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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: September 30, 1997
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-26540
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DESKTOP DATA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3016142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Blanchard Road
Burlington, Massachusetts 01803
(Address of principal executive offices)
(617) 229-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 60 days. Yes X . No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at September 30, 1997
- ------------------- ---------------------------------
Common Stock, par value $.01 8,670,411
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DESKTOP DATA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION Page Number
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996................................ 3
Condensed Consolidated Statements of Income
for the three and nine months ended September 30, 1997 and 1996......... 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1996................... 5
Notes to the Condensed Consolidated Financial Statements..................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 8
PART II - OTHER INFORMATION
Item 6(a) - Exhibits..................................................................... 12
Item 6(b) - Reports on Form 8-K.......................................................... 12
Signature................................................................................ 13
Exhibit Index............................................................................ 14
Exhibits................................................................................. 15
</TABLE>
2
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ITEM 1 DESKTOP DATA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Unaudited
September 30, December 31,
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $29,220 $10,735
Short-term investments 13,157 18,120
Accounts receivable 4,865 4,948
Prepaid expenses and deposits 2,569 1,814
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Total current assets 49,811 35,617
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Long-term investments - 7,928
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Property and equipment, net 5,591 4,640
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Other assets 143 142
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Total assets $55,545 $48,327
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,149 $ 878
Accrued expenses 6,053 3,572
Deferred revenue, current 15,122 13,631
Obligation under capital leases, current 34 34
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Total current liabilities 23,358 18,115
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Obligation under capital leases, noncurrent 12 38
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Deferred revenue, noncurrent 2 190
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Commitments (Note 2)
Stockholders' equity:
Common stock 87 86
Additional paid-in capital 31,925 31,782
Retained earnings (deficit) 161 (1,884)
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Total stockholders' equity 32,173 29,984
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Total liabilities & stockholders' equity $55,545 $48,327
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</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
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DESKTOP DATA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
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1997 1996 1997 1996
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Subscription and royalty revenues $10,218 $8,062 $29,227 $22,457
Other revenues 630 690 2,086 1,645
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Total revenues 10,848 8,752 31,313 24,102
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Cost of revenues 3,424 2,409 9,600 6,519
Customer support expenses 1,372 898 3,852 2,547
Development expenses 1,345 1,024 3,817 3,184
Sales and marketing expenses 3,886 3,199 10,973 8,649
General and administrative expenses 583 359 1,560 1,124
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Total costs and expenses 10,610 7,889 29,802 22,023
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Income from operations 238 863 1,511 2,079
Interest income, net 575 490 1,640 1,370
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Income before provision
for income taxes 813 1,353 3,151 3,449
Provision for income taxes 260 151 1,107 384
-------- ------- ------- -------
Net income $ 553 $ 1,202 $ 2,044 $ 3,065
======== ======= ======= =======
Net income per common and common
equivalent share $ 0.06 $ 0.14 $ 0.23 $ 0.35
======== ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 8,792 8,795 8,750 8,811
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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DESKTOP DATA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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Nine Months Ended
September 30,
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1997 1996
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Cash flows from operating activities:
Net income $ 2,044 $ 3,065
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,152 664
Changes in assets and liabilities:
Accounts receivable 83 (884)
Prepaid expenses and deposits (755) (687)
Accounts payable 1,271 339
Accrued expenses 2,481 613
Deferred revenue 1,303 4,078
-------- --------
Net cash provided by operating activities 7,579 7,188
======== ========
Cash flows from investing activities:
(Increase) decrease in investments, net 12,891 (15,051)
Purchases of property and equipment (2,103) (2,838)
Increase in other assets - (149)
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Net cash provided by (used in) investing activities 10,788 (18,038)
======== ========
Cash flows from financing activities:
Proceeds from exercise of stock options 81 124
Proceeds from stock issuance under employee stock purchase plan 63 154
Payments on obligation under capital leases (26) (22)
-------- --------
Net cash provided by financing activities 118 256
======== ========
Increase (decrease) in cash and cash equivalents 18,485 (10,594)
Cash and cash equivalents, beginning of period 10,735 19,301
-------- --------
Cash and cash equivalents, end of period $ 29,220 $ 8,707
======== ========
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 138 $ 205
======== ========
Cash paid for interest $ 5 $ 4
======== ========
Supplemental disclosure of noncash transactions
Equipment acquired under capital lease obligations $ - $ 25
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</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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DESKTOP DATA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Operations and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements of Desktop Data, Inc. (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's Form
10-K. In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries. Quarterly operating results are not necessarily indicative of the
results which would be expected for the full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Desktop Data Canada, Inc. and
Desktop Data Securities Corp. All material intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments purchased with an
original maturity of three months or less. Those securities with maturities of
three months to twelve months as of the balance sheet date are classified as
short-term investments and securities with maturities of greater than twelve
months are classified as long-term investments.
