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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: March 31, 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 April 30, 1998
------------------- -----------------------------
Common Stock, par value $.01 17,239,428
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NEWSEDGE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE NUMBER
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Item 1 - Financial Statements
Condensed Consolidated Balance Sheets March 31, 1998
and December 31, 1997 (unaudited)..................................... 3
Condensed Consolidated Statements of Income
for the three months ended March 31, 1998 and 1997 (unaudited)........ 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 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 4 - Submission of Matters to a Vote of Security Holders ...................... 18
Item 6(a) - Exhibits................................................................ 19
Item 6(b) - Reports on Form 8-K..................................................... 19
Signature........................................................................... 20
Exhibit Index....................................................................... 21
Exhibits............................................................................ 22
</TABLE>
2
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ITEM 1
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
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MARCH 31, DECEMBER 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 27,723 $ 45,854
Short-term investments 20,013 9,013
Accounts receivable 15,277 17,903
Prepaid expenses and deposits 3,934 5,718
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Total current assets 66,947 78,488
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Long-term investments 3,082 3,760
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Property and equipment, net 9,084 9,497
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Other assets 245 589
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Total assets $ 79,358 $ 92,334
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,105 $ 5,639
Accrued expenses 18,501 13,319
Deferred revenue, current 33,532 32,374
Current portion of long-term obligations 1,283 1,298
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Total current liabilities 56,421 52,630
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Long-term obligations, less current portion 804 1,132
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Deferred revenue, noncurrent 36 39
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Stockholders' equity:
Common stock 171 169
Additional paid-in capital 122,222 124,853
Cumulative translation adjustment 66 24
Accumulated deficit (100,362) (86,513)
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Total stockholders' equity 22,097 38,533
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Total liabilities & stockholders' equity $79,358 $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 INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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Total revenues $ 19,749 $ 18,518
Costs and expenses:
Cost of revenues 8,018 7,275
Customer support expenses 1,667 1,207
Development expenses 3,406 2,573
Sales and marketing expenses 8,480 8,531
General and administrative expenses 1,529 1,656
Merger, disposition and other charges 11,093 1,632
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Total costs and expenses 34,193 22,874
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Loss from operations (14,444) (4,356)
Interest income and other, net 628 791
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Net loss before provision for income taxes (13,816) (3,565)
Provision for income taxes 33 580
------------------ ------------------
Net loss $ (13,849) $ (4,145)
================== ===================
Basic and diluted net loss per common share $ (0.82) $ (0.25)
================== ===================
Weighted average number of common
shares outstanding 16,985 16,561
================== ===================
</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)
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THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (13,849) $ (4,145)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amoritzation 1,306 1,051
Gain (loss) on disposal of property,
equipment and other assets (142) 148
Changes in assets and liabilities:
Accounts receivable 1,757 1,763
Prepaid expenses and deposits 1,741 (230)
Accounts payable and accrued expenses 3,527 2,218
Deferred revenue 1,672 568
Net cash provided by (used in) operating ------------ -------------
activities (3,988) 1,373
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Cash flows from investing activities:
Increase in investments, net (10,323) (7,386)
Purchases of property and equipment, net (899) (1,821)
Contingent purchase price payment (3,918) -
Increase in other assets 1 502
------------ -------------
New cash used in ivesting activites (15,139) (8,705)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,290 381
Increase (decrease) in other long-term obligations (324) 867
Payments on capital lease obligations (12) (40)
------------ -------------
954 1,208
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Effect of exchange rate on cash 42 (18)
Decrease in cash and cash equivalents (18,131) (6,142)
Cash and cash equavalents, beginning of period 45,854 32,853
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Cash and cash equivalents, end of period $ 27,723 $ 26,711
============ =============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 25 $ 34
============ =============
Cash paid for interest $ 73 $ 36
============ =============
</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
addition, on January 6, 1998, the Company also 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.
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.
For the three months ended March 31, 1998, the Company recorded merger,
disposition, and other charges totaling $11.1 million, related primarily to
costs related to the merger with Individual, 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 combining companies. For the three months ended March 31,
1997, these costs, totaling $1.6 million, related primarily to product
development expenses and goodwill amortization 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 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 consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, NewsEDGE Canada Corp., NewsEDGE,
K.K. and NewsEDGE Securities Corp. All material intercompany accounts and
transactions have been eliminated in consolidation.
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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
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 in order to consistently present certain costs in these
condensed consolidated financial statements.
3. 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.
