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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, 1998
------------------
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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NEWSEDGE CORPORATION
(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)
(781) 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 October 31, 1998
- ------------------- -------------------------------
Common Stock, par value $.01 17,142,412
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NEWSEDGE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 (unaudited).................................. 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1998 and 1997 (unaudited)........... 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 (unaudited)..................... 5
Notes to the Condensed Consolidated Financial Statements................................. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 20
Item 6(a) Exhibits................................................................................ 20
Item 6(b) Reports on Form 8-K..................................................................... 20
Signature.......................................................................................... 21
Exhibit Index...................................................................................... 22
Exhibits.......................................................................................... 23
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,152 $ 45,854
Short-term investments 28,151 9,013
Accounts receivable 12,747 17,903
Prepaid expenses and deposits 3,699 5,718
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Total current assets 60,749 78,488
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Long-term investments - 3,760
Property and equipment, net 9,251 9,497
Other assets 278 589
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Total assets $ 70,278 $ 92,334
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,474 $ 5,639
Accrued expenses 17,622 13,319
Deferred revenue, current 26,593 32,374
Current portion of long-term obligations 964 1,298
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Total current liabilities 48,653 52,630
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Long-term obligations, less current portion 503 1,132
Deferred revenue, noncurrent 29 39
Stockholders' equity:
Common stock 175 169
Additional paid-in capital 124,539 124,853
Cumulative translation adjustment 66 24
Accumulated deficit (102,916) (86,513)
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21,864 38,533
Less: Treasury stock, at cost (100,000 shares) 771 -
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Total stockholders' equity 21,093 38,533
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Total liabilities & stockholders' equity $ 70,278 $ 92,334
========= ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
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NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total revenues $19,795 $19,702 $ 58,752 $ 57,742
Costs and expenses:
Cost of revenues 8,117 7,730 24,133 22,756
Customer support expenses 1,387 1,332 4,461 3,795
Development expenses 2,782 3,551 9,054 9,267
Sales and marketing expenses 7,976 8,241 24,403 26,008
General and administrative expenses 1,011 1,326 3,645 4,346
Merger, disposition and other charges - 315 11,093 5,016
-------------- -------------- -------------- --------------
Total costs and expenses 21,273 22,495 76,789 71,188
Loss from operations (1,478) (2,793) (18,037) (13,446)
Interest income and other, net 564 734 1,836 2,395
-------------- -------------- -------------- --------------
Net loss before provision for income
taxes (914) (2,059) (16,201) (11,051)
Provision for income taxes 27 260 114 1,106
-------------- -------------- -------------- --------------
Net loss $ (941) $(2,319) $(16,315) $(12,157)
============== ============== ============== ==============
Basic and diluted net loss per common share $(0.05) $(0.14) $(0.95) $(0.73)
============== ============== ============== ==============
Weighted average number of common
shares outstanding 17,378 16,763 17,199 16,652
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1998 1997
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Cash flows from operating activities:
Net loss $(16,315) $(12,157)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,580 3,066
(Loss) gain on disposal of property,
equipment and other assets (144) 480
Charge for issuance of
common stock for consulting
services - 913
Decrease in retained earnings from changing
fiscal year of combining enterprise - (225)
Changes in assets and liabilities:
Accounts receivable 4,787 5,970
Prepaid expenses 1,977 (1,666)
Accounts payable and accrued expenses 2,517 4,888
Deferred revenue (5,264) (2,882)
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Net cash used in operating activities (9,862) (1,613)
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Cash flows from investing activities:
(Increase) decrease in investments, net (15,219) 12,736
Purchases of property and equipment, net (2,585) (3,896)
Contingent purchase price payment (3,918) -
Cash paid for acquisition - (280)
Increase in other assets (32) (1,224)
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Net cash (used in) provided by investing
activities (21,754) 7,336
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Cash flows from financing activities:
Proceeds from issuance of common stock 3,610 803
Purchase of treasury stock (771) -
Decrease in other long-term obligations (639) (87)
Payments on capital lease obligations (328) (93)
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Net cash provided by financing activities 1,872 623
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Effect of exchange rate on cash 42 (58)
(Decrease) increase in cash and cash equivalents (29,702) 6,288
Cash and cash equivalents, beginning of period 45,854 32,853
-------- --------
Cash and cash equivalents, end of period $ 16,152 $ 39,141
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 95 $ 138
======== ========
Cash paid for interest $ 161 $ 459
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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NEWSEDGE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS
NewsEDGE Corporation (the "Company") is a leading independent provider of
global news and current awareness solutions for business. The Company's mission
is to make news valuable for busy people at work. Formed by the merger of
Desktop Data, Inc. ("Desktop Data") and Individual, Inc. ("Individual"),
NewsEDGE Corporation is the world's largest independent news integrator.
On February 24, 1998, the Company completed its merger with Individual. In
connection with the merger, the Company (i) changed its corporate name from
Desktop Data to NewsEDGE Corporation, (ii) increased the authorized shares of
common stock, par value $.01 per share (the "Common Stock") reserved for
issuance from 15,000,000 to 35,000,000 shares, (iii) amended the 1995 Stock Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder from 1,625,000 to 4,125,000 shares, (iv) amended the 1995 Employee
Stock Purchase Plan to increase the number of shares of Common Stock reserved
for issuance thereunder from 175,000 to 500,000 shares and (v) assumed
outstanding options and warrants to purchase approximately 3,000,000 shares of
Common Stock from grants made under Individual's corporate stock plans.
In connection with the merger with Individual, approximately 8,230,000 shares
of NewsEDGE Common Stock were issued in exchange for all of the outstanding
common stock of Individual. The transaction was accounted for as a pooling of
interests and therefore, all prior period financial statements presented herein
have been restated as if the merger took place at the beginning of such periods.
In addition, on January 6, 1998, the Company acquired the assets, customers,
and personnel of Investment Software Solutions ("ISS"), a former business unit
of ADP Financial Services, Inc., in a cash transaction. The management and
staff of ISS joined the Company to form the nucleus of the Company's new
professional services initiative.
