 $896 $1,432
==== ==== ======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES
-------------------
YEAR ENDED
DECEMBER 31,
-------------------
1992 1993 1994
----- ----- -----
<S> <C> <C> <C>
Installation services...................................... 5.5% 5.4% 3.5%
Hardware sales............................................. 4.6 4.6 1.8
Development projects....................................... 8.1 1.7 4.7
----- ----- -----
Total other revenues..................................... 18.2% 11.7% 10.0%
===== ===== =====
</TABLE>
International revenues (revenues from customers outside of North America)
accounted for less than 5% of revenues during each of the three years ending
December 31, 1994. The Company established a sales and technical support
operation in England during the second half of 1994. The Company expects
international revenues to increase as a percentage of total revenues.
Cost of revenues. Cost of revenues consists primarily of royalties paid to
third party information providers for the cost of news services licensed to
customers, costs associated with transmitting news services to customer sites
and the cost of computer hardware sold to customers. Cost of revenues does not
include customer support expenses. The total cost of revenues was $968,000 in
1992, $2.0 million in 1993 and $3.9 million in 1994, representing 23%, 26% and
27% of total revenues in 1992, 1993 and 1994, respectively. The increase in
cost of revenues as a percentage of total revenues from 1992 to 1994 was
primarily attributable to increased royalties paid to third party information
providers resulting from the increase in newswires available through NewsEDGE.
Customer support. Customer support expenses consist primarily of costs
associated with technical support of the Company's installed base of
customers. Customer support expenses increased from $412,000 in 1992 to
$719,000 in 1993 and $1.9 million in 1994. The increase in customer support
expenses during these periods was due primarily to the hiring of additional
software and technical support personnel to provide enhanced and expanded
telephone and site support to the growing number of the Company's customers.
Customer support expenses decreased as a percentage of revenues from 10% in
1992 to 9% in 1993 but increased to 13% in 1994. The Company anticipates
continuing to make significant expenditures in customer support as the Company
provides service to a growing customer base.
Development. Development expenses consist primarily of costs associated with
the design, programming, and testing of the Company's new software and
services. Development expenses increased from $1.2 million in 1992 to $1.7
million in 1993 and $1.9 million in 1994, representing increases of 41% and
15%, respectively. The increase in development expenses during these periods
was due primarily to the hiring of additional software and test engineers to
support increased development activities. Development expenses decreased as a
percentage of revenues from 28% in 1992 to 22% in 1993 and 13% in 1994. The
Company anticipates continuing to make significant expenditures in development
as the Company develops new and enhanced services.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation costs (including sales commissions and bonuses), travel expenses,
trade shows and other marketing programs. Sales and marketing expenses
increased from $2.5 million in 1992 to $3.9 million in 1993 and $6.2 million
in 1994, representing increases of 57% and 58%, respectively. The increases in
sales and marketing expenses during these periods were due primarily to the
expansion of the Company's direct sales force and marketing organization in
North America. Sales and marketing expenses decreased as a percentage of
revenues from 59% in 1992 to 51% in 1993 and 43% in 1994. As the revenues
derived from subscription renewals and from the expansion of services to
existing customers increases and as the productivity of the sales force
increases, sales and marketing expenses are expected to increase in absolute
dollar amounts but decline as a percentage of total revenues.
19
<PAGE>
General and administrative. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and
general management activities, including legal, accounting and other
professional fees. General and administrative expenses increased from $592,000
in 1992 to $675,000 in 1993 and $900,000 in 1994. These increases were
primarily due to the hiring of additional personnel to support the Company's
expanding operations. General and administrative expenses decreased as a
percentage of revenues from 14% in 1992 to 9% in 1993 and 6% in 1994,
primarily due to the Company's ability to increase revenues without a
corresponding increase in general and administrative expenses. The Company
anticipates that general and administrative expenses will continue to increase
in absolute dollar amounts as the Company hires additional personnel, but may
vary as a percentage of revenues.
Interest income (expense), net. Interest income (expense), net consists of
interest earned on cash and cash equivalents, offset by interest expense on
equipment financing. Interest income (expense), net of $(9,000) in 1992
included $32,000 in interest expense paid on short term loans from certain
stockholders. The increase in interest income (expense), net from $34,000 in
1993 to $97,000 in 1994 was primarily the result of interest earned on higher
cash balances generated from operations and higher interest rates paid on the
invested cash balances.
Provision for income taxes. The Company did not provide for income taxes in
1992, 1993 or 1994 because it incurred operating losses for these periods. As
of December 31, 1994, the Company had available net operating loss
carryforwards of approximately $6.8 million expiring in various amounts from
2004 to 2008. The Company's ability to utilize its net operating loss
carryforwards may be limited in the future if it is determined that the
Company experiences an ownership change, as defined in Section 382 of the
Internal Revenue Code.
Six Months Ended June 30, 1994 and 1995
Revenues. Total revenues increased 68%, from $6.2 million for the six months
ended June 30, 1994 to $10.5 million for the six months ended June 30, 1995.
Subscription and royalty revenues increased from $5.5 million for the six
months ended June 30, 1994 to $9.8 million for the corresponding period in
1995, an increase of 78%. Other revenues decreased from $718,000 for the six
months ended June 30, 1994 to $678,000 for the six months ended June 30, 1995,
a decrease of 6%. The increase in subscription and royalty revenues was due to
increased subscription revenues from new customers, the retention and growth
of revenues from existing customers and increased royalties from the sale of
third party information news. The decrease in other revenues was due to lower
revenues from computer hardware system sales and non-recurring custom
development projects offset by increased installations.
The following tables set forth, for the periods indicated, the dollar
amounts of the components of other revenues and such components as a
percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Installation services........................................... $ 265 $ 342
Hardware sales.................................................. 195 124
Development projects............................................ 258 212
------- -------
Total other revenues.......................................... $718 $678
======= =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES
-----------------
SIX MONTHS
ENDED JUNE 30,
-----------------
1994 1995
-------- -------
<S> <C> <C>
Installation services....................................... 4.3% 3.3%
Hardware sales.............................................. 3.1 1.2
Development projects........................................ 4.1 2.0
-------- -------
Total other revenues ..................................... 11.5% 6.5%
======== =======
</TABLE>
Cost of revenues. Cost of revenues as a percentage of total revenues
remained constant at 28% in the six months ended June 30, 1994 and 1995.
Customer support. Customer support expenses increased from $786,000 for the
six months ended June 30, 1994 to $1.1 million for the six months ended June
30, 1995. Customer support expenses represented 13% of total revenues for the
six months ended June 30, 1994, compared to 11% for the six months ended June
30, 1995. Customer support expenses increased as the result of higher staffing
levels but decreased as a percentage of revenues due to the Company's
significant growth in revenues without commensurate increases in the Company's
customer support expenses.
Development. Development expenses increased from $897,000 for the six months
ended June 30, 1994 to $1.3 million for the six months ended June 30, 1995.
Development expenses represented 14% of total revenues for the six months
ended June 30, 1994, compared to 12% for the six months ended June 30, 1995.
Development expenses increased as the result of higher staffing levels but
declined as a percentage of revenues due to the Company's significant growth
in revenues without commensurate increases in the Company's development
expenses.
Sales and marketing. Sales and marketing expenses increased from $2.9
million for the six months ended June 30, 1994 to $4.1 million for the six
months ended June 30, 1995. Sales and marketing expenses represented 46% of
total revenues in the six months ended June 30, 1994, compared to 39% for the
six months ended June 30, 1995. Sales and marketing expenses increased as the
result of the expansion of the sales and marketing organizations but declined
as a percentage of revenues primarily as a result of the increase in the
Company's total revenues, without a corresponding increase in sales and
marketing expenses.
General and administrative. General and administrative expenses increased
from $414,000 in the six months ended June 30, 1994 to $554,000 in the six
months ended June 30, 1995, primarily due to additions to staff to support the
Company's growth. General and administrative expenses as a percentage of total
revenues declined from 7% in the six months ended June 30, 1994 to 5% in the
six months ended June 30, 1995, primarily due to the Company's ability to
increase revenues without a corresponding increase in general and
administrative expenses.
Interest income (expense), net. Interest income (expense), net increased
from $30,000 in the six months ended June 30, 1994 to $157,000 in the six
months ended June 30, 1995 due to interest earned on higher cash balances
generated from operations and higher interest rates paid on invested cash
balances.
Provision for income taxes. No provision for taxes was made for the six
months ended June 30, 1994 because the Company experienced a net operating
loss for such period. The provision for income taxes of $32,000 for the six
months ended June 30, 1995 represents the alternative minimum tax due under
the Internal Revenue Code and state taxes due in states that do not have net
operating loss carryforwards available.
21
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table presents unaudited quarterly financial information for
each of the six quarters in the period beginning January 1, 1994 and ended
June 30, 1995, as well as the percentage of the Company's total revenues
represented by each item. This information has been derived from the Company's
unaudited consolidated financial statements. The unaudited consolidated
financial statements have been prepared on the same basis as the audited
Consolidated Financial Statements contained herein and include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of such information when read in
conjunction with the Company's audited Consolidated Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus. These operating
results are not necessarily indicative of results for any future period. See
"Risk Factors--Potential Fluctuations in Quarterly Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1994 1994 1995 1995
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Subscription and royalty
revenues............... $2,575 $2,955 $3,475 $3,920 $4,676 $5,145
Other revenues.......... 351 367 428 287 369 309
------ ------ ------ ------ ------ ------
Total revenues........ 2,926 3,322 3,903 4,207 5,045 5,454
Cost of revenues........ 811 931 1,080 1,057 1,394 1,509
Customer support
expenses............... 340 446 546 576 514 616
Development expenses.... 445 452 458 547 636 653
Sales and marketing
expenses............... 1,318 1,546 1,576 1,713 2,010 2,135
General and
administrative
expenses............... 204 210 226 260 270 284
------ ------ ------ ------ ------ ------
Total costs and
expenses............. 3,118 3,585 3,886 4,153 4,824 5,197
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (192) (263) 17 54 221 257
Interest income
(expense), net......... 14 16 28 39 70 87
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes.................. (178) (247) 45 93 291 344
Provision for income
taxes.................. -- -- -- -- 15 17
------ ------ ------ ------ ------ ------
Net income (loss)..... $ (178) $ (247) $ 45 $ 93 $ 276 $ 327
====== ====== ====== ====== ====== ======
<CAPTION>
PERCENTAGE OF TOTAL REVENUES FOR THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1994 1994 1995 1995
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Subscription and royalty
revenues............... 88.0% 89.0% 89.0% 93.2% 92.7% 94.3%
Other revenues.......... 12.0 11.0 11.0 6.8 7.3 5.7
------ ------ ------ ------ ------ ------
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 27.8 28.0 27.7 25.1 27.6 27.7
Customer support
expenses............... 11.6 13.4 14.0 13.7 10.2 11.3
Development expenses.... 15.2 13.6 11.7 13.0 12.6 12.0
Sales and marketing
expenses............... 45.0 46.6 40.4 40.7 39.9 39.1
General and
administrative
expenses............... 7.0 6.3 5.8 6.2 5.3 5.2
------ ------ ------ ------ ------ ------
Total costs and
expenses............. 106.6 107.9 99.6 98.7 95.6 95.3
------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (6.6) (7.9) 0.4 1.3 4.4 4.7
Interest income
(expense), net......... 0.5 0.5 0.7 0.9 1.4 1.6
------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes.................. (6.1) (7.4) 1.1 2.2 5.8 6.3
Provision for income
taxes.................. -- -- -- -- 0.3 0.3
------ ------ ------ ------ ------ ------
Net income (loss)..... (6.1)% (7.4)% 1.1% 2.2% 5.5% 6.0%
====== ====== ====== ====== ====== ======
</TABLE>
22
<PAGE>
The Company's subscription and royalty revenues have increased in each
successive quarter shown above. This consistent increase is attributable to
the increase in the number of customers together with the successful retention
of and growth in revenues from existing customers and the Company's practice
of recognizing revenues from its annually renewable subscription fees ratably
over the subscription term.
Cost of revenues has increased proportionately with revenues in each
successive quarter in the quarters shown above, with the exception of the
fourth quarter of 1994. In the fourth quarter of 1994 cost of revenues
declined from 28% of total revenues in each of the immediately preceding three
quarters to 25% of total revenues, due primarily to a non-recurring adjustment
in royalties paid to a third party information provider as a result of a
renegotiation of contract terms. In the first and second quarters of 1995,
cost of revenues were 28% of total revenues.
The Company has increased operating expenses in the quarters shown above to
generate and support higher revenue levels and development efforts and, in
part, based on its expectations regarding future revenues. If revenue levels
are below expectations, operating results are likely to be adversely affected.
Net income may be disproportionately affected by a reduction in revenues
because a proportionately smaller amount of the Company's expenses varies with
its revenues. As a result, the Company believes that quarter-to-quarter
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private
sales of preferred stock totaling $7.0 million (the last of which occurred in
1992), cash generated from operations and $500,000 of notes payable from
certain principal stockholders in 1991. At June 30, 1995, the Company had
approximately $7.8 million in cash and cash equivalents.
Net cash used in operating activities was $374,000 in 1992. The combination
of improved operating results and the growth in subscription fees, which are
generally annually renewable and payable in advance, resulted in positive net
cash generated from operations of $846,000 and $2.5 million in 1993 and 1994,
respectively. For the six months ended June 30, 1995, net cash generated from
operations totaled $4.4 million, due to profitable operations together with
the continued growth in subscription fees and increased deferred revenue
resulting from advanced payments received from customers.