4. OTHER CONTINGENCIES
In November 1996, a class action stockholder 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 relating to its initial
public offering, as well as in subsequent public disclosures, relating to the
alleged existence of disputes between Joseph A. Amram, Individual's former Chief
Executive Officer, and Individual. The Company believes that the allegations
contained in the complaint are without merit and intends to defend vigorously
against the claims. The ultimate claims payable under these actions, if any, are
neither probable nor estimable.
5. 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
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6. 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 months ended March 31, 1998 and
1997 are as follows:
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Three months ended March 31,
1998 1997
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Comprehensive income:
Net loss $ (13,849) $ (4,145)
Other comprehensive income (loss)
Foreign currency adjustment 42 (18)
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Comprehensive loss $ (13,807) $ (4,163)
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</TABLE>
7. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings per Share, basic earnings per
share was computed by dividing net loss by the weighted average number of common
shares outstanding during the first three months of 1998 and 1997.
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 over 1,000 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 80% of total
revenues during the quarter ended March 31, 1998 are 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. Approximately 8% of total revenues during
the quarter ended March 31, 1998, was derived from the Company's primary single-
user service, NewsEdge NewsPage. NewsPage revenues consists of advertising fees
from companies placing advertisements through this service and from subscription
fees for premium levels of service and fees for the fulfillment of certain user
requests for additional information. The remainder of total revenues was
derived from services provided by business lines that have been terminated or
are being de-emphasized, hardware sales and non-recurring custom development
projects related to the Company's software.
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 NewsEDGE Corporation
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997
Total revenues increased 6.6%, from $18.5 million for the three months
ended March 31, 1997 to $19.7 million for the three months ended March 31, 1998.
During the first quarter of 1998, enterprise service revenue increased 19% to
$15.8 million from $13.3 million for the same period in 1997. The increase in
enterprise service revenue was due primarily to increased subscription revenues
from new customers and the retention and growth of revenues from existing
customers. Single-user revenues increased 17% to $1.5 million from $1.3 million
for the same period in 1997. The increase in single-user revenue resulted
primarily from higher advertising revenue generated from the NewsPage product.
Other revenues decreased 22% to $2.5 million as compared to $4 million for the
same period in 1997. The decrease in other revenues was due primarily to the
reduced sales effort directed at business lines that have been terminated or are
being de-emphasized by the Company.
9
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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, increased to 40.6% for the three months ended
March 31, 1998 from 39.3% for the three months ended March 31, 1997, 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 increased 38.1% to $1.7 million for the three
months ended March 31, 1998, as compared to $1.2 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 increased to 8.4% for the three
month period ended March 31, 1998 as compared to 6.5% 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 increased 32.4% to $3.4 million for the
three months ended March 31, 1998, as compared to $2.6 million for the three
months ended March 31, 1997. Development expenses increased due to higher
staffing levels needed to provide enhancements to existing features and to
develop new features for NewsEdge services. Development expenses, as a
percentage of total revenues, increased to 17.2% for the three month period
ended March 31, 1998, as compared to 13.9% for the comparable 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
remained constant at $8.5 million for each of the three month periods ended
March 31, 1998 and March 31, 1997. Increases in sales and marketing expenses
resulting from additions to the enterprise direct sales force were offset by
decreases in customer acquisition costs. Sales and marketing expenses, as a
percentage of total revenues, decreased to 42.9% for the three month period
ended March 31, 1998, from 46.1% 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 decreased 7.7% to $1.5
million for the three months ended March 31, 1998 as compared to $1.7 million
for the three months ended March 31, 1997. The decrease in general and
administrative expenses was due primarily to a reduction in professional fees
associated with special business development efforts. General and
administrative expenses, as a percentage of total revenues, decreased to 7.7%
for the three month period ended March 31, 1998, from 8.9% for the comparable
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. For the three months ended March 31, 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 months ended March 31, 1997, these costs, totaling $1.6
million, related primarily to product development expenses and goodwill
amortization associated with companies previously acquired by Individual.
Interest income (expense), net decreased to $628,000 for the three month
period ended March 31, 1998, from $791,000 for the comparable period in 1997,
due to the interest earned on lower cash balances.