At September 30, 1997, cash equivalents included approximately $2,258,000 in
money market investments and $23,134,000 in U.S. government agency securities.
At September 30, 1997, short-term investments included approximately $8,049,000
in U.S. Treasury Notes and $5,108,000 in U.S. government agency securities. As
of September 30, 1997, all of the Company's investments are classified and
accounted for as held to maturity.
Net Income Per Common and Common Equivalent Share
For the three and nine month periods ended September 30, 1997 and 1996, net
income per common and common equivalent share is computed by dividing net income
by the weighted average number of common and common equivalent shares
outstanding during that period. Common equivalent shares from stock options
have been included in the computation using the treasury-stock method.
In February 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128 specifies revised
computational guidelines, presentation and disclosure requirements for earnings
per share and supersedes Accounting Principles Board Opinion No. 15. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted; however, upon adoption, SFAS No. 128 requires restatement of all
prior period earnings per share information. The difference between earnings per
share for the three and nine months ended September 30, 1997 and 1996,
calculated in accordance with SFAS No. 128, and net income per common and common
equivalent share computed using the existing rules, is not expected to be
significant.
6
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DESKTOP DATA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Commitments
On August 31, 1995, the Company entered into an operating lease for office
facilities, which commenced in February 1996 and expires in fiscal 2003. The
Company will pay out a total of approximately $2.3 million in monthly lease
payments over the period of the lease. As of September 30, 1997, the Company
has paid a deposit of approximately $150,000 related to the lease.
3. Subsequent Events
On November 2, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Agreement") with Individual, Inc.
("Individual"), a publicly-held company that develops and markets a suite of
customized news and information services that provide knowledge workers with
daily personalized current awareness reports. Individual's proprietary systems
filter incoming information, prepare for each user a daily news briefing, and
deliver its services across a range of delivery platforms, including facsimile,
electronic mail, groupware, intranets and the Internet. Under the terms of the
Agreement, the Company will issue one-half (1/2) of a share of Common Stock for
each outstanding share of Individual common stock (the "Exchange Ratio"). In
addition, each outstanding option, warrant or right to purchase Individual
common stock pursuant to outstanding warrants or rights to purchase common stock
under Individual's various stock option and purchase plans will be assumed by
the Company and will become an option, warrant or right to purchase the
Company's Common Stock after giving effect to the Exchange Ratio. Consummation
of the merger contemplated by the Agreement is conditioned upon the affirmative
vote of both companies' stockholders, among other conditions.
7
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ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Desktop Data, through its NewsEDGE products, delivers a large variety of news
and information sources in real time to professionals' personal computers,
automatically monitoring and filtering the news, and alerting the users to
stories of interest to them. NewsEDGE is delivered via both corporations'
intranets and the internet.
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.
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.
Results of Operations for the Three and Nine Month Periods Ended September 30,
1997
Total revenues increased 24% to $10.8 million for the three months ended
September 30, 1997 as compared to $8.8 million for the same period in 1996.
Year-to-date total revenues increased 30% to $31.3 million as compared to $24.1
million for the same period in 1996. For the three months ended September 30,
1997, subscription and royalty revenues increased 27% to $10.2 million, up from
$8.1 million for the same period in 1996. Year-to-date subscription and royalty
revenues increased 30% to $29.2 million as compared to $22.5 million for the
same period in 1996. For the three month period ended September 30, 1997, other
revenues decreased 9% to $630,000, down from $690,000 for the same period in
1996. Conversely, year-to-date other revenues increased 27% to $2.1 million, up
from $1.6 million for the same period in 1996. 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. Fluctuations in other
revenues occur as a result of increases or decreases in non-recurring custom
development projects and installations of NewsEDGE.
The number of installed customers increased from 373 customers at September
30, 1996, to 410 customers at September 30, 1997, an increase of 10%. The
number of authorized users within customer organizations increased from 110,298
users at September 30, 1996 to 169,438 users at September 30, 1997, an increase
of 54%. The average number of users per customer increased from 270 users at
September 30, 1996 to 369 users at September 30, 1997, an increase of 37%. The
Company's average revenues per customer increased from $63,435 for the nine
months ended September 30, 1996 to $73,806 for the nine months ended September
30, 1997, an increase of 16%.
8
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Cost of revenues, as a percentage of total revenues, increased to 32% and 31%,
respectively, for the three and nine month periods ended September 30, 1997 from
28% and 27%, respectively, for the same periods in 1996. The percentage
increases in cost of revenues were due primarily to increases in royalties paid
to third party information providers and increases in transmission costs.