In the current quarter, there were no additions to merger, disposition and
other charges. For the nine months ended September 30, 1998, these costs,
totaling $11.1 million, related primarily to costs associated with the Merger
with Individual and the purchase of ISS, the termination of the Clarinet
business unit, severance and benefits for terminated employees and the cost of
terminating and settling certain contractual obligations of the combined
companies. For the three- and nine-month periods ended September 30, 1997,
merger, disposition and other charges, totaling $315,000 and $5.0 million,
respectively, related primarily to product development expenses, goodwill
amortization and other charges associated with companies previously acquired by
Individual.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of 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, 1997 included in the Company's Form 10-K. In the opinion of
management, the accompanying unaudited condensed 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 that
would be expected for the full year.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
6
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Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Estimates and assumptions in
these financial statements relate to, among other items, valuation of deferred
tax assets, the allowance for doubtful accounts and accrued liabilities.
Cash Equivalents and Investments
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company's investments are classified as held-to-maturity and
are recorded at amortized cost at September 30, 1998 and December 31, 1997.
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.
Conforming Adjustments and Reclassifications
The Company's condensed consolidated financial statements include adjustments
to conform the accounting policies of Individual to be consistent with those of
the Company. Prior to combining the financial results of Individual and Desktop
Data to form the results for the Company, certain amounts were reclassified to
consistently present certain costs in these condensed consolidated financial
statements.
3. STOCKHOLDERS' EQUITY
On September 9, 1998, the Company announced a plan approved by the Board of
Directors to repurchase up to 1.5 million shares of the Company's stock. Share
repurchases will be funded using available cash. As of September 30, 1998, the
Company had repurchased 100,000 shares at an aggregate cost of approximately
$771,000.
4. CONTINGENT PURCHASE PRICE PAYMENT
In connection with the acquisition of FreeLoader, Inc. ("FreeLoader") in June
1996 by Individual, Individual guaranteed the value of certain shares issued to
the two founders of FreeLoader, which was to be measured during the period
February 1998 through April 1998. If the fair value of the stock was less than
the guaranteed value, then the Company was obligated to pay the difference in
cash. In February 1998, the two founders of FreeLoader exercised their rights
under the value guarantee and received a payment from the Company of
approximately $3.9 million. The contingent purchase price payment was recorded
as a reduction to stockholders' equity.
5. OTHER CONTINGENCIES
A class action shareholder suit was filed against Individual (now the
Company), certain of its directors and officers and the underwriters of its
initial public offering claiming that the defendants made misstatements, or
failed to make statements, to the investing public in Individual's Prospectus
and Registration Statement in connection with its initial public offering
relating to the alleged existence of disputes between Joseph A. Amram,
Individual's former Chief Executive Officer, and Individual. On May 27, 1998,
the U.S. District Court for the District of Massachusetts dismissed the class
action in its entirety. Plaintiffs have appealed that dismissal to the U.S.
Court of Appeals for the First Circuit and oral arguments have been scheduled
for the first week of December. The Company continues to believe that the
allegations contained in the complaint are without merit and intends to defend
vigorously against the claims, and based upon information currently available,
believes that the action will not have a material impact on the Company.
However, there can be no assurance that this litigation will ultimately be
resolved on terms that are favorable to the Company and that the resolution of
this litigation will not have a material adverse effect on the Company.
7
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6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standard (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 specifies new guidelines for
determining a company's operating segments and related requirements for
disclosure. The Company is in the process of evaluating the impact of the new
standard on the presentation of the financial statements and the disclosures
therein. The Statement will become effective for fiscal years beginning after
December 15, 1997. The Company will adopt the new standard for the fiscal year
ending December 31, 1998.
7. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 requires that items defined as other
comprehensive income, such as foreign currency translation adjustments, be
separately classified in the financial statements and that the accumulated
balance of other comprehensive income be reported separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The components of comprehensive income for the three and nine months
ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in thousands) SEPTEMBER 30, September 30,
----------------------------------------------------------------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Comprehensive income:
Net loss $ (941) $(2,319) $(16,315) $(12,157)
Other comprehensive income (loss):
Write down of investments to
amortized cost - - (88) -
Foreign currency adjustment 33 (52) 42 (58)
----------------------------------------------------------------------------
Comprehensive loss $ (908) $(2,371) $(16,361) $(12,215)
============================================================================
</TABLE>
8. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings per Share, basic and diluted earnings
per share were computed by dividing net loss by the weighted average number of
common shares outstanding during the first three and nine months of 1998 and
1997. Diluted earnings per share excludes shares issuable from the assumed
exercise of stock options, as their effect would be antidilutive.
8
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NewsEDGE Corporation (the "Company") is a leading independent provider of
global news and current awareness solutions for business. The Company's mission
is to make news valuable for busy people at work. Formed by the merger (the
"Merger") of Desktop Data, Inc. ("Desktop Data") and Individual, Inc.
("Individual"), the Company is the world's largest independent news integrator.
Clients at approximately 1,250 organizations are provided with a powerful
combination of authoritative content, a comprehensive line of technologies,
customization options, editorial value-added capabilities and superior client
support and consulting services. The Company helps business people find the
most important, relevant stories from an overwhelming volume of daily news,
enabling them to act on the most current information possible.
The Company's revenues are derived primarily from two classes of services:
enterprise services and single-user services. Approximately 83% and 85% of
total revenues during the three- and nine-month periods ended September 30, 1998
was derived from enterprise service revenue. Enterprise service revenues
consist primarily of subscription fees generated from services provided to
corporations, financial institutions and other businesses as well as royalties
received from news providers in connection with sales of their newswires for use
with the Company's NewsEdge Live or NewsEdge Insight products. The remainder of
enterprise revenues consists of hardware sales and non-recurring custom
development projects related to the Company's software. Approximately 8% of
total revenues during the three- and nine-month periods ended September 30,
1998, was derived from the Company's primary single-user service, NewsEdge
NewsPage. NewsPage revenues consist of advertising fees from companies placing
advertisements through this service, subscription fees for premium levels of
service and fees for the fulfillment of certain user requests for additional
information. The remainder of total revenues for the three- and nine-month
periods ended September 30, 1998 was derived from services provided by business
lines that have been terminated or are being de-emphasized.