The Company's investing activities used net cash of $245,000, $384,000 and
$659,000 in 1992, 1993 and 1994, respectively, and $573,000 for the six months
ended June 30, 1995. The principal uses have been for capital expenditures,
primarily computer equipment, required to support the expansion and growth of
the business. The Company has no significant capital commitments and currently
anticipates that additions to property and equipment for 1995 will be
approximately $1.5 million, primarily for the purchase of computer equipment
and leasehold improvements. The terms of the Series B Redeemable Preferred
Stock prohibit capital expenditures in excess of $1.5 million per year without
the consent of the holders of at least two-thirds of the Series B Redeemable
Preferred Stock. See "Description of Capital Stock--Series B Redeemable
Preferred Stock."
The Company's financing activities provided (used) net cash of $1.5 million,
$(11,000) and $10,000 in 1992, 1993 and 1994, respectively, and $(104,000) for
the six months ended June 30, 1995. The Company sold an aggregate of $2.0
million of Series D Convertible Redeemable Preferred Stock in October 1992 and
used a portion of the proceeds to repay $500,000 of notes payable to certain
stockholders.
The Company believes that the proceeds from this offering, together with
existing cash balances and funds anticipated to be generated from operations,
will be sufficient to satisfy working capital and capital expenditure
requirements for at least the next twenty-four months.
23
<PAGE>
BUSINESS
Desktop Data is the leading independent provider of customized, real-time
news and information delivered to knowledge workers over their organizations'
local area networks. The Company's NewsEDGE service currently delivers up to
488 news and information sources in real time to users' personal computers,
automatically monitors and filters the news according to pre-established
personal interest profiles, and alerts users to stories matching their
profiles. The NewsEDGE service is used by executives, salespeople, marketers,
lawyers, accountants, consultants, bankers and financial professionals
throughout customer organizations. As of June 30, 1995, NewsEDGE was installed
by 297 customers, representing approximately 60,000 authorized users.
BACKGROUND
The market for business information services is undergoing significant
change, driven by rapid growth in the amount of available information,
increasingly competitive global industry environments and increased
requirements for professionals to improve the quality and timeliness of the
information they receive. An industry source has estimated that businesses and
organizations in the United States spent over $28 billion in 1994 on business
information services. At the same time, the increasing power and declining
cost of PCs, LANs and related software has fueled widespread investment in and
adoption of distributed computing and communications systems utilizing
client/server architectures. According to industry sources, by the end of 1994
over 66 million PCs worldwide were connected to LANs, at an estimated annual
cost for equipment, installation and support of $8,200 for each PC.
The decentralization of decision making and accountability in large
organizations has created a need for the widespread distribution of business
information to knowledge workers across a number of disciplines and at
different levels within the organization. At the same time, the accelerating
pace of business activity, stimulated by global competitiveness and advanced
electronic communication, has created a need for business information to be
more current, timely and easy to access and use.
While the demand for business information has created a profusion of
information sources, including on-line services and, most recently,
traditional print media taking electronic initiatives such as establishing
World Wide Web sites on the Internet, these sources by themselves have not
addressed the need for that information to be readily available to knowledge
workers on the desktop systems that they use at work every day. Traditional
electronic information sources often require stand-alone proprietary hardware
systems and are typically accessed by centralized, specially trained library
personnel who pass the information on to the knowledge workers who request it.
This approach makes access to information relatively costly and time-
consuming, discourages widespread use of an organization's electronic
information resources, and fails to provide immediate notice of important
breaking news. Consequently, traditional approaches to accessing electronic
information are not well suited to meeting knowledge workers' needs in a fast-
paced and competitive global economy with decentralized decision making and
accountability.
Traditional electronic information sources also have not generally taken
advantage of the large investment in LAN infrastructure. While the major
investment in LAN infrastructure by large organizations has connected
knowledge workers to each other and allowed them to communicate and work
together through E-mail, groupware and other client/server applications, to
date it has not been used effectively to connect them to external information
sources. As a result, the demand for organizations to widely distribute
customized news on a timely basis to workers who need it has not been
satisfied.
THE NEWSEDGE SOLUTION
Desktop Data's NewsEDGE service allows knowledge workers to take advantage
of the abundance of news and information available to their organizations. The
Company installs its NewsEDGE software on a dedicated, customer-owned network
server which is connected to the customer's LAN. Desktop Data
24
<PAGE>
arranges for the delivery to the server of real-time news and information from
the customer's choice of over 100 newswires, aggregating news and information
from up to 488 sources. The news is filtered to reflect personal profiles that
have been established by each user on the user's desktop or laptop computer,
and is delivered in real time, 24 hours a day, seven days a week. When a news
story matching a user's personal profile arrives, the user is notified by a
visual and audio alert, even if the user is then working in another
application. When the user's computer is not on or is not connected to the
LAN, stories matching that user's profile are stored by the server and
delivered when the user's computer is re-activated. NewsEDGE stores
approximately 90 days of news stories in a database on the NewsEDGE server,
whether or not the stories have matched a profile, and enables users to
quickly search the entire database at no additional charge.
NewsEDGE is distinguished from the information offerings of individual news
providers because it integrates the newswires from a number of competitive
sources into a single, comprehensive service offering. It is different than
on-line systems because it is implemented on customer LANs and PCs where news
can be profiled and distributed to all LAN users at a fixed, predictable cost.
Unlike traditional on-line services, which require users to dial out and pull
information when they think of it, NewsEDGE automatically pushes news to
knowledge workers on their own PCs. NewsEDGE leverages the existing LAN
investment of business organizations and enables broad access to real-time
news from multiple highly respected news sources. NewsEDGE alerts knowledge
workers to important developments affecting their business, giving them an
opportunity to gain an edge on competitors.
STRATEGY
Desktop Data's objective is to capitalize on the growing demand for
enterprise-wide information and the significant investments by businesses and
organizations in LANs by enhancing its position as a leading provider of
customized, real-time news and information to knowledge workers who need
timely access to information. While there can be no assurance that this
objective will be achieved, the Company's strategy to accomplish this
objective includes the following key elements:
Focus on the NewsEDGE service. The Company believes that by focusing on the
NewsEDGE service it can increase its customer base, build strong brand
recognition and enhance its leadership position in the enterprise-wide
information services industry. Desktop Data intends to continue to enhance the
NewsEDGE service by increasing the number of news sources available, by
continuing to expand the NewsEDGE database, archiving and search capabilities,
and by offering new services. For example, the Company intends to introduce,
in the third quarter of 1995, a new feature designed to permit NewsEDGE users
to directly access information provided by partners such as NBC Desktop, Inc.
for television and Indepth Data, Inc. for SEC filings. NewsEDGE operates on a
wide range of PC hardware and software and LAN architectures. The Company
intends to continue to assure NewsEDGE's compatibility with emerging systems
such as Windows 95.
Build and maintain relationships with major content and systems
providers. Desktop Data has established relationships with a number of major
news providers, including Dow Jones, Pearson, Reuters and Thomson, as well as
with major systems providers including Lotus, Microsoft and Teknekron Software
Systems, Inc. ("Teknekron"). The Company seeks to position itself as an
independent partner providing news publishers with wider distribution of their
content and providing systems software companies with a core application for
their technology. This approach has enabled the Company to offer its customers
news from a variety of rival sources typically not combined with competitive
offerings, and to provide them on a variety of LAN systems, including Lotus
Notes and the Microsoft Windows NT operating system.
Target large enterprises. Desktop Data targets as its customers major
corporations, financial institutions and government agencies that have made
substantial investments in PCs and LANs and have large numbers of knowledge
workers requiring timely access to information. NewsEDGE is attractive to
25
<PAGE>
these enterprises because it allows them to exploit their LAN investments, to
deliver news and information to a wide range of knowledge workers tailored to
their diverse information needs, and to take advantage of the economies of
scale that result from NewsEDGE's use of the enterprises' own LANs and PCs as
its delivery vehicle.
Expand customer relationships. The Company believes it can increase revenue
and enhance its profitability by expanding the use of NewsEDGE within existing
customer organizations and working to assure continued renewal of annual
subscriptions. Typically, initial NewsEDGE sales are made to one group within
a large organization. The Company then encourages widespread adoption of the
service within other areas of the organization, using the depth and breadth of
the newswires offered, the flexibility of user profiling, and volume discounts
to expand the number of authorized users within the organization. From
December 31, 1991 through December 31, 1994, the Company's average revenues
per customer grew at a compound annual rate of 43%, from $19,686 to $57,445.
Through a high level of customer support and continuing customer contacts, the
Company seeks to assure that existing customers renew their NewsEDGE
subscriptions annually. As its installed base of NewsEDGE customers increases,
the Company expects that an increasing percentage of its revenues will be
derived from renewals of customer subscriptions, at a lower cost to the
Company relative to sales to new customers. For each of the last four years,
the Company's annual renewal rate has been at least 90%.
Encourage wide-spread adoption with subscription-based pricing. The Company
provides NewsEDGE to its customers on an annual subscription basis, which the
Company believes is attractive to customers because it is fixed and
predictable. The annual subscription fee is based on the number of authorized
users and the number and type of news sources selected and is independent of
actual usage. Because there is little incremental cost in supporting
additional users on a network installation, the Company is able to offer
substantial volume discounts to its customers. As additional users are added,
the per user, per day cost of NewsEDGE decreases, encouraging customers to
provide NewsEDGE to more users throughout the organization. From December 31,
1991 through December 31, 1994, the average per day, per user cost of NewsEDGE
for the Company's customers decreased from $1.82 to $0.95, and the average
number of authorized NewsEDGE users per customer increased from 30 to 165. The
Company believes that its enterprise delivery strategy and subscription
pricing model create favorable per-user cost characteristics relative to
alternatives, encouraging its customers to expand the number of authorized
users, select more news sources, increase the number of NewsEDGE servers and
renew their NewsEDGE subscriptions.
Provide direct sales and support. The Company has invested significantly in
developing a direct sales force and customer support group of knowledgeable
and experienced individuals to sell and support its NewsEDGE service. The
Company believes that the size and experience of its sales force provide
Desktop Data with a competitive advantage. Because many customers use NewsEDGE
to support strategic and mission-critical aspects of their businesses, a high
level of customer service and support is critical to customer satisfaction and
retention. The Company maintains technical field service personnel located in
key geographic locations throughout North America, as well as in the United
Kingdom. Desktop Data's toll-free number provides customers in North America
with access to the Company's internal customer support staff of individuals
with extensive networking and customer support experience.
THE NEWSEDGE SERVICE
The Company's NewsEDGE service was designed to operate in a client/server
environment. The Company installs its NewsEDGE software on a dedicated,
customer-owned network server which receives broadcast news on a 24 hour per
day basis. Desktop Data arranges for the communication of news selected by the
customer to the server through leased telephone lines, satellites or FM
sideband transmission.
NewsEDGE server software manages the receipt of news from multiple news
sources over the communications vehicle arranged by the Company. Incoming
stories are tested against the interest profiles
26
<PAGE>
of all NewsEDGE users on the LAN and alerts are sent to each user in
accordance with the user's own profile. All stories received by the server are
indexed by full text, ticker symbols, subject codes and dates and added to a
news history database to support subsequent searching and retrieval.
Typically, approximately 90 days of history of stories received, regardless of
whether the stories have matched a profile, are maintained for user inquiry on
the NewsEDGE server on the customer LAN.
NewsEDGE client software manages the user's interface with the news. The
NewsEDGE client software provides an easy-to-use graphical user interface that
permits users to readily create and modify personalized profile lists of
words, phrases and ticker symbols for news monitoring and alerting. When a
news story matching a user's personal profile arrives, the user is notified by
a visual and audio alert, even if the user is then working in another
application. Users can also conduct immediate searches of news stored in the
NewsEDGE server using Boolean search techniques, key words or phrases, ticker
symbols and subject codes.
NewsEDGE software also provides links to other applications. Using NewsEDGE
linkage and dynamic data exchange ("DDE") capabilities, tabular data in news
stories may be cut and pasted into spreadsheets and text may be cut and pasted
into word processing or E-mail software. For example, using NewsEDGE a user
may be alerted to the release of quarterly financial results by a company the
user follows, retrieve financial statements just released by the company, and
copy those financial statements directly into a spreadsheet, where the data
may be immediately analyzed and manipulated. In addition, the Company is
developing interfaces to on-line resources provided by other news and
information providers. This feature is scheduled for release in the third
quarter of 1995. See "Development."
The following diagram illustrates the NewsEDGE service:
[ARTWORK APPEARS HERE]
NewsEDGE is designed with client-server architecture to leverage customers'
LAN investments. NewsEDGE operates on Windows NT and OS/2 servers. It supports
14 different desktop systems including
27
<PAGE>
Windows, Macintosh, OS/2, Windows NT and the most common versions of UNIX.
NewsEDGE supports 13 different LAN configurations, including Novell Netware,
Banyan VINES and TCP/IP, broadcast, point-to-point, session and mixed
protocols. NewsEDGE also supports server to server connections to groupware,
E-mail, quotation and other applications on customer LANs, including Lotus
Notes, Reuters RT3 and Teknekron Marketsheet. NewsEDGE provides its own
application programming interface ("API") which is available for generalized,
open system connection to an application server.
News and Information Providers
Desktop Data has contracted with providers to make available through the
NewsEDGE service over 100 newswires, aggregating news and information from 488
news sources. News and information sources currently available on NewsEDGE
include newswires from AFP/Extel News Limited ("AFX"), The Associated Press,
Dow Jones, Knight-Ridder/Tribune Information Services, L.P., Nihon Shimbun
America, Inc. ("Nikkei") (English language Japanese news) and Reuters, as well
as the text of stories in The Financial Post (Toronto), Financial Times
(London), The New York Times News Service, USA Today and The Wall Street
Journal. Also available on NewsEDGE are the business sections of over 100
North American newspapers, periodicals such as Forbes, Fortune, InfoWorld,
MacWeek and PC Week and newsletters such as those distributed by American
Banker and Phillips Business Information Services, Inc.
Newswires are delivered to customer LANs through one or more of three
delivery vehicles: leased telephone lines; direct satellite transmission; and
FM sideband transmission. Many newswire providers have established their own
broadcast communications networks using one or more of these three vehicles.