Customer support expenses increased 53% to $1.4 million for the three months
ended September 30, 1997, as compared to $898,000 for the same period in 1996.
Year-to-date customer support expenses increased 51% to $3.9 million for the
nine months ended September 30, 1997, as compared to $2.5 million for the same
period in 1996. These increases resulted primarily from higher staffing levels
and the continuing need for the Company to provide additional support to its
growing customer base. As a percentage of total revenues, customer support
expenses increased to 13% and 12% for the three and nine month periods ended
September 30, 1997 from 10% and 11% for the comparable periods in 1996. At
September 30, 1997, Desktop Data had 62 employees engaged in field and central
customer support operations.
Development expenses increased 31% to $1.3 million for the three months ended
September 30, 1997, as compared to $1.0 million for same period in 1996.
Year-to-date development expenses increased 20% to $3.8 million for the nine
months ended September 30, 1997, as compared to $3.2 million for the same period
in 1996. Increases in development expenses resulted primarily from higher
payroll and recruiting costs deemed necessary to attract and retain new and
existing personnel. As a percentage of total revenues, development expenses
remained relatively constant at 12% for the three and nine month periods ended
September 30, 1997, as compared to 12% and 13% for the comparable periods in
1996. At September 30, 1997, Desktop Data had 44 employees engaged in
development and quality assurance operations.
Sales and marketing expenses increased 22% to $3.9 million for the three month
period ended September 30, 1997, as compared to $3.2 million for the same period
in 1996. Year-to-date sales and marketing expenses increased 27% to $11.0
million for the nine month period ended September 30, 1997, from $8.6 million
for the same period in 1996. Sales and marketing expenses increased during
these periods, primarily due to the expansion of the sales and marketing
organizations. As a percentage of total revenues, sales and marketing expenses
remained relatively constant at 36% and 35% for the three and nine month periods
ended September 30, 1997, as compared with 37% and 36% for the same periods in
1996. As of September 30, 1997, Desktop Data's direct sales force and
marketing staff consisted of 75 employees.
General and administrative expenses increased 62% to $583,000 for the three
months ended September 30, 1997 from $359,000 for the same period in 1996.
Year-to-date general and administrative expenses increased 39% to $1.6 million
for the nine months ended September 30, 1997 from $1.1 million for the same
period in 1996. The increases in general and administrative expenses were due
primarily to additions to staff and new administrative functions to support the
Company's growth. General and administrative expenses, as a percentage of total
revenues, remained relatively constant at 5% for the three and nine month
periods ended September 30, 1997, as compared to 4% and 5% for the same periods
in 1996. At September 30, 1997, Desktop Data had 15 employees engaged in
general and administrative operations.
Interest income, net increased to $575,000 and $1.6 million for the three and
nine month periods ended September 30, 1997, from $490,000 and $1.4 million for
the comparable periods in 1996 due to higher cash and investment balances
generated from operations and higher interest rates earned on cash, cash
equivalent and investment balances.
The provision for income taxes increased to $260,000 and $1.1 million,
respectively, for the three and nine month periods ended September 30, 1997 from
$151,000 and $384,000, respectively, for the comparable periods in 1996. The
increase in the tax provision is due to both a reduction in the tax loss
carryforwards and higher expected taxable income from the Company's operations.
9
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Liquidity and Capital Resources
The Company's combined cash, cash equivalent and investment balance was $42.4
million at September 30, 1997, as compared to $36.8 million at December 31,
1996, an increase of $5.6 million. Net cash of $7.6 million was generated from
operations for the nine months ending September 30, 1997 as a result of the
Company's profitability and increases in current liabilities since the beginning
of the year. Net cash provided by investing activities for the nine months
ended September 30, 1997 was $10.8 million, due to the maturity of certain
investments. Net cash provided by financing activities in the nine months ended
September 30, 1997 was $118,000, due primarily to employee stock option
exercises and stock purchases pursuant to the employee stock purchase plan.
As previously announced, on November 2, 1997, the Company entered into an
Agreement and Plan of Merger and Reorganization (the "Agreement") with
Individual, Inc. ("Individual"), a publicly-held company that develops and
markets a suite of customized news and information services that provide
knowledge workers with daily personalized current awareness reports. Under the
terms of the Agreement, Individual will merge with and into the Company, with
the Company remaining as the surviving entity (the "Merger"). Direct
transaction costs associated with the Merger of Desktop and Individual, which
are not currently reasonably estimable, will be charged to operations upon
consummation of the Merger.
The Company continues to investigate the possibility of additional investments
in or acquisitions of complementary businesses, products or technologies.
The Company believes that its current cash, cash equivalent and investment
balances combined with funds anticipated to be generated from future operations
will be sufficient to satisfy working capital and capital expenditure
requirements for at least the next twelve months.