Enterprise 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. Revenues from subscription fees
are recognized ratably over the subscription term, beginning on installation of
a 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 services are
purchased by the customer directly from the news provider and payments are made
directly from the 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 enterprise
service revenues. For other newswires that are resold by the Company to the
customer, the Company includes a fee for the newswire in the 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.
9
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RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
1998 AS COMPARED TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997
REVENUES
Total revenues for the three months ended September 30, 1998 increased to $19.8
million compared to $19.7 million for the same period in 1997. Total revenues
for the nine months ended September 30, 1998 increased 1.7% to $58.8 million as
compared to $57.7 million for the same period in 1997. These increases were due
primarily to growth in revenues from the Company's enterprise and single worker
product lines, which exceeded the declines in revenues from terminated or
harvested product lines.
Enterprise revenue for the three months ended September 30, 1998 increased 11.5%
to $16.8 million as compared to $15.1 million for the same period in 1997.
Enterprise revenue for the nine months ended September 30, 1998 increased 12.1%
to $49.0 million as compared to $43.7 million for the same period in 1997. The
increase in enterprise revenue was due primarily to an increase in subscription
revenues from new customers and the retention and growth of revenues from
existing customers.
Single worker revenue for the three months ended September 30, 1998 increased
16.3% to $1.7 million as compared to $1.5 million for the same period in 1997.
Single worker revenue for the nine months ended September 30, 1998 increased
18.8% to $5.0 million as compared to $4.2 million for the same period in 1997.
The increase in single worker revenue resulted primarily from higher advertising
and subscription revenue generated from the NewsPage product.
Terminated or harvested product line revenues decreased 59.8% to $1.3 million
and 51.2% to $4.8 million for the three- and nine-month periods ended September
30, 1998, respectively. The decrease in revenues from terminated or harvested
product lines was due primarily to the spin out of the Clarinet business unit
effective March 31, 1998 and an overall reduced sales effort directed at
business lines that have been terminated or are being de-emphasized by the
Company. The Company expects that revenue from terminated or harvested product
lines will continue to decline.
COST OF REVENUES
Cost of revenues consists primarily of royalties paid to information providers,
payroll and related expenses for the editorial and news operations staff, as
well as data transmission and computer related costs for the support and
delivery of the Company's services. Cost of revenues as a percentage of total
revenues for the three- and nine-month periods ended September 30, 1998
increased to 41.0% and 41.1%, respectively, from 39.2% and 39.4%, respectively,
for the same periods in 1997. The percentage increases in cost of revenues were
due primarily to increased royalties paid to third-party information providers.
CUSTOMER SUPPORT EXPENSES
Customer support expenses consist primarily of costs associated with technical
support of the Company's installed base of customers. Customer support expenses
for the three-month period ended September 30, 1998 increased 4.1% to $1.4
million as compared to $1.3 million for the same period in 1997. Customer
support expenses for the nine months ended September 30, 1998 increased 17.5% to
$4.5 million as compared to $3.8 million for the same period in 1997. These
increases resulted primarily from higher staffing levels needed to provide
additional support to the Company's growing customer base. As a percentage of
total revenues, customer support expenses for the three- and nine-month periods
ended September 30, 1998 increased to 7.0% and 7.6%, respectively, from 6.8% and
6.6%, respectively, for the same period in 1997.
DEVELOPMENT EXPENSES
Development expenses consist primarily of costs associated with the design,
programming, and testing of the Company's software and services. Development
expenses for the three-month period ended September 30, 1998 decreased 21.7% to
$2.8 million as compared to $3.6 million for the same period in 1997.
Development expenses for the nine months ended September 30, 1998 decreased 2.3%
to $9.1 million as compared to $9.3 million for the same period in 1997. The
decrease in development expenses resulted from reductions in headcount and
related expenses associated with the spin out of the Clarinet business unit
effective March 31, 1998 and the discontinuation of other
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development efforts previously maintained by Individual. As a percentage of
total revenues, development expenses for the three- and nine-month periods ended
September 30, 1998 decreased to 14.1% and 15.4%, respectively, from 18.0% and
16.0%, respectively, for the same period in 1997.
SALES AND MARKETING EXPENSES
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 for the three-month period ended
September 30, 1998 decreased 3.2% to $8.0 million as compared to $8.2 million
for the same period in 1997. Sales and marketing expenses for the nine months
ended September 30, 1998 decreased 6.2% to $24.4 million as compared to $26.0
million for the same period in 1997. The year-to-date decrease resulted
primarily from reductions in customer acquisition costs and nonrecurring product
management and advertising sales costs charged during the three-month period
ended June 30, 1997 to promote the NewsPage product. Additionally, sales and
marketing costs for the Clarinet business unit were included as part of total
sales and marketing costs for the nine months ended September 30, 1997, but not
included in the current quarter or previous quarter as a result of the spin out
of the Clarinet business unit effective March 31, 1998. As a percentage of
total revenues, sales and marketing expenses for the three- and nine-month
periods ended September 30, 1998 decreased to 40.3% and 41.5%, respectively, as
compared to 41.8% and 45.0%, respectively, for the same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
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 for the three-month period ended September 30, 1998 decreased 23.8% to
$1.0 million as compared to $1.3 million for the same period in 1997. General
and administrative expenses for the nine months ended September 30, 1998
decreased 16.1% to $3.6 million as compared to $4.3 million for the same period
in 1997. The year-to-date decrease in general and administrative expenses was
due primarily to a reduction in professional fees associated with special
business development efforts. Additionally, general and administrative costs
for the Clarinet business unit were included as part of total general and
administrative costs for the nine months ended September 30, 1997, but not
included in the current quarter or previous quarter as a result of the spin out
of the Clarinet business unit effective March 31, 1998. As a percentage of
total revenues, general and administrative expenses for the three- and nine-
month periods ended September 30, 1998 decreased to 5.1% and 6.2%, respectively,
as compared to 6.7% and 7.5%, respectively, for the same period in 1997.