In these cases, Desktop Data's role is to arrange the communications between
the news provider and the NewsEDGE customer's server. For newspapers,
newsletters, magazines and other sources which do not have their own broadcast
communications capabilities, news and information are delivered to the
Company's news consolidation facility in Waltham, Massachusetts, where it is
reformatted for broadcast to NewsEDGE servers and retransmitted to customers
by a common carrier communications provider (currently Mainstream Data, Inc.).
See "Risk Factors--Dependence on News Transmission Sources."
Pricing
NewsEDGE customers are charged an annual subscription fee for the NewsEDGE
service, plus a one-time installation fee. The subscription fee includes the
NewsEDGE software, ongoing customer support, and the customer's choice of
newswires. Pricing varies depending on the number and type of platforms in the
customer's LAN, the number of authorized users and the newswires selected.
Current list prices for installation within the United States range from
$4,000 to $6,000 per server. There are no separate charges for creating or
changing a profile or for conducting searches.
As a result of the low incremental cost of providing NewsEDGE to additional
users, the Company offers substantial volume discounts. For example, the list
price for a customer within the United States with 100 authorized users is
currently $55,000 per year for NewsEDGE, including a basic package of
newswires, for a cost per user per day of $1.51. The same package for 1,000
authorized users lists for $135,000, at a cost per user per day of $0.37. The
NewsEDGE list price for this package decreases on a per user basis as the
number of users increases, as shown below:
<TABLE>
<CAPTION>
NUMBER OF COST PER AUTHORIZED
AUTHORIZED USERS ANNUAL LIST PRICE USER PER DAY
---------------- ----------------- -------------------
<S> <C> <C>
100 $ 55,000 $1.51
200 $ 65,000 $0.89
500 $ 95,000 $0.52
1,000 $135,000 $0.37
2,000 $195,000 $0.27
5,000 $275,000 $0.15
10,000 $395,000 $0.11
</TABLE>
28
<PAGE>
Certain newswires, including popular offerings from Dow Jones and Reuters,
are billed separately directly by the news provider as an addition to the
NewsEDGE subscription fee. Most customers purchase subscriptions for one or
more of these newswires.
SALES AND MARKETING
NewsEDGE is sold and marketed through the Company's direct sales force and
marketing staff, which as of June 30, 1995, consisted of 44 full time
employees based at eleven locations throughout the United States and Canada
and one location in the United Kingdom. Because the decision to purchase
NewsEDGE is complex and has implications for many different groups and
constituencies throughout a customer organization, the Company believes that
the education, NewsEDGE demonstrations and follow-through required to make a
new customer sale is best done by its own sales staff, which focuses
exclusively on NewsEDGE. Desktop Data believes that the size and experience of
its sales force provide the Company with a competitive advantage. The
Company's new account selling is concentrated on major corporations, financial
institutions and government agencies where timely news has high value, where
there are numerous LAN users and where NewsEDGE cost economies of scale can
provide the greatest benefit.
NewsEDGE is generally sold pursuant to annual subscriptions that renew
automatically unless notice of termination is provided prior to the end of the
term. The Company sales team responsible for making the initial sale is also
responsible for renewals and trade-ups. Trade-ups include the purchase by the
customer of additional newswires, the authorization of more users and the
acquisition of additional NewsEDGE servers. The Company's experienced direct
sales force and significant investments in development and customer support
have resulted in annual renewal rates of at least 90% for each of the last
four years.
To expand its service offerings and assist its sales force in selling
NewsEDGE, the Company has entered into development and joint marketing
relationships with various corporate partners. For example, the Company has
contracted with Reuters and Teknekron to adapt NewsEDGE for use in conjunction
with products sold by each of these companies to the trading floors of
financial services firms, and to jointly market the resulting service.
Similarly, Desktop Data has contracted with NBC Desktop to make NBC Desktop's
television and video offerings available through NewsEDGE and to jointly
market this service, which is currently scheduled to be introduced in the
third quarter of 1995.
Under agreements with Lotus and Microsoft, the Company is provided with
access to alpha and beta versions of new products being developed by these
companies. These arrangements enable the Company to develop and launch
features and services which are complementary to new Lotus or Microsoft
products simultaneously with the launch by Lotus or Microsoft of those
products. In addition, the Company has a marketing agreement with Lotus under
which Lotus and Desktop Data sales personnel exchange information concerning
sales prospects and make joint sales calls.
NEWSEDGE CUSTOMERS
As of June 30, 1995, NewsEDGE had been installed by 297 customers,
representing approximately 60,000 authorized users. NewsEDGE customers
include:
Corporate. Arthur Andersen LLP, AT&T Corporation, Compaq Computer
Corporation, Computer Sciences Corporation, Deloitte & Touche LLP, Dow Jones,
Hewlett-Packard Co., Johnson & Higgins, Johnson & Johnson, John Labatt
Limited, Microsoft, NYNEX Corporation, Pfizer Inc., Royal Dutch/Shell Group,
Unilever United States, Inc., U S West, Inc.
Financial. Bankers Trust Company, Barclays Bank PLC, Citibank N.A., Credit
Suisse, Donaldson, Lufkin & Jenrette, Inc., FMR Corp. (Fidelity Investments),
Merrill Lynch & Co., Inc., Moody's Investment Services, NationsBank Services,
Inc., Putnam Investment Management Inc., Standard & Poor's, Toronto Dominion
Bank.
29
<PAGE>
Government. California Legislative Commission, the U.S. Department of
Defense, the U.S. Department of the Treasury, the U.S. Postal Service, the
Executive Office of the President.
No customer has accounted for over 5% of the Company's revenues in any of
the last three years.
CUSTOMER SUPPORT
The Company believes that customer service and support is critical to
achieving its objectives. The Company employs its own customer support staff,
which provides centralized hotline telephone support, field installation,
training and upgrade and maintenance support for NewsEDGE customers. The
NewsEDGE support staff consists of individuals with technical knowledge and
experience relating not only to NewsEDGE, but also to the various
client/server architectures and systems installed at customer sites.
NewsEDGE is a highly visible application operating on customer networks. The
operation of NewsEDGE is dependent on the customer's hardware, news
communication to the customer's site, the operation of the customer network,
other applications which the customer may be running simultaneously and the
technical skills of the customer's NewsEDGE administrator. The NewsEDGE
support staff diagnoses problems and suggests solutions over the telephone
and, where necessary, travels to customer sites for further diagnosis and
maintenance and brings in specialized expertise from the Company's emergency
staff of technology experts or the NewsEDGE engineers themselves. The Company
has a comprehensive call monitoring and problem tracking system to concentrate
and escalate attention to customer problems.
As of June 30, 1995, the Company had 33 employees engaged in field and
central customer support operations.
DEVELOPMENT
The Company recognizes that the continued enhancement of NewsEDGE and the
extension of its news and information offerings is critical to obtaining new
customers and to obtaining trade-up sales and renewals from existing
customers. Since its inception, Desktop Data has made substantial investments
in research and development, issuing six new releases of its NewsEDGE software
since the service's first launch in 1990. The NewsEDGE software has been
developed by the Company's internal development and quality assurance staff.
New versions of NewsEDGE are released periodically and made available to the
client/server systems installed at customer sites as part of the annual
NewsEDGE subscription fee. The current version of NewsEDGE, release 2.05, was
made available to customers beginning in April 1995.
The Company is developing interfaces to on-line resources provided by other
news and information providers. This feature is scheduled for release in the
third quarter of 1995 and is designed to permit NewsEDGE users to be alerted
to or search for these resources using NewsEDGE, and then to link directly to
them. For example, a user may be alerted that a press conference announcing
breaking developments for a company matching the user's profile is about to be
broadcast by NBC Desktop, Inc. The new feature is designed to allow the user
to directly access this press conference on the user's computer screen through
NewsEDGE, rather than waiting for a later news story reporting on the event.
Another application of this feature is designed to permit users to readily
retrieve SEC filings by linking directly with Indepth Data, Inc., which
distributes such filings.
Other development efforts have been focused on supporting additional desktop
operating platforms and LAN configurations, increasing the number of news
sources, expanding storage for news history and providing enhanced precision
and functionality for user searches and profiles. The Company's development
expenses were $1.2 million, $1.7 million and $1.9 million in 1992, 1993 and
1994, respectively.
30
<PAGE>
The NewsEDGE software is entirely proprietary to the Company. The Company
believes that control over its own development is critical to its speed and
flexibility in meeting market and technology changes. The NewsEDGE server is
developed in modules according to the primary NewsEDGE functions: a news
collection and alerting module; a news database module for storing and
retrieving the full text of the news stories; a network module adaptable to
the network protocols installed at customer sites; and a module which allows
customer administrators to configure newswire access and monitor NewsEDGE
activity.
An important aspect of NewsEDGE development is the continuing enhancement of
the number of newswires offered by the Company. The Company's marketing
personnel identify newswires to be added to the NewsEDGE offerings based on
customer feedback, and negotiate contracts with news providers. The newswires
are then integrated with NewsEDGE by development and support personnel. The
Company is currently seeking to expand its offerings with additional industry-
specific information to increase sales to customers in new vertical markets
and with additional international news sources to increase the availability of
global, 24 hour a day coverage by NewsEDGE.
As of June 30, 1995, Desktop Data had 32 employees engaged in development
and quality assurance operations.
COMPETITION
The business information services industry is intensely competitive and is
characterized by rapid technological change and the entry into the field of
extremely large and well-capitalized companies as well as smaller competitors.
The Company competes or may compete directly or indirectly with the following
categories of companies: (i) large, well-established news and information
providers such as Dialog, Dow Jones, Lexis/Nexis, Pearson, Reuters and
Thomson; (ii) market data services companies such as ADP, Bloomberg, Quotron
and Telerate; (iii) traditional print media companies that are increasingly
searching for opportunities for on-line provision of news, including through
the establishment of World Wide Web sites on the Internet; (iv) large
providers of LAN-based software systems such as Lotus and Microsoft, which
could, in the future, ally with competing news and information providers; and
(v) to a lesser degree, consumer-oriented commercial on-line services and
Internet access providers. Many of these companies and market participants not
named above have substantially greater financial, technical and marketing
resources than the Company.
The Company believes that NewsEDGE is differentiated from the news and
system products offered by large news and systems providers because of the
Company's ability to deliver news from many different, competing providers on
an enterprise-wide basis, directly to LAN-connected personal computers,
customized to meet the needs of each individual user, at a relatively low cost
per user. Although they may compete with the Company in some respects, the
Company attempts to establish cooperative, mutually beneficial relationships
with large information or systems providers, many of whom are information
providers and customers as well as current and potential joint marketing
partners.
In addition, several smaller companies offer directly competitive products
or services that provide news to enterprises through the customer's computer
network. The Company believes that NewsEDGE offers advantages over each of
these competing products. For example, each of the competing services offers
substantially fewer real-time news sources than does NewsEDGE. Furthermore,
unlike NewsEDGE, certain competitors do not offer real-time scrolling of news
stories, while others do not support Lotus Notes or other groupware
applications. In addition, many competitors rely on database engines developed
by third parties, and as a result the Company believes these services are not
as readily adaptable to evolving customer information provider needs as is
NewsEDGE. Finally, each of these smaller competitors is owned by a larger
organization, which the Company believes restricts their ability to attract a
large variety of news sources and makes it difficult for them to provide the
same level and focus of sales, development and customer support as can be
provided by Desktop Data.
31
<PAGE>
Increased competition, on the basis of price or otherwise, may require price
reductions or increased spending on marketing or software development, which
could have a material adverse effect on the Company's business and results of
operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company primarily relies upon a combination of copyright, trademark and
trade secret laws and license agreements to establish and protect proprietary
rights in its technology. The NewsEDGE software is licensed to customers on a
non-exclusive basis pursuant to license agreements containing provisions
prohibiting unauthorized use, copying and transfer of the licensed program.
The source code for the Company's software is protected both as a trade secret
and as an unpublished copyrighted work. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software or technology without authorization or to develop similar technology
independently. In addition, effective copyright and trade secret protection
may be unavailable or limited in certain foreign countries. The Company does
not hold any patents.
Because the software development industry is characterized by rapid
technological change, the Company believes that factors such as the
technological and creative skills of its personnel, new software developments,
frequent software enhancements, name recognition and reliable maintenance are
more important to establishing and maintaining a technology leadership
position than the various legal protections of its technology.
The Company believes that its software, trademarks and other proprietary
rights do not infringe the proprietary rights of third parties. There can be
no assurance, however, that third parties will not assert such infringement by
the Company with respect to current or future software or services. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause software release delays or might require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company.
EMPLOYEES
The Company had 118 full-time employees as of June 30, 1995. The Company's
employees are not represented by any collective bargaining organization, and
the Company has never experienced a work stoppage. The Company believes that
its relationships with its employees are good.
FACILITIES
The Company's corporate headquarters are located in Waltham, Massachusetts.
The Company leases approximately 15,000 square feet of a multi-tenant facility
under a lease expiring in March 1996. The Company leases additional facilities
and offices for sales and customer service and support in New York, New
Jersey, Washington D.C., Pennsylvania, Illinois, California, Toronto, Canada
and London, England. The Company believes that its existing facilities and
offices and additional or alternative space available to it are adequate to
meet its requirements for the foreseeable future.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald L. McLagan.................. 53 Chairman, President, Chief Executive
Officer and Director
Edward R. Siegfried................ 50 Vice President--Finance and Operations,
Treasurer and Assistant Secretary
Clifford M. Pollan................. 38 Vice President--Sales and Marketing
Daniel F. X. O'Reilly, Ph.D........ 48 Vice President--Development
A. Baron Cass, III(2).............. 51 Director
David R. Semmel(1)................. 38 Director
Peter P. Homans(1)................. 44 Director
Ellen Carnahan(2).................. 40 Director
Rory J. Cowan(1)(2)................ 42 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. McLagan is the founder of the Company and has been President and a
director since its inception in 1988. Mr. McLagan was elected Chairman and
Chief Executive Officer in June 1995. From 1985 to 1988, Mr. McLagan was Vice
President and General Manager of the Information Services Division of Lotus
Development Corporation, a computer software company. From 1969 to 1984, Mr.