Certain Factors Affecting Future Operating Results
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control. The following
discussion highlights some of the risks which may affect future operating
results.
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. Increased competition, on the basis of price or otherwise,
may require price reductions or increased spending on marketing or software
development, which could have material adverse effect on the Company's business
and results of operations. In the recent past, competition has increased as
several new companies and Internet-based technologies have entered the market.
The Company believes that this has resulted in a lengthening of its customers'
decision making process and may adversely affect the Company's business and
results of operations in the future.
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 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.
Dependence on News Providers. The Company currently makes over 650 news and
information sources available through NewsEDGE, pursuant to agreements between
the Company and numerous 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, Dow Jones & Company,
Inc., The Financial Times (London), Reuters America, Inc. 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
10
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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 occurrence 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.
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 WavePhore ("WavePhore"), a common carrier communications vendor.
WavePhore is also the communications provider for many newswires offered by the
Company through NewsEDGE. The Company's agreement with WavePhore expires on
December 31, 1998. This agreement can be terminated earlier in the event of a
material breach by the Company of the agreement. If the agreement with WavePhore
were terminated on short notice, or if WavePhore 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. The Company believes that if WavePhore were unable to
fulfill its obligations, other sources of retransmission would be available to
the Company, although the transition from WavePhore to those sources could
result in delays or interruptions of service that could have a material adverse
affect on the Company's business.
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 technological developments.
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. 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.
11
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DESKTOP DATA, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports Filed on Form 8-K.
- -----------------------------------------------
6(a) Exhibits.
10.1 - 1995 Employee Stock Purchase Plan, as amended
11.1 - Computation of Earnings Per Share
27.0 - Financial Data Schedule
6(b) REPORTS ON FORM 8-K
A Form 8-K was filed by the Company on November 14, 1997 which reported
that the Company entered into an Agreement and Plan of Merger and
Reorganization (the "Agreement") with Individual, Inc. ("Individual")
on November 2, 1997. Under the terms of the Agreement, the Company will
issue one-half (1/2) of a share of Common Stock for each outstanding
share of Individual common stock (the "Exchange Ratio"). In addition,
each outstanding option, warrant or right to purchase common stock
pursuant to outstanding warrants or rights to purchase common stock
under Individual's various stock option and purchase plans will be
assumed by the Company and will become an option, warrant or right to
purchase the Company's Common Stock after giving effect to the Exchange
Ratio. Consummation of the Merger contemplated by the Agreement is
conditioned upon the affirmative vote of both companies' stockholders,
among other conditions.
12
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DESKTOP DATA, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DESKTOP DATA, INC.
(Registrant)
Date: November 14, 1997 /s/ Edward R. Siegfried
--------------------------------------
Edward R. Siegfried
Vice President--Finance and Operations,
Treasurer and Assistant Secretary
13
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DESKTOP DATA, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
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<S> <C> <C>
10.1 - 1995 Employee Stock Purchase Plan, as amended 15
11.1 - Computation of earnings per share 24
27.0 - Financial Data Schedule 25
</TABLE>
14
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EXHIBIT 10.1
DESKTOP DATA, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
Article 1 - Purpose.
- -------------------
This 1995 Employee Stock Purchase Plan (the "Plan") is intended to
encourage stock ownership by all eligible employees of Desktop Data, Inc. (the
"Company"), a Delaware corporation, and its participating subsidiaries (as
defined in Article 17) so that they may share in the growth of the Company by
acquiring or increasing their proprietary interest in the Company. The Plan is
designed to encourage eligible employees to remain in the employ of the Company
and its participating subsidiaries. The Plan is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423(b) of the
Internal Revenue Code of 1986, as amended (the "Code").
Article 2 - Administration of the Plan.
- --------------------------------------
The Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). The Committee shall consist of not
less than two members of the Company's Board of Directors. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by the
Board of Directors. The Committee may select one of its members as Chairman,
and shall hold meetings at such times and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
The interpretation and construction by the Committee of any provisions of
the Plan or of any option granted under it shall be final, unless otherwise
determined by the Board of Directors. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best,
provided that any such rules and regulations shall be applied on a uniform basis
to all employees under the Plan. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from
appointing a Committee, the Board of Directors shall have all power and
authority to administer the Plan. In such event, the word "Committee" wherever
used herein shall be deemed to mean the Board of Directors.
Article 3 - Eligible Employees.