MERGER, DISPOSITION AND OTHER CHARGES
Merger, disposition and other charges consist primarily of the nonrecurring
costs related to the Company's recent business combinations. In the current
quarter, there were no additions to merger, disposition and other charges. For
the nine months ended September 30, 1998, these costs, totaling $11.1 million,
related primarily to costs associated with the Merger with Individual and the
purchase of ISS, the termination of the Clarinet business unit, severance and
benefits for terminated employees and the cost of terminating and settling
certain contractual obligations of the combined companies. For the three- and
nine-month periods ended September 30, 1997, merger, disposition and other
charges, totaling $315,000 and $5.0 million, respectively, related primarily to
product development expenses, goodwill amortization and other charges associated
with companies previously acquired by Individual.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net during the three- and nine-month periods ended
September 30, 1998, decreased to $564,000 and $1.8 million, respectively, from
$734,000 and $2.4 million, respectively, for the same periods in 1997, due to
the interest earned on lower cash and investment balances.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three- and nine-month periods ended
September 30, 1998 decreased to $27,000 and $114,000, respectively, as compared
to $260,000 and $1.1 million, respectively, for the same periods in 1997. The
higher tax provision for the three- and nine-month periods ended September 30,
1997, related to the tax provision generated from the profitable operations of
Desktop Data when operating as a separate entity. Components of the
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provisions include state taxes due in states that do not have net operating loss
carry-forwards available, foreign tax liabilities and the alternative minimum
tax due under the Internal Revenue Code. The Company has not recorded a deferred
tax benefit in the periods presented for the potential future benefit of its tax
loss carry-forwards as the Company has concluded that it is not likely such
deferred tax asset would be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments totaled $44.3 million at
September 30, 1998, as compared to $58.6 million at December 31, 1997, a
decrease of $14.3 million. Net cash of approximately $9.9 million was used in
operations for the nine months ending September 30, 1998 primarily resulting
from the Company's net loss for the period. Net cash used in investing
activities for the nine months ended September 30, 1998 was approximately $21.8
million, resulting from a $3.9 million contingent purchase price payment made to
FreeLoader founders, purchases of $15.2 million in short-term investments and
purchases of $2.6 million in property and equipment. Net cash provided by
financing activities for the nine months ended September 30, 1998 was $1.9
million due primarily to employee stock option exercises and stock purchases
made pursuant to the Company's stock plans, net of $771,000 in treasury stock
purchases.
The Company continues to investigate the possibility of 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.
The Company believes that its current cash and cash equivalents, investment
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 twelve months.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Company has established a Year 2000 compliance program and anticipates
that its products and internal systems should operate correctly at the turn of
the century. The Company has been performing Year 2000 tests for the past three
years. A formal organizational structure of senior management and quality
assurance for support of Year 2000 initiatives has been in place since April of
1997.
Compliance Program: The scope of the Company's compliance program focuses on
four key areas: products, third-party information providers, business partners'
applications, and internal systems. The Company's compliance program has a
three-step process to evaluate each of the key areas which includes (i)
inventory review, (ii) assessment/testing, and (iii) resolution and contingency
planning.
. PRODUCTS. Since the Merger in February 1998, the Company has taken an
inventory of existing products from its predecessor companies to review its
overall compliance status. The Company is testing certain released products
offered by the Company, but has decided not to test those products that will
be discontinued before the Year 2000. The Company is establishing clear
migration paths for those customers who have products installed that will be
discontinued. As of September 30, 1998, the Company had completed testing on
approximately 35% of its supported products and estimates completion of this
test process by March 31, 1999. When testing products for "Year 2000
compliance" the Company attempts to confirm that (i) news can be collected
over the boundary from 12/31/1999 to 1/1/2000, (ii) date fields with either
two or four digit year formats will function correctly for years in the new
millennium, (iii) date fields in both server and client log files will be
displayed correctly, (iv) the products will be able to conduct searches for
date ranges that overlap the new millennium, and (v) the Year 2000 will be
recognized as a leap year. New products under development for this year and
next have Year 2000 qualification as part of their standard test plans. None
of these development projects have been impacted by the Company's Year 2000
readiness efforts.
. THIRD-PARTY INFORMATION PROVIDERS. The Company relies on content provided by
third-party information providers. Communication with the Company's
information providers with respect to their Year 2000 compliance status was
50% complete as of September 30, 1998. The Company's goal is to have all
information providers' compliance responses complete by March 31, 1999. Also,
the Company is trying to minimize its dependence on third party information
provider's external date formats by internally generating timestamps on its
server.
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. BUSINESS PARTNERS' APPLICATIONS. The Company's customers invest in third-
party software, some of which is supplied by the Company's business partners
for the purpose of integrating news into the customer's applications. The
Company has identified such business partners and has requested from them the
status of their Year 2000 compliance efforts. These communications were 50%
complete as of September 30, 1998. The Company's goal is to have all business
partners' compliance responses received by March 31, 1999. Additionally, the
Company has an arrangement with WavePhore, a common carrier communications
vendor, for the delivery of news and information from third party news
providers who do not have their own broadcast communications capability.
WavePhore has expressed to the Company its intention to have all of its
products and services year 2000 compliant by December 31, 1998. While the
Company is committed to taking every reasonable action to obtain assurances
from such business partners that their software is Year 2000 compliant, it can
not guarantee the performance of such business partners or predict whether any
of the assurances provided by them may be accurate and realistic.
. INTERNAL SYSTEMS. The Company has completed its inventory of its internal
systems and its assessment of such systems' compliance status is 50%
complete, with an anticipated completion date of March 31, 1999. The scope of
these systems ranges from accounting, payroll, communications, network
hardware and applications, internet access, internal information systems,
hosted customer servers, and production news refinery systems. The majority
of the Company's internal systems and equipment are currently Year 2000
compliant.