McLagan was employed by Data Resources, Inc., an economic information service
company, most recently as Executive Vice President.
Mr. Siegfried joined the Company in 1989 as a Vice President, Treasurer and
Assistant Secretary and was elected Vice President--Finance and Operations in
May 1995. From 1985 to 1989, Mr. Siegfried served as the Vice President
responsible for finance, administration and operations at Softbridge
Microsystems, Inc., a computer software development company. From 1974 to
1985, Mr. Siegfried was the Senior Vice President--Finance and Administration
of Data Resources, Inc. Mr. Siegfried is a certified public accountant and
from 1967 to 1974 was employed by Arthur Andersen LLP, most recently as Audit
Manager.
Mr. Pollan joined the Company in 1989 as a Vice President and was elected
Vice President--Sales and Marketing in May 1995. From 1986 to 1989, Mr. Pollan
was a Director of Sales at Lotus Development Corporation. From 1985 to 1986,
Mr. Pollan was the Vice President of Sales of Isys Corporation, a financial
information company, and from 1978 to 1985 was employed by Data Resources,
Inc., most recently as a Director of Consulting.
Dr. O'Reilly joined the Company in 1989 as a Vice President and was elected
Vice President--Development in May 1995. From 1979 to 1989, Dr. O'Reilly was
the Vice President of the Information System Development Group of Data
Resources, Inc. From 1975 through 1979, Dr. O'Reilly held various teaching
positions in the Mathematics Departments of Marquette University, Simmons
College and Boston College.
Mr. Cass has served on the Board of Directors of the Company since November
1989. Mr. Cass has been a general partner of CCS & Associates, L.P., an
investment general partnership, since 1983. Mr. Cass is also currently a
general partner of CII Holdings L.P., an investment partnership, a general
partner of Equity Analysts, L.P., a real estate investment partnership, and a
general partner of Sands Partnership No. 1, L.P., an investment partnership.
Previously, Mr. Cass was a Vice President with the investment firms of
Goldman, Sachs & Co. and Bear Stearns & Co., Inc.
33
<PAGE>
Mr. Semmel has served on the Board of Directors of the Company since
November 1989. Mr. Semmel has been a general partner of Pangaea, L.P., an
investment fund, since 1993 and a general partner of Pangaea Partners, L.P., a
venture capital fund, since 1988. From 1981 to 1988, Mr. Semmel was a Vice
President of System Software Associates, Inc., an applications software
company.
Mr. Homans has served on the Board of Directors of the Company since
November 1989. Mr. Homans has been a general partner of Pangaea, L.P., an
investment fund, since 1993. From 1990 to 1993, Mr. Homans was the President
of Homans Research, Inc., a private investment research firm, which he
founded. Prior to that time, Mr. Homans was a broker with H.C. Wainwright &
Co., Inc., a brokerage firm with which he remains affiliated.
Ms. Carnahan has served on the Board of Directors of the Company since March
1991. Ms. Carnahan has been a general partner of William Blair Venture
Partners III, a venture capital firm, and Research Director of William Blair &
Company, an investment banking firm, since 1988. Prior to 1988, Ms. Carnahan
was Vice President of Marketing and Planning at SPSS, Inc., an applications
software company.
Mr. Cowan has served on the Board of Directors of the Company since May
1993. Mr. Cowan has been an Executive Vice President of R.R. Donnelley & Sons
Company, a supplier of commercial print and print-related services, since 1991
and was a Group President from 1989 to 1991. Mr. Cowan has also been the
Chairman of Stream International Inc., a software services company, since
April 1995.
Each director holds office until that director's successor has been duly
elected and qualified. Upon the closing of this offering, the Company's Board
of Directors will be divided into three classes. Messrs. Semmel and Cass will
serve in the class the term of which expires in 1996; Mr. Homans and Ms.
Carnahan will serve in the class the term of which expires in 1997; and
Messrs. McLagan and Cowan will serve in the class the term of which expires in
1998. Upon the expiration of the term of each class of directors, directors
comprising such class of directors will be elected for a three-year term at
the next succeeding annual meeting of stockholders.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and
qualified. All of the current directors were nominated in accordance with a
stockholders agreement, which agreement will terminate upon the closing of
this offering. There are no family relationships among any of the executive
officers or directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 1995, the Board of Directors established a Compensation Committee
and an Audit Committee. The Compensation Committee makes recommendations
concerning the salaries and incentive compensation of employees of and
consultants to the Company and administers the Company's 1989 Stock Plan, 1995
Stock Plan, 1995 Employee Stock Purchase Plan and 1995 Non-Employee Director
Stock Option Plan. The Audit Committee is responsible for reviewing the
results and scope of audits and other services provided by the Company's
independent auditors.
DIRECTOR COMPENSATION
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the Board of Directors.
The Company's 1995 Non-Employee Director Stock Option Plan (the "Director
Option Plan") was adopted by the Board of Directors on June 16, 1995 and
approved by the stockholders on June 26, 1995. The Director Option Plan
provides for the grant of options to purchase a maximum of 100,000 shares of
Common Stock of the Company to non-employee directors of the Company. Under
the Director Option Plan, each non-employee director will receive, on the date
such person is first elected to the Board, an option to purchase 5,000 shares
of the Company's Common Stock, vesting over four years. Beginning at
34
<PAGE>
the Company's next annual meeting and at each successive annual meeting, each
non-employee director who has attended at least 75% of the board meetings
during the previous fiscal year will receive an option to purchase 2,500
shares of Common Stock, vesting on the first anniversary of the date of such
grant. All options granted under the Director Option Plan will have an
exercise price equal to the fair market value of the Common Stock on the date
of grant. The term of each option will be for a period of ten years from the
date of grant. Options may not be assigned or transferred except by will or by
the laws of descent and distribution and are exercisable to the extent vested
only while the optionee is serving as a director of the Company or within 90
days after the optionee ceases to serve as a director of the Company (except
that if a director dies or becomes disabled while he or she is serving as a
director of the Company, the option is exercisable for a one-year period
thereafter).
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation of the Company's Chief Executive Officer and each of its other
executive officers (collectively, the "Named Executive Officers"). The Company
did not grant any stock options, restricted stock awards or stock appreciation
rights or make any long-term incentive plan payouts to any of the Named
Executive Officers during 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
--------------------------- ---------- --------- ---------------
<S> <C> <C> <C>
Donald L. McLagan......................... $ 115,500 -- $289
Chairman, President and Chief Executive
Officer
Edward R. Siegfried....................... 115,500 -- 289
Vice President--Finance and Operations,
Treasurer and Assistant Secretary
Clifford M. Pollan........................ 115,500 $ 45,157 271
Vice President--Sales and Marketing
Daniel F. X. O'Reilly..................... 115,500 -- 289
Vice President--Development
</TABLE>
- --------
(1) Represents matching contributions made by the Company to the Named
Executive Officer under the Company's 401(k) plan.
Each of the Named Executive Officers has entered into a non-competition
agreement with the Company, which restricts him from competing with the
Company through June 28, 1996, unless his employment is terminated
involuntarily without cause or in connection with a change of control of the
Company.
The following table sets forth information with respect to the Named
Executive Officers concerning options exercised during the year ended December
31, 1994. As of June 30, 1995, none of the Named Executive Officers held any
options to purchase Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1)
---- ------------------ -----------
<S> <C> <C>
Donald L. McLagan................................ -- --
Edward R. Siegfried.............................. -- --
Clifford M. Pollan............................... 177,777 $216,000
Daniel F. X. O'Reilly............................ -- --
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at the option exercise date, as determined by the Company's
Board of Directors, minus the per share exercise price.
35
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to 1995, the Company had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by the Company's Board of Directors. In June 1995,
the Company established compensation and audit committees of its Board of
Directors which are composed of non-employee directors. See "Committees of the
Board of Directors."
STOCK PLANS
1989 Stock Plan. The Company's 1989 Stock Plan (the "1989 Plan") was adopted
by the Company's Board of Directors on July 17, 1989 and approved by the
Company's stockholders on July 18, 1989. The Board of Directors voted in June
1995 to terminate the 1989 Plan upon the effective date of this offering and
no further options may be issued under the 1989 Plan after such date. Under
the terms of the 1989 Plan, non-statutory stock options have been granted to
employees, consultants and directors of the Company. Options granted under the
1989 Plan expire five years from the date of grant. Generally options issued
under the 1989 Plan vest at a rate of 25% after one year, with the remainder
vesting monthly over the next three years.
1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Plan") was adopted
by the Board of Directors on June 16, 1995 and approved by the stockholders on
June 26, 1995. The 1995 Plan provides for the grant of incentive stock options
to employees and the grant of non-statutory stock options, stock awards and
purchase rights to employees, consultants, directors and officers of the
Company. The 1995 Plan provides for the issuance of up to 625,000 shares.
Generally, under the 1995 Plan, an award is not transferable by the
awardholder except by will or by the laws of descent and distribution. No
incentive stock option may be exercised more than 90 days following
termination of employment unless the termination is due to death or
disability, in which case the option is exercisable for a maximum of 180 days
after such termination. Options granted under the 1995 Plan expire ten years
from the date of grant or five years from the date of grant in the case of
incentive stock options issued to employees holding more than 10% of the total
combined voting power of the Company.
The 1995 Plan and the 1989 Plan are administered by the Compensation
Committee of the Board of Directors, which currently consists of disinterested
directors of the Company. Subject to the provisions of such plans, the
Compensation Committee has the authority to select the optionees and determine
the terms of the options granted, including: (i) the number of shares subject
to each option, (ii) when the option becomes exercisable, (iii) the exercise
price of the option (which in the case of an incentive stock option cannot be
less than the market price of the Common Stock as of the date of grant), (iv)
the duration of the option, and (v) the time, manner and form of payment upon
exercise of an option.
As of June 30, 1995, options to purchase 275,102 shares of Common Stock at a
weighted average exercise price of $2.63 per share were outstanding under the
1989 Plan, options to purchase 343,922 shares of Common Stock had been
exercised at a weighted average exercise price of $0.25 per share under the
1989 Plan, and no options or other awards had been granted under the 1995
Plan.
1995 Employee Stock Purchase Plan. The 1995 Employee Stock Purchase Plan
(the "1995 Purchase Plan") was adopted by the Board of Directors on June 16,
1995 and approved by the Company's stockholders on June 26, 1995. The 1995
Purchase Plan will take effect upon completion of this offering. The 1995
Purchase Plan provides for the issuance of up to 175,000 shares of Common
Stock pursuant to the exercise of nontransferable options granted to
participating employees.
The 1995 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company, except employees who own
five percent or more of the Company's stock, whose customary employment is 20
hours or more per week and more than five months in any calendar year and who
have completed at least one year of employment are eligible to participate in
the 1995 Purchase Plan. Employees who own five percent or more of the
Company's Common Stock and directors who are not employees of the Company may
not participate in the 1995 Purchase Plan. To participate in
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<PAGE>
the 1995 Purchase Plan, an employee must authorize the Company to deduct an
amount (not less than one percent nor more than ten percent of a participant's
total cash compensation) from his or her pay during six-month offering periods
commencing on January 1 and July 1 of each year (each a "Plan Period"). In no
case may an employee purchase more than 250 shares in any Plan Period. The
exercise price for the option for each Plan Period is 85% of the lesser of the
market price of the Common Stock on the first or last business day of the Plan
Period. If an employee is not a participant on the last day of the Plan
Period, such employee is not entitled to exercise his or her option, and the
amount of his or her accumulated payroll deductions will be refunded. An
employee's rights under the 1995 Purchase Plan terminate upon his or her
voluntary withdrawal from the 1995 Purchase Plan at any time or upon
termination of employment. No options have been granted to date under the 1995
Purchase Plan. As of June 30, 1995, approximately 68 employees would have been
eligible to participate in the 1995 Purchase Plan.
401(K) PLAN
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
All employees of the Company who have completed at least three consecutive
months of service are eligible to participate in the 401(k) Plan. The 401(k)
Plan provides that each participant may contribute from 1% to 15% of his or
her pre-tax compensation (up to a statutorily prescribed annual limit, $9,240
in 1995) to the 401(k) Plan. The percentage elected by certain highly
compensated participants may be required to be lower. All amounts contributed
to the 401(k) Plan by employee participants and earnings on these
contributions are fully vested at all times. The Company matches employee
contributions to the 401(k) Plan in an amount equal to a percentage of the
employees' eligible compensation contributed to the 401(k) Plan (not to exceed
6% of employee compensation) which is determined annually by the Board of
Directors. Employee participants may elect to invest their contributions in
various established funds, which include fixed income, growth and equity
funds.
CERTAIN TRANSACTIONS
R.R. Donnelley & Sons Company ("Donnelley"), which holds 10.3% of the Common
Stock of the Company prior to this offering, is a customer of the Company, and
was billed an aggregate of $91,833 in NewsEDGE subscriber fees in the year
ended December 31, 1994. Mr. Cowan, Executive Vice President of Donnelley,
serves on the Board of Directors of the Company. The Company has retained R.R.
Donnelley Financial International Printing Services, a division of Donnelley,
as its financial printer for this Prospectus. Printing expenses in connection
with this offering are estimated to be approximately $120,000.
William Blair & Company, an affiliate of William Blair Venture Partners III
("Blair"), a 10.3% holder of the Company's Common Stock prior to this offering
and a Selling Stockholder in this offering, is a customer of the Company and
was billed an aggregate of $65,500 in NewsEDGE subscriber fees in the year
ended December 31, 1994. Ms. Carnahan, a general partner of Blair, serves on
the Board of Directors of the Company.