- ------------------------------
All employees of the Company or any of its participating subsidiaries whose
customary employment is 20 hours or more per week and for more than five months
in any calendar
<PAGE>
-2-
year and who have completed one year of employment shall be eligible to receive
options under the Plan to purchase common stock of the Company, and all eligible
employees shall have the same rights and privileges hereunder. Persons who are
eligible employees on the first business day of any Payment Period (as defined
in Article 5) shall receive their options as of such day. Persons who become
eligible employees after any date on which options are granted under the Plan
shall be granted options on the first day of the next succeeding Payment Period
on which options are granted to eligible employees under the Plan. In no event,
however, may an employee be granted an option if such employee, immediately
after the option was granted, would be treated as owning stock possessing five
percent or more of the total combined voting power or value of all classes of
stock of the Company or of any parent corporation or subsidiary corporation, as
the terms "parent corporation" and "subsidiary corporation" are defined in
Section 424(e) and (f) of the Code. For purposes of determining stock ownership
under this paragraph, the rules of Section 424(d) of the Code shall apply, and
stock which the employee may purchase under outstanding options shall be treated
as stock owned by the employee.
Article 4 - Stock Subject to the Plan.
- -------------------------------------
The stock subject to the options under the Plan shall be shares of the
Company's authorized but unissued Common Stock, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may
be issued pursuant to the Plan is 175,000, subject to adjustment as provided in
Article 12. If any option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the unpurchased shares subject thereto
shall again be available under the Plan.
Article 5 - Payment Period and Stock Options.
- --------------------------------------------
The first Payment Period during which payroll deductions will be
accumulated under the Plan shall commence on the later to occur of January 1,
1996 and the first day of the first calendar month following effectiveness of
the Form S-8 registration statement filed with the Securities and Exchange
Commission covering the shares to be issued pursuant to the Plan and shall end
on June 30, 1996. The Payment Period commencing January 1, 1998 shall end on
August 31, 1998. Then, for the remainder of the duration of the Plan, Payment
Periods shall consist of the six-month periods commencing on March 1 and
September 1 and ending on August 31 and February 28 of each calendar year,
respectively.
Twice each year, on the first business day of each Payment Period, the
Company will grant to each eligible employee who is then a participant in the
Plan an option to purchase on the last day of such Payment Period, at the Option
Price hereinafter provided for, a maximum of 250 shares, on condition that such
employee remains eligible to participate in the Plan throughout the remainder of
such Payment Period. The participant shall be entitled to exercise the option
so granted only to the extent of the participant's accumulated payroll
deductions on the last day of such Payment Period. If the participant's
accumulated payroll deductions on the last day of the Payment Period would
enable the participant to purchase more than 250 shares except
<PAGE>
-3-
for the 250 share limitation, the excess of the amount of the accumulated
payroll deductions over the aggregate purchase price of the 250 shares shall be
promptly refunded to the participant by the Company, without interest, unless
the participant waives the right to receive such excess funds and agrees to
carry forward such excess funds into the next Payment Period. The Option Price
per share for each Payment Period shall be the lesser of (i) 85% of the average
market price of the Common Stock on the first business day of the Payment Period
and (ii) 85% of the average market price of the Common Stock on the last
business day of the Payment Period, in either event rounded up. The foregoing
limitation on the number of shares subject to option and the Option Price shall
be subject to adjustment as provided in Article 12.
For purposes of the Plan, the term "average market price" on any date means
(i) the average (on that date) of the high and low prices of the Common Stock on
the principal national securities exchange on which the Common Stock is traded,
if the Common Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on that date) of the Common Stock on The Nasdaq
National Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the average of the closing bid and asked prices last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on The Nasdaq National Market;
or (iv) if the Common Stock is not publicly traded, the fair market value of the
Common Stock as determined by the Committee after taking into consideration all
factors which it deems appropriate, including, without limitation, recent sale
and offer prices of the Common Stock in private transactions negotiated at arm's
length.
For purposes of the Plan, the term "business day" means a day on which
there is trading on The Nasdaq National Market or the aforementioned national
securities exchange, whichever is applicable pursuant to the preceding
paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or
legal holiday in the Commonwealth of Massachusetts.
No employee shall be granted an option which permits the employee's right
to purchase stock under the Plan, and under all other Section 423(b) employee
stock purchase plans of the Company and any parent or subsidiary corporations,
to accrue at a rate which exceeds $25,000 of fair market value of such stock
(determined on the date or dates that options on such stock were granted) for
each calendar year in which such option is outstanding at any time. The purpose
of the limitation in the preceding sentence is to comply with Section 423(b)(8)
of the Code. If the participant's accumulated payroll deductions on the last
day of the Payment Period would otherwise enable the participant to purchase
Common Stock in excess of the Section 423(b)(8) limitation described in this
paragraph, the excess of the amount of the accumulated payroll deductions over
the aggregate purchase price of the shares actually purchased shall be promptly
refunded to the participant by the Company, without interest.
Article 6 - Exercise of Option.