Costs: To date the Company has not relied on outside consulting expertise for
assessing its products or testing for Year 2000 related issues. The Company is
utilizing internal personnel to identify Year 2000 readiness in its supported
products, network hardware/applications, internal business and information
systems. The Company estimates that the total direct cost of the Company's Year
2000 compliance efforts will be approximately $500,000. The total time
estimated for the project for internal employees would equate to approximately
three person years. As of September 30, 1998, the Company had spent
approximately $100,000. These costs do not include estimates of indirect costs
associated with time spent by the Company's management or staff discussing Year
2000 issues internally or with third parties. Such discussions are handled by
existing employees through the ordinary course of business. The Company has not
identified the need to hire additional staff specifically to address third party
questions or concerns.
Risks: With regard to third party information suppliers, the Company is
addressing, through normal operating procedures, two categories of possible
issues: (i) a small percentage of wires may exhibit presentation issues with
the new millennium and (ii) some third party information providers may have
delivery problems associated with Year 2000 issues. The Company is identifying
presentation issues by internal quality assurance or editorial reviewers. When
identified, presentation issues are being handled by contacting the information
provider who may correct the problem at the source or by having the Company
develop a workaround in the software. The risks associated with delivery
problems present more serious issues for the Company as the Company would be
without certain news content. The Company will seek to obtain substitute news
sources if specific news providers experience technical difficulties delivering
their content as a result of a Year 2000 problem, but the Company cannot
guarantee the availability of such substitute content.
In connection with the Company's business partners' applications, the Company
has developed alternative delivery solutions, such as the internet or leased
line transmission, to be used if WavePhore experiences similar delivery
difficulties as discussed above. The Company estimates that in the worst case
scenario, it would take approximately eight weeks for it to remedy such a
delivery problem. While the Company does not anticipate a failure in its ability
to delivers news, and has established contingency plans as discussed above, such
a failure may (i) have a material adverse effect upon the Company's business,
results of operations and financial condition, (ii) require the Company to incur
unanticipated material expenses to remedy any problem and (iii) result in
litigation due to the Company's inability to fulfill its contractual
obligations. In such cases the Company would likely suffer a disruption in its
revenue stream and operations could be materially impacted. For an additional
discussion of the risks associated with the Company's dependence on news
transmission sources, see the Risk Factor section of this filing regarding
Dependence on News Transmissions Sources.
Contingency Plans: At this time, the Company's contingency plans relating to
the above discussed Year 2000 issues include (i) having additional support staff
and programmers being on call for January 1, 2000, in the event of a disruption
of the Company's services, (ii) seeking alternative news sources and (iii)
preparing alternative news delivery mechanisms. The Company's assessment of its
products and internal systems for Year 2000 compliance will be an ongoing effort
throughout the remainder of this year and next. The information contained
herein is the product
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of conclusions made from the information and test results available to the
Company at this time. For an additional discussion of the risks associated with
the Year 2000, see the Risk Factor section of this filing regarding Risks
Relating to Year 2000 Issues.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain of the above statements in this report are forward-looking statements
that involve risks and uncertainties. The Company operates in a rapidly
changing environment that involves a number of risks, some of which are beyond
the Company's control. Actual results could differ materially as a result of a
variety of factors. The discussion below and in the Company's other SEC reports
highlights some of the risks which may affect future operating results.
Uncertainties Relating to Integration of Operations
The Company merged with Individual on February 24, 1998 with the expectation
that the Merger would result in long term anticipated benefits. These
anticipated benefits will depend in part on whether the companies' operations
can be integrated in an efficient and effective manner. There can be no
assurance that this will occur. The combination of the companies requires,
among other things, integration of the companies' respective service offerings
and coordination of the companies' sales, marketing and research and development
efforts. Historically, the sales models used by the Company and Individual have
differed significantly. While the Company sold principally to the enterprise
market utilizing a direct sales force, Individual addressed the three tiers of
the market with a distribution strategy that utilized a direct sales force at
the enterprise level, telesales to workgroups, and an Internet distribution
model that incorporated World Wide Web ("Web") banner advertising, marketing
relationships with a number of high traffic Web sites and agreements with
Internet Service Providers to capture the individual knowledge worker. There
can be no assurance that the Company will be able to take full advantage of the
combined sales force's efforts. The Company and Individual also used a number
of distribution channels in certain overseas markets in which products are sold
and there can be no assurance that channel conflicts will not develop as the
Company attempts to integrate these channels.
The success of the integration process will be significantly influenced by the
ability of the Company to attract and retain key management, sales, marketing
and research and development personnel. There is no assurance that the
foregoing will be accomplished smoothly or successfully. The current
integration of operations requires the dedication of management resources, which
may distract attention from the day-to-day operations of the Company. The
inability of management to successfully integrate the operations of the
companies could have a material adverse effect upon the business, operating
results and financial condition of the Company. In addition, there can be no
assurance that the Company will not incur additional material charges in
subsequent quarters to reflect additional costs associated with the Merger.
Management of Growth and Hiring of Additional Personnel
The Company has experienced growth in revenues and expansion of its operations
which have placed significant demands on the Company's management, development,
sales and customer support staff. Continued growth will require the Company to
hire and retain more development, selling and customer support personnel. The
Company has at times experienced, and is now experiencing, difficulty in
recruiting and retaining qualified personnel. As of October 31, 1998, the
Company was seeking personnel for more than 25 full-time positions. Recruiting
and retaining qualified personnel is an intensely competitive and time-consuming
process. There can be no assurance that the Company will be able to attract and
retain the necessary personnel to accomplish its growth strategies. Continued
difficulties with the recruiting and retention of personnel could adversely
affect the Company's ability to satisfy customer demand in a timely fashion or
to support satisfactorily its customers and operations, which could in turn,
materially adversely affect its business, operating results and financial
condition. On October 28, 1998, the Company announced that Edward R. Siegfried
will retire from his full time position as Vice President-Finance and Chief
Financial Officer effective March 31, 1999. Mr. Siegfried has served as Vice
President of Finance since March of 1989. After March, Mr. Siegfried will
continue with the Company on a part time basis and will work on special business
development initiatives. He will participate in the search, which is underway,
for his replacement as Chief Financial Officer.