In connection with the Company's payment upon the closing of this offering
of all accrued and unpaid dividends on the Series A Convertible Preferred
Stock, Messrs. Cass, Homans, McLagan and Semmel, together with their
respective affiliates, will receive an estimated $255,000, $12,000, $435,000
and $168,000, respectively, in their capacities as holders of Series A
Convertible Preferred Stock of the Company.
In connection with the Company's payment upon the closing of this offering
of all accrued and unpaid dividends on the Series B Redeemable Preferred
Stock, Messrs. Cass, McLagan and Semmel, together with their respective
affiliates, will receive an estimated $12,000, $30,000 and $11,000,
respectively, in their capacities as holders of Series B Redeemable Preferred
Stock, and Blair will receive an estimated $530,000.
The Company may use a portion of the proceeds of this offering to redeem the
Series B Redeemable Preferred Stock. Messrs. Cass, McLagan and Semmel are the
holders of 261, 641.25 and 225 shares of Series B Redeemable Preferred Stock,
respectively, and Blair is the holder of 11,250 shares of Series B Redeemable
Preferred Stock.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1995 and as adjusted to
reflect the sale of the shares offered hereby by (i) each person who is known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director and Named Executive Officer of the Company,
(iii) all directors and executive officers of the Company as a group, and (iv)
each Selling Stockholder. Unless otherwise indicated below, to the knowledge
of the Company, all persons listed below have sole voting and investment power
with respect to their shares of Common Stock, except to the extent authority
is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES TO BE
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)(2)
NAME AND ADDRESS OF ----------------------- SHARES BEING -----------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- ------------ ---------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS, OFFICERS AND
5% STOCKHOLDERS
Donald L. McLagan (3).... 2,189,791 33.6% -- 2,189,791 26.7%
c/o Desktop Data, Inc.
1601 Trapelo Road
Waltham, MA 02154
William Blair Venture
Partners III (4)........ 668,620 10.3 94,000 574,620 7.0
222 West Adams Street
Chicago, IL 60606
R.R. Donnelley & Sons
Company................. 673,514 10.3 -- 673,514 8.2
Corporate Headquarters
77 West Wacker Drive
Chicago, IL 60601
A. Baron Cass, III (5)... 314,064 4.8 -- 314,064 3.8
David R. Semmel (6)...... 213,239 3.3 -- 213,239 2.6
Peter P. Homans.......... 65,302 1.0 -- 65,302 *
Rory J. Cowan............ -- -- -- -- --
Ellen Carnahan (7)....... 668,620 10.3 94,000 574,620 7.0
c/o William Blair
Venture Partners III
222 West Adams Street
Chicago, IL 60606
Edward R. Siegfried...... 271,110 4.2 -- 271,110 3.3
Daniel F. X. O'Reilly.... 222,221 3.4 -- 222,221 2.7
Clifford M. Pollan....... 213,332 3.3 -- 213,332 2.6
All Executive Officers
and Directors as a group
(nine persons) (3) (5)
(6) (7)................. 4,157,679 63.8 94,000 4,063,679 49.6
OTHER SELLING
STOCKHOLDERS
Gwendolyn Garland
Babcock................. 135,502 2.1 67,751 67,751 *
Clark L. Bernard......... 17,886 * 8,888 8,998 *
Corning Partners II...... 83,797 1.3 17,000 66,797 *
Adam Crescenzi........... 23,713 * 7,114 16,599 *
Brenda Earl.............. 33,875 * 3,111 30,764 *
Mark Hager............... 67,751 1.0 8,888 58,863 *
David E. Mullare......... 26,836 * 4,444 22,392 *
Myrna H. Freedman
Irrevocable Trust....... 42,937 * 11,826 31,111 *
Edward G. Pringle........ 17,886 * 17,886 -- --
Sherman H. Starr......... 26,836 * 4,615 22,221 *
Catherine W. Tennican.... 16,937 * 16,937 -- --
Michael Tennican......... 84,688 1.3 17,777 66,911 *
Richard Trull............ 40,355 * 8,888 31,467 *
Allen H. Wolozin......... 35,787 * 33,875 1,912 *
</TABLE>
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<PAGE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes 6,515,937 shares of Common Stock outstanding as of June
30, 1995. The number of shares of Common Stock deemed outstanding after
this offering includes an additional 1,677,000 shares of Common Stock
which are being offered for sale by the Company in this offering.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 444,442 shares held in trust for the benefit of Mr. McLagan's two
children, of which Mr. McLagan's wife is the sole trustee. Does not
include 44,443 shares held by Mr. McLagan's sister, Mr. McLagan disclaims
beneficial ownership in such shares. In addition, Mr. McLagan holds 641.25
shares of Series B Redeemable Preferred Stock.
(4) The general partner of William Blair Venture Partners III ("Blair") is
William Blair Venture Management Co. ("Blair Management"). The general
partners of Blair Management, who may be deemed to share voting and
investment power with respect to the shares held by Blair, are Ms.
Carnahan, a director of the Company, George S. Newmark and Samuel Guren.
Ms. Carnahan and Messrs. Newmark and Guren disclaim beneficial ownership
of such shares, except to the extent of their proportionate interests in
Blair. In addition, Blair holds 11,250 shares of Series B Redeemable
Preferred Stock.
(5) Includes 70,460 shares held by Prime Petroleum, Inc. Profit Sharing Trust
("Prime"), of which Mr. Cass is the sole trustee, and of which he and his
spouse are the sole beneficiaries, and 70,460 shares held by Sands
Partnership No. 1 Money Purchase Pension Plan, of which Mr. Cass is a co-
trustee but not a beneficiary. In addition, Mr. Cass holds 261 shares of
Series B Redeemable Preferred Stock.
(6) Includes 30,491 shares held by Pangaea Partners, L.P., of which Mr. Semmel
is a general partner and may be deemed to share voting and investment
power with respect to the shares held by Pangaea Partners, L.P. Mr. Semmel
disclaims beneficial ownership of such shares, except to the extent of his
proportionate interest in Pangaea Partners, L.P. In addition, Mr. Semmel
holds 225 shares of Series B Redeemable Preferred Stock.
(7) Includes 668,620 shares held by Blair. The general partner of Blair is
Blair Management. The general partners of Blair Management, who may be
deemed to share voting and investment power with respect to the shares
held by Blair, are Ms. Carnahan, a director of the Company, George S.
Newmark and Samuel Guren. Ms. Carnahan and Messrs. Newmark and Guren
disclaim beneficial ownership of such shares, except to the extent of
their proportionate interests in Blair. In addition, Blair holds 11,250
shares of Series B Redeemable Preferred Stock.
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock of
the Company will consist of 15,000,000 shares of Common Stock, $.01 par value
per share, 1,000,000 shares of Preferred Stock, $.01 par value per share, and
13,500 shares of Series B Redeemable Preferred Stock, $.01 par value per
share.
COMMON STOCK
As of June 30, 1995, there were 6,515,937 shares of Common Stock
outstanding. Based upon the number of shares outstanding as of that date and
giving effect to the issuance of the 1,677,000 shares of Common Stock offered
by the Company hereby, there will be 8,192,937 shares of Common Stock
outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this offering will be, when issued
and paid for, validly issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future. Upon
the closing of this offering, there will be no shares of Preferred Stock
outstanding other than shares of Series B Redeemable Preferred Stock.
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<PAGE>
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no present plans to issue
any additional shares of Preferred Stock.
SERIES B REDEEMABLE PREFERRED STOCK
In December 1990, the Company issued and sold 13,500 shares of the Company's
Series B Redeemable Preferred Stock. The Series B Redeemable Preferred Stock
has no voting or conversion rights. Dividends accrue cumulatively on the
Series B Redeemable Preferred Stock at an annual rate of $10.00 per share,
whether or not declared, and are payable upon redemption (except under certain
circumstances, as described below) or liquidation, unless earlier declared by
the Board of Directors. At June 30, 1995, dividends aggregating $613,000 had
accrued on the Series B Redeemable Preferred Stock. The Series B Redeemable
Preferred Stock was issued and sold in conjunction with shares of the
Company's Series C Convertible Preferred Stock, all of which will be converted
to shares of Common Stock on the closing of this offering.
The Company may redeem the Series B Redeemable Preferred Stock at its
option, at any time, at a redemption price equal to $100 per share plus all
accrued but unpaid dividends, although the redemption price is subject to
reduction under the circumstances described below.
If the former holders of Series C Preferred Stock receive, in the aggregate,
more than $9,165,726 (the "Threshold Amount") from the sale of shares of
Common Stock issued upon the conversion of the Series C Preferred Stock
("Underlying Common Stock"), the redemption price for the Series B Redeemable
Preferred Stock is subject to reduction (but not below $.01 per share) by an
amount equal to the aggregate amount received on the sale of Underlying Common
Stock in excess of the Threshold Amount. If such liquidation value is adjusted
to $.01 per share, the redemption price of the Series B Redeemable Preferred
Stock will not include dividends accrued after the closing of this offering.
The Company may also be obligated to redeem the Series B Redeemable
Preferred Stock if: there is a significant change in ownership of the Company;
the Company fails to fulfill its obligations under the terms of the Series B
Redeemable Preferred Stock or the stock purchase agreement pursuant to which
the Company issued and sold the Series B Redeemable Preferred Stock (the
"Series B Agreement"); any representation or warranty of the Company contained
in the Series B Agreement or made in connection therewith proves to have been
false or misleading in any material respect when made; the Company or any
subsidiary makes an assignment for the benefit of creditors or becomes
bankrupt or insolvent; a judgment in excess of $100,000 is rendered against
the Company or any subsidiary and is not paid or discharged within 90 days; or
the Company or any subsidiary defaults in the performance of any obligation
resulting in the acceleration of obligations in excess of $250,000.
For so long as at least 20% of the originally issued Series B Redeemable
Preferred Stock remains outstanding, the Company must obtain the consent of
holders of at least 66.67% of the outstanding shares
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<PAGE>
of Series B Redeemable Preferred Stock to take various actions, including:
redeeming shares of stock other than shares of the Series B Redeemable
Preferred Stock; incurring debt or acquiring an interest in any business for
an amount in excess of $250,000; issuing shares on a parity with or senior to
the Series B Redeemable Preferred Stock; merging with another entity; selling
more than 20% of its assets other than in the ordinary course of business;
liquidating, dissolving or effecting a recapitalization or reorganization;
making acquisitions or capital expenditures in excess of $1,500,000 in any
twelve month period; entering into leases (other than capitalized leases)
providing for annual payments in excess of $300,000; and amending any stock
option or employee stock plan. The Company may redeem the Series B Redeemable
Preferred Stock at its option at any time and intends to do so if the
covenants or restrictions described in this paragraph limit its ability to
take actions otherwise desired.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section
203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained such status
with the approval of the Board of Directors or unless the business combination
is approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns,
or within three years did own, 15% or more of the corporation's voting stock.
The Company's Amended and Restated Certificate provides for the division of
the Board of Directors into three classes as nearly equal in size as possible
with staggered three-year terms. See "Management--Executive Officers and
Directors." Any director may be removed without cause only by the vote of at
least 75% of the shares entitled to vote for the election of directors or with
cause by the vote of at least a majority of such shares. The classification of
the Board of Directors could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring,
control of the Company.
The Company's Amended and Restated By-laws, which will be in effect upon the
closing of this offering, provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before
a meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a notice of
nominations or other business to be brought before an annual meeting must be
delivered not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the proxy statement delivered to stockholders in
connection with the preceding year's annual meeting or, if either the date of
the annual meeting is more than 30 days before or more than 60 days after such
anniversary, or if no proxy statement was delivered to stockholders in
connection with the preceding year's annual meeting, such notice must be
delivered not earlier than 90 days prior to such annual meeting and not later
than the later of 60 days prior to the annual meeting or 10 days following the
date on which public announcement of the date of such annual meeting is first
made by the Company. With respect to special meetings, notice must generally
be delivered not more than 90 days prior to such meeting and not later than
the later of 60 days prior to such meeting or 10 days following the day on
which public announcement of such meeting is first made by the Company. The
notice must contain, among other things, certain information about the
stockholder delivering the notice and, as applicable, background information
about each nominee or a description of the proposed business to be brought
before the meeting.
The Company's Amended and Restated Certificate authorizes the Board of
Directors, when considering a tender offer or merger or acquisition proposal,
to take into account factors in addition to potential economic benefits to
stockholders. Such factors may include: (i) the interests of the Company's
41
<PAGE>
stockholders, including the possibility that these interests might be best
served by the continued independence of the Company; (ii) whether the proposed
transaction might violate Federal or state laws; (iii) the consideration being
offered in the proposed transaction in relation to the then current market
price for the outstanding capital stock of the Company, as well as in relation
to the market price for the capital stock of the Company over a period of
years, the estimated price that might be achieved in a negotiated sale of the
Company as a whole or in part or through orderly liquidation, the premiums
over market price for the securities of other corporations in similar
transactions, current political, economic and other factors bearing on
securities prices and the Company's financial condition and future prospects;
and (iv) the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with the Company,
upon the communities in which the Company conducts its business and upon the
economy of the state, region and nation. The foregoing provisions could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the Company.
The Company's Amended and Restated Certificate provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders, and
that special meetings may be called only by the Chairman of the Board of
Directors, a majority of the Board of Directors, or the President of the
Company. These provisions could have the effect of delaying until the next
annual stockholder's meeting stockholder actions that are favored by the
holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Company's Common Stock, because such person or entity,
even if it acquired a majority of the outstanding voting securities of the
Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholder's meeting,
and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or By-laws, unless a corporation's certificate of
incorporation or By-laws, as the case may be, requires a greater percentage.
The Amended and Restated Certificate requires the affirmative vote of the
holders of at least 75% of the outstanding voting stock of the Company to
amend or repeal certain provisions of the Amended and Restated Certificate and
to reduce the number of authorized shares of Common Stock and Preferred Stock.