- ------------------------------
Each eligible employee who continues to be a participant in the Plan on the
last day of a Payment Period shall be deemed to have exercised his or her option
on such date and shall be deemed to have purchased from the Company such number
of full shares of Common Stock reserved for the purpose of the Plan as the
participant's accumulated payroll deductions on such
<PAGE>
-4-
date will pay for at the Option Price, subject to the 250 share limit of the
option and the Section 423(b)(8) limitation described in Article 5. If the
individual is not a participant on the last day of a Payment Period, the he or
she shall not be entitled to exercise his or her option. Only full shares of
Common Stock may be purchased under the Plan. Unused payroll deductions
remaining in a participant's account at the end of a Payment Period by reason of
the inability to purchase a fractional share shall be carried forward to the
next Payment Period.
Article 7 - Authorization for Entering the Plan.
- -----------------------------------------------
An employee may elect to enter the Plan by filling out, signing and
delivering to the Company an authorization:
A. Stating the percentage to be deducted regularly from the employee's pay;
B. Authorizing the purchase of stock for the employee in each Payment
Period in accordance with the terms of the Plan; and
C. Specifying the exact name or names in which stock purchased for the
employee is to be issued as provided under Article 11 hereof.
Such authorization must be received by the Company at least ten days before the
first day of the next succeeding Payment Period and shall take effect only if
the employee is an eligible employee on the first business day of such Payment
Period.
Unless a participant files a new authorization or withdraws from the Plan,
the deductions and purchases under the authorization the participant has on file
under the Plan will continue from one Payment Period to succeeding Payment
Periods as long as the Plan remains in effect.
The Company will accumulate and hold for each participant's account the
amounts deducted from his or her pay. No interest will be paid on these
amounts.
Article 8 - Maximum Amount of Payroll Deductions.
- ------------------------------------------------
An employee may authorize payroll deductions in an amount (expressed as a
whole percentage) not less than one percent (1%) but not more than ten percent
(10%) of the employee's total compensation, including base pay or salary and any
overtime, bonuses or commissions.
Article 9 - Change in Payroll Deductions.
- ----------------------------------------
Deductions may not be increased or decreased during a Payment Period.
However, a participant may withdraw in full from the Plan.
Article 10 - Withdrawal from the Plan.
- -------------------------------------
<PAGE>
-5-
A participant may withdraw from the Plan (in whole but not in part) at any
time prior to the last day of a Payment Period by delivering a withdrawal notice
to the Company.
To re-enter the Plan, an employee who has previously withdrawn must file a
new authorization at least ten days before the first day of the next Payment
Period in which he or she wishes to participate. The employee's re-entry into
the Plan becomes effective at the beginning of such Payment Period, provided
that he or she is an eligible employee on the first business day of the Payment
Period.
Article 11 - Issuance of Stock.
- ------------------------------
Certificates for stock issued to participants shall be delivered as soon as
practicable after each Payment Period by the Company's transfer agent.
Stock purchased under the Plan shall be issued only in the name of the
participant, or if the participant's authorization so specifies, in the name of
the participant and another person of legal age as joint tenants with rights of
survivorship.
Article 12 - Adjustments.
- ------------------------
Upon the happening of any of the following described events, a
participant's rights under options granted under the Plan shall be adjusted as
hereinafter provided:
A. In the event that the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a
reorganization, split-up, liquidation, recapitalization or the like of the
Company, the shares of Common Stock shall be exchanged for other securities
of the Company, each participant shall be entitled, subject to the conditions
herein stated, to purchase such number of shares of Common Stock or amount of
other securities of the Company as were exchangeable for the number of shares
of Common Stock that such participant would have been entitled to purchase
except for such action, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or
exchange; and
B. In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which shall
at the time be subject to option hereunder, each participant upon exercising
such an option shall be entitled to receive (for the purchase price paid upon
such exercise) the shares as to which the participant is exercising his or
her option and, in addition thereto (at no additional cost), such number of
shares of the class or classes in which such stock dividend or dividends were
declared or paid, and such amount of cash in lieu of fractional shares, as is
equal to the number of shares thereof and the amount of cash in lieu of
fractional shares, respectively, which the participant would have received if
the participant had been the holder of the shares as to which the participant
is exercising his or her option at all times between the date of the granting
of such option and the date of its exercise.
<PAGE>
-6-
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in Article 4 hereof which are subject to options
which have been or may be granted under the Plan and the limitations set forth
in the second paragraph of Article 5 shall also be appropriately adjusted to
reflect the events specified in paragraphs A and B above. Notwithstanding the
foregoing, any adjustments made pursuant to paragraphs A or B shall be made only
after the Committee, based on advice of counsel for the Company, determines
whether such adjustments would constitute a "modification" (as that term is
defined in Section 424 of the Code). If the Committee determines that such
adjustments would constitute a modification, it may refrain from making such
adjustments.