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Effects of Merger on Customers
There can be no assurance that the present and potential customers of the
Company will continue their current buying patterns without regard to the
Merger. Any significant delay or reduction in orders could have an adverse
effect on the near-term business and results of operations of the Company. In
addition, uncertainties regarding product overlap of the Company's services and
resolution of that overlap may cause customers to delay purchasing decisions
regarding these products.
Fluctuations in Quarterly Results
The Company's quarterly operating results may fluctuate significantly in the
future depending on factors such as demand for its services, changes in service
mix, the size and timing of new and renewal subscriptions from corporate
customers, advertising revenue levels, the effects of new service announcements
by the Company and its competitors, the ability of the Company to develop,
market and introduce new and enhanced versions of its services on a timely basis
and the level of product and price competition. A substantial portion of the
Company's cost of revenue, which consists principally of fees payable to
information providers, telecommunications costs and personnel expenses, is
relatively fixed in nature. The operating expense levels of the Company are
based, in significant part, on their expectations of future revenue. If
quarterly revenues are below management's expectations, results of operations
would be adversely affected because a relatively small amount of the Company's
costs and expenses will vary with its revenues.
Future Operating Results Uncertain
The Company's ability to increase its revenues will depend upon its ability to
expand its sales force, to increase sales to new customers as well as increase
penetration into existing customers, to integrate the Company's product
offerings under a single brand and to generate increased revenue from the
Company's internet products. In addition, as of December 31, 1997, Individual
had an accumulated deficit on a stand-alone basis of approximately $88.5
million. The time required for the Company to reach profitability is highly
uncertain and there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. The failure of the Individual
portion of the Company's business to achieve profitability could have a material
adverse effect on the Company's business, results of operations and financial
condition. As a result, the Company believes that period-to-period comparisons
of the Company's and Individual's pre-merger or the Company's post-merger
results of operations are not and will not necessarily be meaningful and should
not be relied upon as an indication of future performance. Due to all of the
foregoing factors, it is possible that in some future quarter the Company's
operating results will 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. Although each of the Company and Individual
experienced growth in revenues in recent years, there can be no assurance that,
in the future, the Company will sustain revenue growth or be profitable on a
quarterly or annual basis.
Dependence on Continued Growth in Use of the Internet
The Company distributes certain products and services across multiple delivery
platforms, including facsimile, electronic mail, and private networks based on
Lotus Notes and other groupware products. Sales of certain of the Company's
products and services depend upon the adoption of the Internet as a widely used
medium for commerce and communication. Rapid growth in the use of and interest
in the Internet is a recent phenomenon. There can be no assurance that
communication or commerce over the Internet will become widespread or that
extensive content will continue to be provided over the Internet. The Internet
may not prove to be a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary infrastructure,
such as a reliable network backbone, or timely development and commercialization
of performance improvements, including high speed modems. In addition, to the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed upon it by
such potential growth or that the performance or reliability of the Web will not
be adversely affected by this continued growth. The Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Web and the Company's online
services. If the necessary infrastructure or complementary services necessary
to make the Internet a viable commercial marketplace are not developed, or if
the Internet does not become a viable commercial
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marketplace, the Company's business, results of operations, and financial
condition could be materially adversely affected.
Reliance on Advertising Revenues and Uncertainty of the Web as an Advertising
Medium
The Internet is an unproven medium for paid advertising sponsorship of Web-
based services such as the Company's NewsPage product. Subscriptions to the
Web-based service are partially subsidized by revenues from the sale of
advertisements on the Web pages of such services. Most of the Company's
advertising customers have only limited experience with the Web as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Web-based advertising and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media. The Company's ability to generate significant
advertising revenues to subsidize subscriptions to its Web-based services will
depend upon, among other things, advertisers' acceptance of the Web as an
effective and sustainable advertising medium, the development of a large base of
users of the Company's services possessing demographic characteristics
attractive to advertisers, and the ability of the Company to develop and update
effective advertising delivery and measurement systems. No standards have yet
been widely accepted for the measurement of the effectiveness of Web-based
advertising, and there can be no assurance that such standards will develop
sufficiently to support Web-based advertising as a significant advertising
medium. In addition, there is intense competition in the sale of advertising on
the Internet, which has resulted in a wide range of rates quoted by different
vendors for a variety of advertising services, which makes it difficult to
project future levels of Internet advertising revenues that will be realized
generally or by any specific company. Competition among current and future Web
sites, as well as competition with other traditional media for advertising
placements, could result in significant price competition and reductions in
advertising revenues. As a result of these factors, there can be no assurance
that the Company will sustain or increase current advertising sales levels.
Failure to do so could have a material adverse effect on the Company's business,
results of operations and financial condition.
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 Dow Jones, Bridge, Lexis/Nexis, Pearson, Reuters and Thomson;
(ii) market data services companies such as ADP and Bloomberg; (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 and Internet-based
software systems such as IBM/Lotus, Netscape and Microsoft, which could, in the
future, ally with competing news and information providers; and (v) single-
user, advertising-subsidized Web-based 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. 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, results of
operations and financial condition.
Risks Relating to Acquisitions
Management may from time to time consider acquisitions of assets or businesses
that it believes may enable the Company to obtain complementary skills and
capabilities, offer new products, expand its customer base or obtain other
competitive advantages. Such acquisitions involve potential risks, including
difficulties in assimilating the acquired company's operations, technology,
products and personnel, completing and integrating acquired in-process
technology, diverting management's resources, uncertainties associated with
operating in new markets and working with new employees and customers, and the
potential loss of the acquired company's key employees.