The By-laws may be amended or repealed by a majority vote of the Board of
Directors or the holders of a majority of the shares of the Company's voting
stock, provided that the affirmative vote of the holders of at least 75% of
the voting stock is required to amend or repeal certain of the indemnification
provisions contained in the By-laws. Such 75% stockholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any Preferred Stock that might be outstanding at the
time any such amendments are submitted to stockholders. The foregoing
provisions could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of the
Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate contains certain provisions
permitted under the DGCL relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as the breach of a director's duty of
loyalty or acts or omissions which involve intentional misconduct or a knowing
violation of law. These provisions do not limit or eliminate the rights of the
Company or any stockholder to seek non-monetary relief, such as an injunction
or rescission, in the event of a breach of a director's fiduciary duty. These
provisions will not alter a director's liability under Federal securities
laws. The Company's Amended and Restated Certificate also contains provisions
indemnifying the directors and officers of the Company to the fullest extent
permitted by the DGCL. The Company believes that these provisions will assist
the Company in attracting and retaining qualified individuals to serve as
directors.
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<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on the number of shares of Common
Stock outstanding as of June 30, 1995, and assuming no exercise of the options
to purchase 275,102 shares of Common Stock outstanding on such date, the
Company will have 8,192,937 shares of Common Stock outstanding. Of these
shares, the 2,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may
generally only be sold in compliance with the limitations of Rule 144
described below.
SALES OF RESTRICTED SHARES
The remaining 6,192,937 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. Of the Restricted Shares, up to 1,260,743 may be
eligible for sale in the public market immediately after this offering
pursuant to Rule 144(k) under the Securities Act. An additional 314,164
Restricted Shares may be eligible for sale in the public market in accordance
with Rule 701 under the Securities Act beginning 90 days after the effective
date of this offering. Of the remaining 4,618,030 outstanding Restricted
Shares, 4,452,751 will be eligible for resale under Rule 144 commencing 90
days after the effective date of this offering. 6,079,554 of such shares are
subject to lock-up agreements as described below (the "Lock-Up Agreements").
In addition, 3,524,123 of the Restricted Shares are entitled to registration
rights as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Common Stock
(approximately 82,000 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed, provided certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied. In
addition, Affiliates must comply with the restrictions and requirements of
Rule 144, other than the two-year holding period requirement, in order to sell
shares of Common Stock which are not restricted securities. Also, under Rule
144(k), a person who is not an Affiliate and has not been an Affiliate for at
least three months prior to the sale and who has beneficially owned Restricted
Shares for at least three years may resell such shares without compliance with
the foregoing requirements. In meeting the two and three year holding periods
described above, a holder of Restricted Shares can include the holding periods
of a prior owner who was not an Affiliate. The Securities and Exchange
Commission has proposed an amendment to Rule 144 which would reduce the
holding period required for shares subject to Rule 144 to become eligible for
sale in the public market from two years to one year, and from three years to
two years in the case of Rule 144(k). If this proposal is adopted, an
additional 31,950 shares will become eligible for sale to the public 180 days
after the Effective Date.
Rule 701 under the Securities Act provides that the shares of Common Stock
acquired on the exercise of currently outstanding options issued under an
employee benefit plan may be resold by persons, other than Affiliates,
beginning 90 days after the date of this Prospectus, subject only to the
manner of sale provisions of Rule 144, and by Affiliates under Rule 144
without compliance with its two-year minimum holding period, subject to
certain limitations.
OPTIONS
As of June 30, 1995, options to purchase a total of 275,102 shares of Common
Stock were outstanding (of which options to purchase 99,111 shares were then
exercisable); 272,104 of the total shares issuable
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<PAGE>
pursuant to such options are subject to Lock-up Agreements. An additional
900,000 shares of Common Stock are available for future grants under the
Company's stock plans. See "Management--Stock Plans."
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issuable pursuant to the Company's
stock plans that do not qualify for an exemption under Rule 701 from the
registration requirements of the Securities Act. The Company expects to file
these registration statements 90 days following the closing of this offering,
and such registration statements are expected to become effective upon filing.
Shares covered by these registration statements will thereupon be eligible for
sale in the public markets, subject to Rule 144 limitations applicable to
Affiliates and the Lock-up Agreements, to the extent applicable.
LOCK-UP AGREEMENTS
The Company, certain security holders, including the Selling Stockholders,
and all officers and directors of the Company, who in the aggregate will hold,
following the offering, 6,079,554 shares of Common Stock and options to
purchase 272,104 shares of Common Stock, have agreed, pursuant to the Lock-up
Agreements, not to directly or indirectly, without the prior written consent
of the Representatives of the Underwriters, offer, sell, offer to sell,
contract to sell, or otherwise dispose of any shares of Common Stock
beneficially owned by them for a period of 180 days after the date of this
Prospectus; provided, however, that certain current and former employees of
the Company who are also stockholders of the Company may sell an aggregate of
up to 38,970 of these shares commencing 90 days after the date of this
Prospectus.
REGISTRATION RIGHTS
At the completion of this offering, the holders of 2,166,327 shares of
Common Stock issuable upon the conversion of the Series A Convertible
Preferred Stock will be entitled to certain rights contained in a certain
Series A Preferred Stock Purchase Agreement dated as of November 13, 1989 and
the holders of 1,357,796 shares of Common Stock issuable upon the conversion
of the Series C Convertible Preferred Stock and the Series D Redeemable
Convertible Preferred Stock will be entitled to certain registration rights
contained in a certain Amended and Restated Registration Agreement dated as of
October 20, 1992. The Company is generally obligated to bear the expenses of
all such registrations, except underwriting discounts and commissions. For
purposes of the description below, Common Stock issuable upon the conversion
of the Series A Convertible Preferred Stock is referred to as "Series A
Registration Rights Shares" and Common Stock issuable upon the conversion of
the Series C Convertible Preferred Stock and the Series D Redeemable
Convertible Preferred Stock are referred to as "Series C and D Registration
Rights Shares."
If the Company files any registration statement with the Securities and
Exchange Commission in connection with a public offering of any shares of
Common Stock, holders of Series A Registration Rights Shares may require the
Company to include such shares in such registration statement, unless the
managing underwriter of such registration determines that the inclusion of the
shares would adversely affect the public offering. Holders of 25% of the
Series A Registration Rights Shares may, at any time, require the Company to
file a registration statement on Form S-3 under the Securities Act, or any
successor form thereto, if the aggregate price to the public of such offering
can reasonably be anticipated to exceed $250,000 and if the Company is
entitled to use Form S-3. There is no limitation on the number of
registrations on Form S-3 that may be requested by the holders of Series A
Registration Rights Shares.
At any time after six months from the completion of the sale of Common Stock
offered hereby, holders of at least 40% of the Series C and D Registration
Rights Shares may require the Company to file a registration statement with
respect to all or part of their Series C and D Registration Rights Shares on
either Form S-1 or Form S-3 under the Securities Act. If the Company files any
registration statement with
44
<PAGE>
the Securities and Exchange Commission in connection with a public offering on
either a Form S-1 or Form S-3 under the Securities Act, holders of
Registration Rights Shares may require the Company to include such shares in a
registration statement, unless the managing underwriter of such registration
determines that the inclusion of the shares would adversely affect the public
offering. There is no limitation on the number of registrations on Forms S-1
or Form S-3 that may be requested by the holders of Series C and D
Registration Rights Shares, although the Company is not required to bear the
expenses of more than two required S-1 registrations.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Volpe, Welty & Company, have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................... 417,500
Volpe, Welty & Company............................................. 417,500
Bear, Stearns & Co. Inc............................................ 75,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 75,000
Hambrecht & Quist LLC.............................................. 75,000
Lehman Brothers Inc................................................ 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 75,000
Montgomery Securities.............................................. 75,000
Morgan Stanley & Co. Incorporated.................................. 75,000
Oppenheimer & Co., Inc............................................. 75,000
Robertson, Stephens & Company, L.P................................. 75,000
William Blair & Company............................................ 50,000
Cowen & Company.................................................... 50,000
Dain Bosworth Incorporated......................................... 50,000
First Albany Corporation........................................... 50,000
Punk, Ziegel & Knoell.............................................. 50,000
SoundView Financial Group, Inc..................................... 50,000
Wessels, Arnold & Henderson........................................ 50,000
Pennsylvania Merchant Group LTD.................................... 35,000
Rodman & Renshaw Inc............................................... 35,000
The Seidler Companies Incorporated................................. 35,000
H.C. Wainwright Co., Inc........................................... 35,000
---------
Total............................................................ 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $.60 per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock, at the initial offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 2,000,000, and the Company
will
46
<PAGE>
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the Common Stock offered hereby. If purchased,
the Underwriters will offer such additional shares on the same terms as those
on which the 2,000,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
The Company, each of its officers and directors, and certain of its
securityholders have agreed, subject to certain exceptions, not to offer, sell
or otherwise dispose of any shares of Common Stock for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters; provided, however, that certain of the
Company's current and former employees who are also stockholders of the
Company may sell an aggregate of up to 38,970 of these shares commencing 90
days after the date of this Prospectus. The Representatives of the
Underwriters may, in their sole discretion and at any time without notice,
release all or any portion of the securities subject to Lock-up Agreements.
See "Shares Eligible for Future Sale."
This offering will be made pursuant to the provisions of Schedule E to the
By-Laws of the National Association of Securities Dealers, Inc. ("Schedule
E"). Due to the indirect ownership interest of William Blair & Co. in William
Blair Venture Partners III, which is a principal and selling stockholder in
the offering, William Blair & Co. may be deemed to be participating in this
offering. William Blair & Co. is also an underwriter in this offering.
Accordingly, under Schedule E the initial public offering price can be no
higher than that recommended by a "qualified independent underwriter" meeting
certain standards. In accordance with Schedule E, Alex. Brown & Sons
Incorporated is serving as a qualified independent underwriter in pricing this
offering and in conducting due diligence with respect to the Company.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiations among the Company, representatives
of the Selling Stockholders and the Representatives of the Underwriters. Among
the factors considered in such negotiations were the prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalizations and stages of development of other companies which this
Company, representatives of the Selling Stockholders and the Representatives
of the Underwriters believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. The Common Stock has been
approved for quotation on The Nasdaq National Market under the symbol "DTOP."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, Boston, Massachusetts, and
for the Underwriters by Hale and Dorr, Boston, Massachusetts.
EXPERTS
The Consolidated Financial Statements as of December 31, 1993 and December
31, 1994 and for each of the three years in the period ended December 31, 1994
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report and are included herein in reliance on the authority
of said firm as experts in giving said reports.