If the Company is to be consolidated with or acquired by another entity in
a merger, a sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Committee or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor Board")
shall, with respect to options then outstanding under the Plan, either (i) make
appropriate provision for the continuation of such options by arranging for the
substitution on an equitable basis for the shares then subject to such options
either (a) the consideration payable with respect to the outstanding shares of
the Common Stock in connection with the Acquisition, (b) shares of stock of the
successor corporation, or a parent or subsidiary of such corporation, or (c)
such other securities as the Successor Board deems appropriate, the fair market
value of which shall not materially exceed the fair market value of the shares
of Common Stock subject to such options immediately preceding the Acquisition;
or (ii) terminate each participant's options in exchange for a cash payment
equal to the excess of (a) the fair market value on the date of the Acquisition,
of the number of shares of Common Stock that the participant's accumulated
payroll deductions as of the date of the Acquisition could purchase, at an
option price determined with reference only to the first business day of the
applicable Payment Period and subject to the 250 share, Code Section 423(b)(8)
and fractional-share limitations on the amount of stock a participant would be
entitled to purchase, over (b) the result of multiplying such number of shares
by such option price.
The Committee or Successor Board shall determine the adjustments to be made
under this Article 12, and its determination shall be conclusive.
Article 13 - No Transfer or Assignment of Employee's Rights.
- -----------------------------------------------------------
An option granted under the Plan may not be transferred or assigned and may
be exercised only by the participant.
Article 14 - Termination of Employee's Rights.
- ---------------------------------------------
Whenever a participant ceases to be an eligible employee because of
retirement, voluntary or involuntary termination, resignation, layoff,
discharge, death or for any other reason, his or her rights under the Plan shall
immediately terminate, and the Company shall promptly refund, without interest,
the entire balance of his or her payroll deduction account under the Plan.
Notwithstanding the foregoing, eligible employment shall be treated as
continuing intact while a participant is on military leave, sick leave or other
bona fide leave of
<PAGE>
-7-
absence, for up to 90 days, or for so long as the participant's right to re-
employment is guaranteed either by statute or by contract, if longer than 90
days.
Article 15 - Termination and Amendments to Plan.
- -----------------------------------------------
The Plan may be terminated at any time by the Company's Board of Directors
but such termination shall not affect options then outstanding under the Plan.
It will terminate in any case when all or substantially all of the unissued
shares of stock reserved for the purposes of the Plan have been purchased. If
at any time shares of stock reserved for the purpose of the Plan remain
available for purchase but not in sufficient number to satisfy all then unfilled
purchase requirements, the available shares shall be apportioned among
participants in proportion to the amount of payroll deductions accumulated on
behalf of each participant that would otherwise be used to purchase stock, and
the Plan shall terminate. Upon such termination or any other termination of the
Plan, all payroll deductions not used to purchase stock will be refunded,
without interest.
The Committee or the Board of Directors may from time to time adopt
amendments to the Plan provided that, without the approval of the stockholders
of the Company, no amendment may (i) increase the number of shares that may be
issued under the Plan; (ii) change the class of employees eligible to receive
options under the Plan, if such action would be treated as the adoption of a new
plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under
the Securities Exchange Act of 1934 to become inapplicable to the Plan.
Article 16 - Limits on Sale of Stock Purchased under the Plan.
- -------------------------------------------------------------
The Plan is intended to provide shares of Common Stock for investment and
not for resale. The Company does not, however, intend to restrict or influence
any employee in the conduct of his or her own affairs. An employee may,
therefore, sell stock purchased under the Plan at any time the employee chooses,
subject to compliance with any applicable federal or state securities laws and
subject to any restrictions imposed under Article 21 to ensure that tax
withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY
MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
Article 17 - Participating Subsidiaries.
- ---------------------------------------
The term "participating subsidiary" shall mean any present or future
subsidiary of the Company, as that term is defined in Section 424(f) of the
Code, which is designated from time to time by the Board of Directors to
participate in the Plan. The Board of Directors shall have the power to make
such designation before or after the Plan is approved by the stockholders.
<PAGE>
-8-
Article 18 - Optionees Not Stockholders.
- ---------------------------------------
Neither the granting of an option to an employee nor the deductions from
his or her pay shall constitute such employee a stockholder of the shares
covered by an option until such shares have been actually purchased by the
employee.
Article 19 - Application of Funds.
- ---------------------------------
The proceeds received by the Company from the sale of Common Stock pursuant
to options granted under the Plan will be used for general corporate purposes.
Article 20 - Notice to Company of Disqualifying Disposition.