Dependence on Cooperative Marketing Arrangements
The Company has entered into certain cooperative marketing agreements and
informal arrangements with software vendors, Web site sponsors and operators of
online services, including Microsoft and Netscape. These companies presently
market services that compete directly with those of the Company. If the
Company's marketing activities with such companies were terminated, reduced,
curtailed, or otherwise modified, the Company may not be able to replace or
supplement such efforts alone or with others. If these companies were to develop
and market their own business
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information services or those of the Company's competitors, the Company's
business and results of operations and financial condition may be materially and
adversely affected.
Litigation Risks
A class action shareholder suit was filed against Individual (now the
Company), certain of its directors and officers and the underwriters of its
initial public offering claiming that the defendants made misstatements, or
failed to make statements, to the investing public in Individual's Prospectus
and Registration Statement in connection with its initial public offering
relating to the alleged existence of disputes between Joseph A. Amram,
Individual's former Chief Executive Officer, and Individual. On May 27, 1998,
the U.S. District Court for the District of Massachusetts dismissed the class
action in its entirety. Plaintiffs have appealed that dismissal to the U.S.
Court of Appeals for the First Circuit and oral arguments have been scheduled
for the first week of December. The Company continues to believe that the
allegations contained in the complaint are without merit and intends to defend
vigorously against the claims, and based upon information currently available,
believes that the action will not have a material impact on the Company.
However, there can be no assurance that this litigation will ultimately be
resolved on terms that are favorable to the Company and that the resolution of
this litigation will not have a material adverse effect on the Company.
Dependence on 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, The Financial Times, Reuters and Thompson. The
Company's agreements with news providers are generally for terms of one to three
years, 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 the Company fails to fulfill its obligations under the
agreement. 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 could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, an increase in the fees required to be paid by the Company to its
information providers would have an adverse effect on the Company's gross
margins and results of operations. Because the Company licenses the
informational content included in its services from third parties, the Company's
exposure to copyright infringement actions may increase. Although the Company
generally obtains representations as to the origins and ownership of such
licensed content and generally obtains indemnification for any breach thereof,
there can be no assurance that such representations will be accurate or that
indemnification will adequately compensate the Company for any breach.
Dependence on News Transmission Sources
The Company's news and information for certain of the NewsEDGE products 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, the
Company'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 news
consolidation facility, where it is reformatted for broadcast to NewsEDGE
servers and retransmitted to customers through an arrangement between the
Company and WavePhore, a common carrier communications vendor. WavePhore
presently markets services that compete directly with those of the Company.
WavePhore is also the communications provider for many newswires offered by the
Company through NewsEdge services. The Company's agreement with WavePhore
expires on December 31, 1999. 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
could 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, results of
operations and financial
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condition. Wavephore did experience technical difficulties in May 1998 due to
the disablement of the PanAmSat Galaxy IV satellite. This disablement caused an
interruption in the delivery of news services to between one-third and one-half
of the Company's customers. The interruption was resolved in approximately ten
days and did not have a material impact on the Company's financial results.
Risk of System Failure or Inadequacy
The Company's operations are dependent on its ability to maintain its computer
and telecommunications systems in effective working order and to protect its
systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Although the Company has limited
back-up capability, this measure does not eliminate the significant risk to the
Company's operations from a natural disaster or system failure at its principal
site. In addition, any failure or delay in the timely transmission or receipt of
news feeds and computer downloads from its information providers, due to system
failure of the information providers, the public network or otherwise, could
disrupt the Company's operations.
Risks Relating to Year 2000 Issues
The Company believes that its software and services are substantially year
2000 compliant and currently does not anticipate material expenditures to remedy
any year 2000 problems. However, many computer systems were not designed to
handle any dates beyond the year 1999, and therefore, many companies will be
required to modify their computer hardware and software prior to the year 2000
in order to remain functional. The Company utilizes third-party computer and
telecommunications equipment to produce and distribute its products as well as
to operate other aspects of its business, and while the Company is currently
testing all such systems, there can be no assurances that such equipment is Year
2000 compliant. The Company also is addressing two categories of possible
issues relating to its third party information suppliers: (i) a small
percentage of wires may exhibit presentation issues with the new millennium and
(ii) some third party information providers may have delivery problems
associated with Year 2000 issues. The Company is identifying presentation
issues and when identified, they are being handled by contacting the information
provider who may correct the problem at the source or by having the Company
develop a workaround in the software. The risks associated with delivery
problems present more serious issues for the Company as the Company would be
without certain news content. The Company will seek to obtain substitute news
sources if specific news providers experience technical difficulties delivering
their content as a result of a Year 2000 problem, but the Company cannot
guarantee the availability of such substitute content. Also, the Company has
developed alternative delivery solutions, such as the internet or leased line
transmission, to be used if WavePhore, a common carrier communications vendor
that delivers news and information from certain third party news providers,
experiences delivery difficulties due to the Year 2000 problem. The Company
estimates that in the worst case scenario, it would take approximately eight
weeks for it to remedy such a delivery problem. While the Company is committed
to taking every reasonable action to obtain assurances from such business
partners that their software and products are Year 2000 compliant, it can not
guarantee the performance of such business partners or predict whether any of
the assurances provided by them may be accurate and realistic. Although the
Company does not anticipate a failure in its ability to delivers news, and has
established contingency plans, such a failure may (i) have a material adverse
effect upon the Company's business, results of operations and financial
condition, (ii) require the Company to incur unanticipated material expenses to
remedy any problem and (iii) result in litigation due to the Company's inability
to fulfill its contractual obligations. In such cases the Company would likely
suffer a disruption in its revenue stream and operations could be materially
impacted.
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 its service offerings and keep pace with technological
developments. The Company's future success will depend on its ability to
enhance its existing services, to develop new products and services that address
the needs of its customers and to respond to technological advances and emerging
industry standards and practices, each on a timely basis. Services as complex as
those offered by the Company entail significant technical risks, often encounter
development delays and may result in service failures when first introduced or
as new versions are released. Any such delays in development or failures that
occur after commercial introduction of new or enhanced services may result in
loss of or delay in
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market acceptance, which could have a material adverse effect upon the Company's
business, results of operations and financial condition.