47
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company and the Common Stock, reference is hereby made to the
Registration Statement including exhibits, schedules and reports filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission in Washington, D.C. and copies of all or any part of which may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Regional Offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of
the prescribed fees.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent accounting firm and quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
48
<PAGE>
DESKTOP DATA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994, June 30,
1995 and Pro Forma
as of June 30, 1995...................................................... F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended
December 31, 1994 and for the Six Months Ended June 30, 1994 and 1995.... F-4
Consolidated Statements of Stockholders' Deficit for Each of the Three
Years in the Period Ended December 31, 1994, the Six Months Ended June
30, 1995 and Pro Forma as of June 30, 1995............................... F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended
December 31, 1994 and for the Six Months Ended June 30, 1994 and 1995.... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Desktop Data, Inc.:
We have audited the accompanying consolidated balance sheets of Desktop
Data, Inc. (a Delaware corporation) as of December 31, 1993 and 1994, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the three years in the period ended December 31, 1994. 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 in accordance with generally accepted auditing
standards. 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Desktop Data, Inc. as of
December 31, 1993 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 24, 1995 (except with respect to
the matters discussed in Note 9, as
to which the date is June 26, 1995)
F-2
<PAGE>
DESKTOP DATA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------ JUNE 30, JUNE 30,
1993 1994 1995 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 2,209,365 $ 4,073,450 $ 7,760,435 $ 7,760,435
Accounts receivable...... 1,535,063 2,257,830 2,254,855 2,254,855
Prepaid expenses and
deposits................ 432,813 744,416 1,004,456 1,004,456
----------- ----------- ----------- -----------
Total current assets... 4,177,241 7,075,696 11,019,746 11,019,746
----------- ----------- ----------- -----------
Property and equipment, at
cost:
Computer equipment....... 977,689 1,544,845 2,057,148 2,057,148
Furniture and fixtures... 145,212 199,687 225,567 225,567
Machinery and equipment.. 56,742 70,056 90,030 90,030
Equipment under capital
lease................... -- 95,081 95,081 95,081
----------- ----------- ----------- -----------
1,179,643 1,909,669 2,467,826 2,467,826
Less--accumulated
depreciation............ 514,378 821,747 1,064,597 1,064,597
----------- ----------- ----------- -----------
665,265 1,087,922 1,403,229 1,403,229
----------- ----------- ----------- -----------
Other Assets............... 32,317 56,317 207,450 207,450
----------- ----------- ----------- -----------
$ 4,874,823 $ 8,219,935 $12,630,425 $12,630,425
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable......... $ 409,371 $ 421,876 $ 762,336 $ 762,336
Accrued expenses......... 717,133 1,629,219 2,547,798 2,547,798
Currently redeemable
Series B preferred
stock................... -- 1,895,625 1,963,125 1,963,125
Currently redeemable
Series C preferred
stock................... -- 210,625 218,125 --
Deferred revenue,
current................. 5,017,351 7,563,767 10,053,920 10,053,920
Obligation under capital
lease, current.......... -- 19,016 19,016 19,016
Accrued dividends on
Series A preferred
stock................... -- -- -- 1,968,765
----------- ----------- ----------- -----------
Total current
liabilities........... 6,143,855 11,740,128 15,564,320 17,314,960
----------- ----------- ----------- -----------
Obligation under capital
lease, noncurrent......... -- 61,803 50,710 50,710
----------- ----------- ----------- -----------
Deferred revenue,
noncurrent................ -- 56,514 82,489 82,489
----------- ----------- ----------- -----------
Commitments (Note 6)
Redeemable preferred Stock,
$.01 par value
Series B--authorized,
issued and outstanding--
13,500 shares........... 1,760,625 -- -- --
Series C--authorized,
issued and outstanding--
1,500 shares............ 195,625 -- -- --
Series D--authorized,
issued and outstanding--
20,000 shares........... 2,238,900 2,438,900 2,538,900 --
Stockholders' deficit:
Series A convertible
preferred stock, $.01
par value--Authorized,
issued and outstanding--
5,335,410 shares
Liquidation preference--
$5,468,794.............. 53,354 53,354 53,354 --
Common stock, $.01 par
value--
Authorized--15,000,000
shares
Issued and
outstanding--2,400,876
shares, 2,642,213
shares, 2,668,814
shares and 6,515,937
shares, respectively.. 24,009 26,422 26,688 65,159
Additional paid-in
capital................. 2,803,287 2,479,277 2,316,879 3,120,022
Accumulated deficit...... (8,318,641) (8,605,708) (8,002,915) (8,002,915)
----------- ----------- ----------- -----------
(5,437,991) (6,046,655) (5,605,994) (4,817,734)
Less--treasury stock, at
cost--27,457 shares at
December 31, 1993 and
29,485 shares at
December 31, 1994, and
no shares at June 30,
1995 and pro forma...... 26,191 30,755 -- --
----------- ----------- ----------- -----------
Total stockholders'
deficit............... (5,464,182) (6,077,410) (5,605,994) (4,817,734)
----------- ----------- ----------- -----------
$ 4,874,823 $ 8,219,935 $12,630,425 $12,630,425
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DESKTOP DATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- -----------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $4,206,776 $ 7,660,177 $14,357,624 $6,247,710 $10,498,560
Costs and expenses:
Cost of revenues....... 968,182 2,009,807 3,878,896 1,742,201 2,903,125
Customer support
expenses.............. 411,922 719,725 1,907,926 786,291 1,130,247
Development expenses... 1,172,164 1,653,643 1,902,200 896,509 1,288,397
Sales and marketing
expenses.............. 2,487,346 3,897,665 6,152,745 2,864,116 4,144,646
General and
administrative
expenses.............. 592,159 674,833 899,796 414,248 554,330
----------- ----------- ----------- ---------- -----------
Total costs and
expenses............. 5,631,773 8,955,673 14,741,563 6,703,365 10,020,745
Income (loss) from
operations........... (1,424,997) (1,295,496) (383,939) (455,655) 477,815
Interest income
(expense), net......... (8,677) 33,815 96,872 30,458 156,978
----------- ----------- ----------- ---------- -----------
Income (loss) before
provision for income
taxes.................. (1,433,674) (1,261,681) (287,067) (425,197) 634,793
Provision for income
taxes.................. -- -- -- -- 32,000
----------- ----------- ----------- ---------- -----------
Net income (loss)..... $(1,433,674) $(1,261,681) (287,067) (425,197) 602,793
=========== ===========
Accretion of dividends
on Series B preferred
stock.................. (135,000) (67,500) (67,500)
----------- ---------- -----------
Net income (loss)
available for common
stockholders........... $ (422,067) $ (492,697) $ 535,293
=========== ========== ===========
Pro forma net income
(loss) per common and
common equivalent share
(Note 1)............... $ (.06) $ (.07) $ .08
=========== ========== ===========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding (Note 1)... 6,670,410 6,648,123 6,921,619
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DESKTOP DATA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK
--------------------- -------------------- ADDITIONAL ------------------ TOTAL
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED NUMBER STOCKHOLDERS'
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT OF SHARES COST DEFICIT
---------- --------- --------- --------- ---------- ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1991........... 5,335,410 $ 53,354 2,367,425 $23,674 $3,367,847 $(5,623,286) 5,574 $ (2,662) $(2,181,073)
Issuance costs of
Series D
redeemable
preferred stock... -- -- -- -- (34,802) -- -- -- (34,802)
Purchase of
treasury stock.... -- -- -- -- -- -- 9,781 (8,553) (8,553)
Exercise of stock
options........... -- -- 23,271 233 5,612 -- -- -- 5,845
Accretion of
dividends on
redeemable
preferred stock... -- -- -- -- (188,900) -- -- -- (188,900)
Net loss........... -- -- -- -- -- (1,433,674) -- -- (1,433,674)
---------- -------- --------- ------- ---------- ----------- ------- -------- -----------
Balance, December
31, 1992........... 5,335,410 53,354 2,390,696 23,907 3,149,757 (7,056,960) 15,355 (11,215) (3,841,157)
Purchase of
treasury stock.... -- -- -- -- -- -- 12,102 (14,976) (14,976)
Exercise of stock
options........... -- -- 10,180 102 3,530 -- -- -- 3,632
Accretion of
dividends on
redeemable
preferred stock... -- -- -- -- (350,000) -- -- -- (350,000)
Net loss........... -- -- -- -- -- (1,261,681) -- -- (1,261,681)
---------- -------- --------- ------- ---------- ----------- ------- -------- -----------
Balance, December
31, 1993........... 5,335,410 53,354 2,400,876 24,009 2,803,287 (8,318,641) 27,457 (26,191) (5,464,182)
Purchase of
treasury stock.... -- -- -- -- -- -- 2,028 (4,564) (4,564)
Exercise of stock
options........... -- -- 241,337 2,413 25,990 -- -- -- 28,403
Accretion of
dividends on
redeemable
preferred stock... -- -- -- -- (350,000) -- -- -- (350,000)
Net loss........... -- -- -- -- -- (287,067) -- -- (287,067)
---------- -------- --------- ------- ---------- ----------- ------- -------- -----------
Balance, December
31, 1994........... 5,335,410 53,354 2,642,213 26,422 2,479,277 (8,605,708) 29,485 (30,755) (6,077,410)
Purchase of
treasury stock.... -- -- -- -- -- -- 281 (1,930) (1,930)
Retirement of
treasury stock.... -- -- (29,766) (298) (32,387) -- (29,766) 32,685 --
Exercise of stock
options........... -- -- 56,367 564 44,989 -- -- -- 45,553
Accretion of
dividends on
redeemable
preferred stock... -- -- -- -- (175,000) -- -- -- (175,000)
Net income......... -- -- -- -- -- 602,793 -- -- 602,793
---------- -------- --------- ------- ---------- ----------- ------- -------- -----------
Balance, June 30,
1995 (unaudited)... 5,335,410 53,354 2,668,814 26,688 2,316,879 (8,002,915) -- -- (5,605,994)
Pro forma
adjustments
(unaudited)....... (5,335,410) (53,354) 3,847,123 38,471 803,143 -- -- -- 788,260
---------- -------- --------- ------- ---------- ----------- ------- -------- -----------
Pro Forma Balance,
June 30, 1995
(unaudited)........ -- $ -- 6,515,937 $65,159 $3,120,022 $(8,002,915) -- $ -- $(4,817,734)
========== ======== ========= ======= ========== =========== ======= ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DESKTOP DATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ---------------------------
1992 1993 1994 1994 1995
----------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $(1,433,674) $(1,261,681) $ (287,067) $ (425,197) $ 602,793
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating
activities--
Depreciation.......... 134,996 196,127 307,369 147,210 242,850
Changes in assets and
liabilities--
Accounts receivable.. (710,693) (358,350) (722,767) (676,264) 2,975
Prepaid expenses and
deposits............ (73,597) (172,939) (311,603) (305,995) (260,040)
Accounts payable..... 174,033 60,811 12,505 43,634 340,460
Accrued expenses..... 167,665 185,701 912,086 440,461 918,579
Deferred revenue..... 1,367,520 2,195,833 2,602,930 1,479,499 2,516,128
----------- ----------- ---------- ---------- ----------
Net cash provided by
(used in) operating
activities......... (373,750) 845,502 2,513,453 703,348 4,363,745
----------- ----------- ---------- ---------- ----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (237,559) (383,648) (634,946) (335,488) (558,157)
Increase in other
assets............... (7,317) -- (24,000) -- (14,559)
----------- ----------- ---------- ---------- ----------
Net cash used in
investing
activities......... (244,876) (383,648) (658,946) (335,488) (572,716)
----------- ----------- ---------- ---------- ----------
Cash flows from
financing activities:
Proceeds from sale of
redeemable preferred
stock, net of
issuance costs....... 1,965,198 -- -- -- --
Proceeds from exercise
of stock options..... 5,845 3,632 28,403 15,035 45,553
Repayment of notes
payable to
stockholders......... (500,000) -- -- -- --
Purchase of treasury
stock................ (8,553) (14,976) (4,564) (4,564) (1,930)
Payments on obligation
under capital lease.. -- -- (14,261) (1,781) (11,093)
Deferred registration
costs................ -- -- -- -- (136,574)
----------- ----------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities......... 1,462,490 (11,344) 9,578 8,690 (104,044)
----------- ----------- ---------- ---------- ----------
Increase in cash and
cash equivalents...... 843,864 450,510 1,864,085 376,550 3,686,985
Cash and cash
equivalents, beginning
of period............. 914,991 1,758,855 2,209,365 2,209,365 4,073,450
----------- ----------- ---------- ---------- ----------
Cash and cash
equivalents, end of
period................ $ 1,758,855 $ 2,209,365 $4,073,450 $2,585,915 $7,760,435
=========== =========== ========== ========== ==========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest.. $ 32,133 $ 2,184 $ 2,578 $ 1,197 $ 1,466
=========== =========== ========== ========== ==========
Supplemental disclosure
of noncash
transactions:
Equipment acquired
under capital lease
obligation........... $ -- $ -- $ 95,081 $ 95,081 $ --
=========== =========== ========== ========== ==========
Accretion of dividends
on redeemable
preferred stock...... $ 188,900 $ 350,000 $ 350,000 $ 175,000 $ 175,000
=========== =========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Desktop Data, Inc. (the Company) was incorporated on July 11, 1988, and
through its NewsEDGE service and software, delivers a large variety of news
and information sources in real time to personal computers installed on LANs,
automatically monitors and filters the news and alerts users to stories of
interest to them.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
(a) Unaudited Pro Forma Presentation
As discussed in Notes 3 and 4, all outstanding shares of Series A, Series C
and Series D preferred stock will convert into common stock upon the closing
of the Company's initial public offering contemplated herein. The pro forma
unaudited consolidated balance sheet and statement of stockholders' deficit as
of June 30, 1995 reflect the conversion of the Series A, Series C and Series D
preferred stock into shares of common stock and the accrual of $1,968,765 of
Series A preferred stock dividends payable upon consummation of the Company's
proposed initial public offering.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and Desktop Data Canada, Inc., its wholly owned subsidiary. All
material intercompany accounts and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities,
effective January 1, 1994. The adoption of this statement did not have a
material effect on the Company's financial position or results of operations.
Under SFAS No. 115, investments for which the Company has the positive intent
and ability to hold to maturity are reported at amortized cost, which
approximates fair market value, and are classified as held-to-maturity. These
investments include all cash equivalents. Cash equivalents have original
maturities of less than three months at the time of acquisition and consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1993 1994 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Money market accounts..................... $1,141,981 $ 709,137 $6,123,536
Securities purchased under agreements to
resell................................... 900,000 1,800,000 --
U.S. Treasury bills....................... -- 986,730 999,829
---------- ---------- ----------
$2,041,981 $3,495,867 $7,123,365
========== ========== ==========
</TABLE>
(d) Depreciation
The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of assets over their
estimated useful lives of five years.
(e) Research and Development and Software Development Costs
Research and development costs are expensed as incurred. SFAS No. 86,
Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed, requires the capitalization of certain
F-7
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
computer software development costs incurred after technological feasibility
is established. The Company has not capitalized software development costs to
date, as the costs incurred after technological feasibility of a software
product has been established have not been significant.
(f) Revenue Recognition
Revenues in the accompanying consolidated statements of operations consist
of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- ----------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Subscription and royalty
revenues............... $3,440,567 $6,764,028 $12,925,145 $5,529,924 $ 9,820,463
Other revenues.......... 766,209 896,149 1,432,479 717,786 678,097
---------- ---------- ----------- ---------- -----------
$4,206,776 $7,660,177 $14,357,624 $6,247,710 $10,498,560
========== ========== =========== ========== ===========
The Company licenses its software for a specified term under standard
subscription agreements. Subscription revenues are recognized ratably over the
term of the agreement, generally 12 months, beginning upon installation. The
unearned portion of revenue is shown as deferred revenue in the accompanying
consolidated balance sheets. Royalty revenues are recognized as they are
earned under agreements with certain news providers. Other revenues are
recognized at the time of shipment or when services are rendered, and consist
of the following:
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- ----------------------
1992 1993 1994 1994 1995
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Installation services... $ 233,450 $ 412,700 $ 497,223 $ 264,836 $ 342,476
Hardware sales.......... 193,877 351,338 262,438 194,579 124,073
Development projects.... 338,882 132,111 672,818 258,371 211,548
---------- ---------- ----------- ---------- -----------
$ 766,209 $ 896,149 $ 1,432,479 $ 717,786 $ 678,097
========== ========== =========== ========== ===========
</TABLE>
Cost of revenues includes royalties payable to news service and transmission
providers and is expensed over the term of the subscription agreement.
(g) Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Monetary assets and liabilities are translated using the exchange rate
in effect at the end of the period, while non-monetary assets and liabilities
are translated at historical rates. Revenues and expenses are translated using
exchange rates in effect during the period. Gains or losses from foreign
currency translation are expensed as incurred. There were no significant gains
or losses from foreign currency translations during any period presented.
(h) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(i) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. The Company maintains the majority of cash
balances with two financial institutions, and its accounts receivable balances
are primarily domestic. No single customer accounted for greater than 10% of
revenues or represents a significant credit risk to the Company.