- -----------------------------------------------------------
By electing to participate in the Plan, each participant agrees to notify
the Company in writing immediately after the participant transfers Common Stock
acquired under the Plan, if such transfer occurs within two years after the
first business day of the Payment Period in which such Common Stock was
acquired. Each participant further agrees to provide any information about such
a transfer as may be requested by the Company or any subsidiary corporation in
order to assist it in complying with the tax laws. Such dispositions generally
are treated as "disqualifying dispositions" under Sections 421 and 424 of the
Code, which have certain tax consequences to participants and to the Company and
its participating subsidiaries.
Article 21 - Withholding of Additional Income Taxes.
- ---------------------------------------------------
By electing to participate in the Plan, each participant acknowledges that
the Company and its participating subsidiaries are required to withhold taxes
with respect to the amounts deducted from the participant's compensation and
accumulated for the benefit of the participant under the Plan, and each
participant agrees that the Company and its participating subsidiaries may
deduct additional amounts from the participant's compensation, when amounts are
added to the participant's account, used to purchase Common Stock or refunded,
in order to satisfy such withholding obligations. Each participant further
acknowledges that when Common Stock is purchased under the Plan the Company and
its participating subsidiaries may be required to withhold taxes with respect to
all or a portion of the difference between the fair market value of the Common
Stock purchased and its purchase price, and each participant agrees that such
taxes may be withheld from compensation otherwise payable to such participant.
It is intended that tax withholding will be accomplished in such a manner that
the full amount of payroll deductions elected by the participant under Article 7
will be used to purchase Common Stock. However, if amounts sufficient to
satisfy applicable tax withholding obligations have not been withheld from
compensation otherwise payable to any participant, then, notwithstanding any
other provision of the Plan, the Company may withhold such taxes from the
participant's accumulated payroll deductions and apply the net amount to the
purchase of Common Stock, unless the participant pays to the Company, prior to
the exercise date, an amount sufficient to satisfy such withholding obligations.
Each participant further acknowledges that the Company and its participating
subsidiaries may be required to withhold taxes in connection with the
disposition of stock acquired under the Plan and agrees that the Company or any
participating subsidiary may take
<PAGE>
-9-
whatever action it considers appropriate to satisfy such withholding
requirements, including deducting from compensation otherwise payable to such
participant an amount sufficient to satisfy such withholding requirements or
conditioning any disposition of Common Stock by the participant upon the payment
to the Company or such subsidiary of an amount sufficient to satisfy such
withholding requirements.
Article 22 - Governmental Regulations.
- -------------------------------------
The Company's obligation to sell and deliver shares of Common Stock under
the Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
identify shares of Common Stock issued under the Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
Article 23 - Governing Law.
- --------------------------
The validity and construction of the Plan shall be governed by the laws of
the Commonwealth of Massachusetts, without giving effect to the principles of
conflicts of law thereof.
Article 24 - Approval of Board of Directors and Stockholders of the Company.
- ---------------------------------------------------------------------------
The Plan was adopted by the Board of Directors on June 16, 1995 and was
approved by the stockholders of the Company on June 22, 1995.
<PAGE>
EXHIBIT 11.1
DESKTOPDATA, INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER SHARE
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income available for common
stockholders $ 553 $ 1,202 $ 2,044 $ 3,065
======== ======== ======== ========
Weighted average common shares outstanding 8,664 8,592 8,647 8,561
Common stock equivalents outstanding,
pursuant to the treasury stock method 128 203 103 250
-------- -------- -------- --------
Weighted average number of common and
common equivalent shares outstanding 8,792 8,795 8,750 8,811
-------- -------- -------- --------
Net income per common and common
equivalent share $ 0.06 $ 0.14 $ 0.23 $ 0.35
======== ======== ======== ========
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 29,220 29,220
<SECURITIES> 13,157 13,157
<RECEIVABLES> 4,865 4,865
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 49,811 49,811
<PP&E> 8,341 8,341
<DEPRECIATION> 2,750 2,750
<TOTAL-ASSETS> 55,545 55,545
<CURRENT-LIABILITIES> 23,358 23,358
<BONDS> 0 0
0 0
0 0
<COMMON> 87 87
<OTHER-SE> 32,086 32,086
<TOTAL-LIABILITY-AND-EQUITY> 32,173 32,173
<SALES> 10,848 31,313
<TOTAL-REVENUES> 10,848 31,313
<CGS> 3,424 9,600
<TOTAL-COSTS> 10,610 29,802
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 813 3,151
<INCOME-TAX> 260 1,107
<INCOME-CONTINUING> 553 2,044
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 553 2,044
<EPS-PRIMARY> .06 .23
<EPS-DILUTED> .06 .23
</TABLE>