Dependence on Proprietary Technology
The Company is heavily dependent upon proprietary technology. 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 technologies or services. Individual licensed the proprietary SMART
filtering software, which is used as the filtering engine for all of its
products and services, from Cornell Research Foundation, Inc. ("Cornell
University"). Under the terms of the license agreement with Cornell University,
Individual, and now the Company, has exclusive worldwide rights until February
1999 to design, develop, market, and sell systems and services based on the
SMART software for the retrieval and dissemination of data from recent and
continually changing data sources. Provided that the Company is not then in
default of the license agreement, at the end of the initial term of the
agreement the Company will retain a continuing worldwide, non-exclusive,
perpetual royalty-free right to use the SMART software; and in addition, the
Company owns, and will continue to own, all enhancements to the SMART software
that it has developed. There can be no assurance, however, that Cornell
University will not license the SMART software to a third-party, including a
competitor of the Company, once the Company's exclusive rights have lapsed. In
addition, Cornell University may terminate the license agreement if the Company
has materially breached the agreement and such breach remains uncured for 60
days after written notice of such breach has been given. If the license
agreement were to terminate, the Company could be required to develop or acquire
a replacement filtering technology, and there can be no assurance that such
technology could be developed or acquired, on a timely basis or at all, and on
favorable terms to the Company. Consequently, any termination of the Company's
license agreement with Cornell University would have a material adverse effect
on the Company's business, results of operations, and financial condition.
There has been substantial litigation in the information services industry
involving intellectual property rights. Although the Company believes that it
is not infringing the intellectual property rights of others, there can be no
assurance that such claims, if asserted, would not have a material adverse
effect on the Company's business, results of operations, and financial
condition. In addition, inasmuch as the Company licenses the informational
content that is included in its services from third parties, its exposure to
copyright infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of such
licensed content. Although the Company generally obtains representations as to
the origins and ownership of such licensed informational content and generally
obtains indemnification to cover any breach of any such representations, there
can be no assurance that such representations will be accurate or that such
indemnification will provide adequate compensation for any breach of such
representations. In the future, litigation may be necessary to enforce and
protect trade secrets, copyrights and other intellectual property rights of the
Company. The Company may also be subject to litigation to defend against
claimed infringement of the rights of others or to determine the scope and
validity of the intellectual property rights of others. Any such litigation
would be costly and divert management's attention, either of which would have a
material adverse effect on the Company's business, results of operations, and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties, and
prevent the Company from selling its services, any one of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
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NEWSEDGE CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A class action shareholder suit was filed against Individual (now the
Company), certain of its directors and officers and the underwriters of its
initial public offering claiming that the defendants made misstatements, or
failed to make statements, to the investing public in Individual's Prospectus
and Registration Statement in connection with its initial public offering
relating to the alleged existence of disputes between Joseph A. Amram,
Individual's former Chief Executive Officer, and Individual. On May 27, 1998,
the U.S. District Court for the District of Massachusetts dismissed the class
action in its entirety. Plaintiffs have appealed that dismissal to the U.S.
Court of Appeals for the First Circuit and oral arguments have been scheduled
for the first week of December. The Company continues to believe that the
allegations contained in the complaint are without merit and intends to defend
vigorously against the claims, and based upon information currently available,
believes that the action will not have a material impact on the Company.
However, there can be no assurance that this litigation will ultimately be
resolved on terms that are favorable to the Company and that the resolution of
this litigation will not have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K.
6(a) Exhibits.
27.1 - Financial Data Schedule for the three- and nine-month periods
ended September 30, 1998
27.2 - Restated Financial Data Schedule for the three- and nine-month
periods ended September 30, 1997
6(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
20
<PAGE>
NEWSEDGE CORPORATION 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.
NEWSEDGE CORPORATION
(Registrant)
Date: November 13, 1998 /s/ Edward R. Siegfried
-----------------------------
Edward R. Siegfried
Vice President - Finance and CFO,
Treasurer and Assistant Secretary
21
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S> <C>
27.1 -- Financial Data Schedule for September 30, 1998 23
27.2 -- Restated Financial Data Schedule for September 30, 1997 24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 16,152 16,152
<SECURITIES> 28,151 28,151
<RECEIVABLES> 12,747 12,747
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 60,749 60,749
<PP&E> 19,556 19,556
<DEPRECIATION> 10,305 10,305
<TOTAL-ASSETS> 70,278 70,278
<CURRENT-LIABILITIES> 48,653 48,653
<BONDS> 0 0
0 0
0 0
<COMMON> 175 175
<OTHER-SE> 20,918 20,918
<TOTAL-LIABILITY-AND-EQUITY> 70,278 70,278
<SALES> 19,795 58,752
<TOTAL-REVENUES> 19,795 58,752
<CGS> 8,117 24,133
<TOTAL-COSTS> 21,273 76,789
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (914) (16,201)
<INCOME-TAX> 27 114
<INCOME-CONTINUING> (941) (16,315)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (941) (16,315)
<EPS-PRIMARY> (0.05) (0.95)
<EPS-DILUTED> (0.05) (0.95)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<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> 39,140 39,140
<SECURITIES> 21,836 21,836
<RECEIVABLES> 10,928 10,928
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 77,021 77,021
<PP&E> 16,477 16,477
<DEPRECIATION> 6,859 6,859
<TOTAL-ASSETS> 88,965 88,965
<CURRENT-LIABILITIES> 46,385 46,385
<BONDS> 0 0
162 162
0 0
<COMMON> 0 0
<OTHER-SE> 40,864 40,864
<TOTAL-LIABILITY-AND-EQUITY> 88,965 88,965
<SALES> 19,702 57,742
<TOTAL-REVENUES> 19,702 57,742
<CGS> 7,730 22,756
<TOTAL-COSTS> 22,495 71,188
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,059) (11,051)
<INCOME-TAX> 260 1,106
<INCOME-CONTINUING> (2,319) (12,157)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,319) (12,157)
<EPS-PRIMARY> (0.14) (0.73)
<EPS-DILUTED> (0.14) (0.73)
</TABLE>