F-8
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(j) Pro forma Net Income (Loss) Per Common and Common Equivalent Share
For the year ended December 31, 1994, and for the six months ended June 30,
1994 and 1995, pro forma net income (loss) per common and common equivalent
share is computed by dividing net income (loss), less the charge for the
accretion of the Series B preferred stock, by the pro forma weighted average
number of common and dilutive common stock equivalent shares outstanding
during that period, plus the number of shares of common stock issuable upon
conversion of all shares of Series A, Series C and Series D preferred stock
and the number of shares of common stock to be issued pursuant to the proposed
initial public offering sufficient to generate proceeds for the payment of
approximately $2,660,000 of dividends on the Series A and Series B preferred
stock which will be paid upon consummation of the proposed initial public
offering. Stock options granted after July 1, 1994 have been reflected as
outstanding for all periods presented, using the treasury stock method
required by the Securities and Exchange Commission. Other common stock
equivalents have not been included for the year ended December 31, 1994 and
the six months ended June 30, 1994, as the amounts would be antidilutive.
Historical net income (loss) per share data has not been presented, as such
information is not considered to be relevant or meaningful.
(k) Interim Financial Statements
The accompanying consolidated balance sheet as of June 30, 1995, the
consolidated statements of operations and cash flows for the six months ended
June 30, 1994 and 1995, and the consolidated statement of stockholders'
deficit for the six months ended June 30, 1995, are unaudited, but in the
opinion of management, include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the results for
these interim periods. The results of operations for the six months ended June
30, 1995 are not necessarily indicative of results to be expected for the
entire year.
(l) New Accounting Standard
During October 1994, the Financial Accounting Standards Board issued SFAS
No. 119, Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments, which requires disclosures about derivative financial
instruments. SFAS No. 119 will be effective for 1995. The Company does not
expect the adoption of this standard to have a material effect on its
financial position or results of operations.
(2) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes, the objective of which is to recognize the amount of current and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the
financial statements as measured by enacted tax laws.
At December 31, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $6,800,000. The net operating
loss carryforwards expire from 2004 through 2008 and are subject to review and
possible adjustment by the Internal Revenue Service. The Tax Reform Act of
1986 contains provisions that may limit the net operating loss carryforwards
available to be used in any given year in the event of significant changes in
ownership interest.
F-9
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) INCOME TAXES--(CONTINUED)
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $ 2,933,000 $ 2,756,000
Deferred revenue................................... -- 185,000
Nondeductible accruals............................. 64,000 168,000
Nondeductible depreciation......................... 40,000 56,000
Other temporary differences........................ (5,000) (5,000)
Valuation allowance................................ (3,032,000) (3,160,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Due to the uncertainty surrounding the realization of the net deferred tax
asset, the Company has provided a full valuation allowance against this
amount. The increase in the valuation allowance from December 31, 1993 to
December 31, 1994 is primarily the result of 1994 operations.
The provision for income taxes in the accompanying consolidated statement of
operations for the six months ended June 30, 1995 represents the alternative
minimum tax due, as required under the Internal Revenue Code, and state taxes
due in states that do not have net operating loss carryforwards available.
(3) REDEEMABLE PREFERRED STOCK
In December 1990, the Company sold 13,500 shares of Series B redeemable
preferred stock (the Series B preferred stock) and 1,500 shares of Series C
convertible preferred stock (the Series C preferred stock) for gross proceeds
of $1,350,000 and $150,000, respectively. On October 20, 1992, the Company
sold 20,000 shares of Series D convertible redeemable preferred stock (the
Series D preferred stock) for gross proceeds of $2,000,000. The underlying
agreements place certain restrictions on the Company with respect to the use
of funds and transfers of ownership, among others. The rights, preferences and
privileges of the redeemable preferred stock are as follows.
(a) Liquidation Preferences and Voting Rights
The redeemable preferred stockholders have a preference in liquidation, pari
passu with the holders of Series A preferred stock, over common stockholders
of $100 per share plus any accrued and unpaid dividends whether or not
declared. If the offering price of the Company's common stock in a public
offering exceeds $13.10 per share and all accrued dividends on the Series B
preferred stock have been paid through that date, the liquidation value per
share of the Series B preferred stock may be reduced to a minimum of $.01
depending upon the proceeds received by certain stockholders following the
conversion of the Series C preferred stock into shares of common stock.
Series C and Series D preferred stockholders are entitled to one vote on an
as-converted basis for each share of common stock issuable upon conversion.
The Series B preferred stockholders have no voting rights.
F-10
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) REDEEMABLE PREFERRED STOCK--(CONTINUED)
(b) Conversion
Each share of Series C and Series D preferred stock is convertible at any
time into approximately 534.90 shares and 33.68 shares of common stock,
respectively, subject to adjustment for certain dilutive events. Conversion is
at the option of the stockholder; however, upon a public offering of the
Company with gross proceeds and a price per share of at least $10,000,000 and
$5.61, respectively, the Company may require the conversion of all shares of
the Series C and Series D preferred stock. The Series B preferred stock is not
convertible.
(c) Dividends
Dividends accrue cumulatively on the Series B, Series C and Series D
preferred stock at an annual rate of $10.00 per share, whether or not
declared, and are payable upon redemption (except under certain circumstances,
as described below) or liquidation, unless earlier declared by the Board of
Directors. At June 30, 1995, dividends of $613,125, $68,125 and $538,900, on
the Series B, Series C and Series D preferred stock, respectively, have
accrued. No dividends are payable on the Series C and Series D preferred stock
upon the conversion into common stock in the event of a public offering. No
dividends may be paid on the Company's common stock while the Series B
preferred stock remains outstanding.
(d) Redemption
The Company is obligated to redeem the Series B and Series C preferred stock
on December 14, 1995. The redemption price is equal to the liquidation value,
as defined above. In the event that the Series B liquidation value has been
reduced to $.01 per share, the Series B redemption price shall not include
dividends accrued through that date. The mandatory redemption requirement
related to Series B preferred stock is relieved upon a public offering with an
offering price which exceeds $13.10 per share. The Company is obligated to
redeem the Series D preferred stock, together with accrued but unpaid
dividends, on October 20, 1997.
The Company may also be required to redeem the Series B, Series C and Series
D preferred stock upon a greater than 50% change in ownership, as defined, and
in the event of certain defined defaults. The Company may, at any time, redeem
any or all of the then outstanding Series B preferred stock at the redemption
price noted above.
(4) SERIES A CONVERTIBLE PREFERRED STOCK
The rights, preferences and privileges of the Series A convertible preferred
stock (the Series A preferred stock) are as follows.
(a) Liquidation Preferences and Voting Rights
Series A preferred stockholders have a preference in liquidation, pari passu
with the holders of the redeemable preferred stock, over common stockholders
of $.656 per share plus any accrued and unpaid dividends whether or not
declared. Series A preferred stockholders are entitled to vote as if the
preferred stock had been converted into common stock.
F-11
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) SERIES A CONVERTIBLE PREFERRED STOCK--(CONTINUED)
(b) Conversion
Each share of Series A preferred stock is convertible into approximately
.444 shares of common stock, subject to adjustment for certain dilutive
events. Conversion is at the option of the stockholder; however, the Company
may require the conversion of all the Series A preferred stock upon any of the
following: (i) the closing of a public offering of the Company's common stock,
(ii) approval by a majority of the holders of the then outstanding shares of
Series A preferred stock, or (iii) at such a time that less than 40% of the
originally issued Series A preferred stock remains outstanding.
(c) Dividends
Dividends accrue cumulatively at $.0656 per share per annum, whether or not
declared, and are payable upon liquidation or mandatory conversion. Dividends
on Series A preferred stock are payable in cash or, upon the occurrence of
certain events, in shares of common stock at the Company's option. As of June
30, 1995, $1,968,765 of dividends have accrued to Series A preferred
stockholders.
(5) STOCK OPTION PLAN
The Company has a stock option plan (the Plan) pursuant to which 622,222
shares of common stock are reserved for issuance. The Plan is administered by
the Board of Directors and provides for the granting of incentive stock
options, non-statutory stock options, stock awards and direct stock purchases.
Under the Plan, the Company has granted non-statutory stock options to
certain employees. The options vest generally over a four-year period and
expire not more than five years from the date of grant. The Company has the
right to repurchase shares acquired through these options upon the occurrence
of certain events. The Company also has the right of first refusal to
repurchase any shares of stock acquired from the exercise of options should
the optionholder decide to sell them. The Company's right of first refusal
will expire upon a public offering with proceeds to the Company of at least
$5,000,000.
The following schedule summarizes the nonqualified stock option activity:
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS PRICE RANGE
---------- -----------
<S> <C> <C>
Outstanding, December 31, 1991....................... 302,261 $ .02-$ .68
Granted............................................ 117,851 .90- 1.24
Exercised.......................................... (23,271) .02- .68
Terminated......................................... (17,042) .02- .90
-------- -----------
Outstanding, December 31, 1992....................... 379,799 .02- 1.24
Granted............................................ 77,823 1.24
Exercised.......................................... (10,180) .02- .90
Terminated......................................... (7,022) .02- 1.24
-------- -----------
Outstanding, December 31, 1993....................... 440,420 .02- 1.24
Granted............................................ 91,655 2.25- 2.81
Exercised.......................................... (241,337) .02- 1.24
Terminated......................................... (14,857) .34- 2.81
-------- -----------
Outstanding, December 31, 1994....................... 275,881 .34- 2.81
Granted............................................ 65,036 4.50- 7.43
Exercised.......................................... (56,367) .34- 2.25
Terminated......................................... (9,448) 1.24- 4.50
-------- -----------
Outstanding, June 30, 1995........................... 275,102 $ .34-$7.43
======== ===========
Exercisable, June 30, 1995........................... 99,111 $ .34-$2.25
======== ===========
</TABLE>
F-12
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) COMMITMENTS
(a) Operating Leases
The Company conducts its operations in facilities under operating leases
expiring through 1996. The Company's future minimum lease payments under these
leases as of December 31, 1994 are approximately as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1995............................ $344,000
1996............................ 63,000
--------
$407,000
========
</TABLE>
Rent expense charged to operations was approximately $240,000, $319,000 and
$452,000 for the years ended December 31, 1992, 1993 and 1994, respectively,
and $200,000 and $242,000 for the six months ended June 30, 1994 and 1995,
respectively.
(b) Capital Lease
The Company leases equipment under a capital lease. Future minimum lease
payments under the capital lease as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1995................................................................. $21,530
1996................................................................. 21,530
1997................................................................. 21,530
1998................................................................. 21,530
1999................................................................. 5,383
-------
Total minimum lease payments......................................... 91,503
Less--Amount representing interest................................... 10,684
-------
Obligation under capital lease....................................... 80,819
Less--Current portion of capital lease obligation.................... 19,016
-------
$61,803
=======
</TABLE>
(7) PREPAID EXPENSES AND DEPOSITS
Prepaid expenses and deposits in the accompanying consolidated balance
sheets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1993 1994 1995
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid commissions.......................... $342,088 $ 597,729 $ 787,197
Other........................................ 90,725 146,687 217,259
-------- ---------- ----------
$432,813 $ 744,416 $1,004,456
======== ========== ==========
</TABLE>
F-13
<PAGE>
DESKTOP DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) ACCRUED EXPENSES
Accrued expenses in the accompanying consolidated balance sheets consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1993 1994 1995
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and payroll-related.................. $348,107 $ 697,647 $ 709,385
Other........................................ 369,026 931,572 1,838,413
-------- ---------- ----------
$717,133 $1,629,219 $2,547,798
======== ========== ==========
</TABLE>
(9) SUBSEQUENT EVENTS
(a) Stock Split
On June 26, 1995, the Company's stockholders approved a 1-for-2.25 reverse
stock split of the common stock. The reverse stock split has been
retroactively reflected in the accompanying consolidated financial statements
and notes for all periods presented.
(b) Stock Plans
On June 26, 1995, the Company's stockholders approved the 1995 Stock Plan,
which allows for stock awards, direct purchases and the grant of options to
purchase shares of the Company's common stock. A maximum of 625,000 shares may
be issued under the plan. The stockholders also approved the 1995 Non-Employee
Director Stock Option Plan, which allows for the grant of options to purchase
up to 100,000 shares of the Company's common stock to the directors of the
Company, and the 1995 Employee Stock Purchase Plan, which permits eligible
employees to purchase up to an aggregate of 175,000 shares of the Company's
common stock at a price per share equal to 85% of the fair market value during
certain specified periods.
(c) Authorized Preferred Stock
On June 26, 1995, the Company's stockholders approved a new class of
undesignated preferred stock, subject to the closing of the initial public
offering contemplated herein, after which time the Series A, Series C and
Series D preferred stock will no longer be authorized.
F-14
<PAGE>
[ARTWORK APPEARS HERE]
NEWSEDGE SERVER SOFTWARE NEWSFEED DELIVERY
. Dedicated PC Server . Satellite
. OS/2 or Windows NT . FM
. May be duplexed for fault- . Leased Line
tolerant applications
NEWSEDGE CLIENT INTERFACES LANS SUPPORTED
. Windows . Novell Netware
. Lotus Notes . FTP's PC/TCP
. OSF/Motif . Banyan VINES
. Macintosh . Microsoft LAN Manager
. OS/2 Presentation Manager . IBM LAN Server
. Windows NT . DEC Pathworks
. E-Mail
. API
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 11
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Consolidated Financial and Operating Data........................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 33
Certain Transactions...................................................... 37
Principal and Selling Stockholders........................................ 38
Description of Capital Stock.............................................. 39
Shares Eligible for Future Sale........................................... 43
Underwriting.............................................................. 46
Legal Matters............................................................. 47
Experts................................................................... 47
Additional Information.................................................... 48
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL SEPTEMBER 5, 1995 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 Shares
[LOGO OF DESKTOP DATA, INC. APPEARS HERE]
Desktop Data, Inc.
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Volpe, Welty & Company
August 11, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