The provision for income taxes of $33,000 and $580,000 for the three month
periods ended March 31, 1998 and 1997, respectively, are based on the expected
effective tax rate for the entire fiscal year. The $580,000 provision for
income taxes for the three month period ended March 31, 1997 related to the tax
liability generated from the profitable operations of Desktop Data. The Company
has not recorded a deferred tax benefit in either period for the potential
future benefit of its tax loss carryforwards, as the Company has concluded that
it is not likely such deferred tax asset would be realized.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments totaled $50.8 million
at March 31, 1998, as compared to $58.6 million at December 31, 1997, a decrease
of $7.8 million. Net cash of approximately $4 million was used in operations for
the three months ending March 31, 1998 primarily resulting from the Company's
net loss for the period. Net cash used for investing activities for the three
months ended March 31, 1998 was approximately $15.1 million, resulting from a
$3.9 million contingent purchase price payment made to FreeLoader founders,
purchases of $10.3 million in short-term investments and purchases of $900,000
in property and equipment. Net cash provided by financing activities for the
three months ended March 31, 1998 was $953,000 due primarily to employee stock
option exercises and stock purchases made pursuant to the Company's stock plans.
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 and
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.
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 discussion
below 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.
11
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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 companies' respective
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 in the future fluctuate
significantly 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
12
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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 marketplace, the Company's business, results
of operations, and financial condition could be materially adversely affected.
Reliance on Advertising Revenues and Uncertainty of Web as Advertising Medium
The Internet is an unproven medium for paid advertising sponsorship of Web-
based services such as the Company's NewsEdge NewsPage service. 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.
Dependence on Key Personnel
Competition for qualified sales, technical and other qualified personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain additional highly qualified employees in the future. If
the Company is unable to hire and retain such personnel, its business, operating
results and financial condition could be materially adversely affected. Success
of the integration process following the Merger and future financial success
also depends in significant part upon the continued service of its key
technical, sales and senior management personnel. The loss of the services of a
significant number of these key employees could have a material adverse effect
on its business, operating results and financial condition. Additions and
departures of existing personnel, particularly in key positions, can be
disruptive and can result in departures of additional personnel, which could
have a material adverse effect upon 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
13
<PAGE>
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
on-line services, including Microsoft, Netscape and NETCOM. 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 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 relating to its initial public offering, as well as
in subsequent public disclosures, relating to the alleged existence of disputes
between Joseph A. Amram, Individual's former Chief Executive Officer, and
Individual. The Company believes 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
14
<PAGE>
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, 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, results of
operations and financial condition.
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
Because the Company's software and services are not date sensitive or date
dependent, 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. Many enterprises, including the Company's
present and potential customers, will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem, which
may result in spending being diverted from network applications, such as the
Company's products, over the next two years. Additionally, 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 there can
be no assurances that such equipment is year 2000 compliant. Although the
Company intends to take measures to address the impact, if any, of year 2000
issues, failure of any critical equipment to operate properly in the year 2000
may have a material adverse effect upon the Company's business, results of
operations and financial condition or require the Company to incur unanticipated
material expenses to remedy any problem.
15
<PAGE>
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 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
16
<PAGE>
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.
17
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
A Special Meeting of Stockholders was held on February 24, 1998. Holders of an
aggregate of 8,690,866 shares at the close of business on January 9, 1998 were
entitled to vote at the meeting. At such meeting, the Company's stockholders
voted as follows:
PROPOSAL I. To approve and adopt the Agreement and Plan of Merger and
Reorganization dated November 2, 1997 (the "Agreement"), relating to the
proposed Merger of Individual, with and into the Company and the issuance of
shares of Company common stock, par value $.01 per share ("Company Common
Stock") to the stockholders of Individual pursuant to the Agreement.
<TABLE>
<CAPTION>
Total Vote for Total Vote Against Abstentions from Broker Non-votes
Proposal I Proposal I Proposal I
<S> <C> <C> <C>
5,377,106 81,868 11,925 310,090
</TABLE>
PROPOSAL II. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation of (the "Charter") to change the corporate name of
Desktop Data, Inc. to "NewsEDGE Corporation," subject to and upon consummation
of the Merger.
<TABLE>
<CAPTION>
Total Vote for Total Vote Against Abstentions from Broker Non-votes
Proposal II Proposal II Proposal II
<S> <C> <C> <C>
5,704,127 61,711 15,151 N/A
</TABLE>
PROPOSAL III. To approve an amendment to the Company's Charter to increase the
number of authorized shares of Company Common Stock from 15,000,000 shares to
35,000,000 shares, subject to and upon consummation of the Merger.
<TABLE>
<CAPTION>
Total Vote for Total Vote Against Abstentions from Broker Non-votes
Proposal III Proposal III Proposal III
<S> <C> <C> <C>
5,535,506 233,758 11,725 N/A
</TABLE>
PROPOSAL IV. To approve an amendment to the Company's 1995 Stock Plan to
increase the number of shares of Company Common Stock to be reserved for
issuance thereunder from 1,625,000 to 4,125,000 shares, subject to and upon
consummation of the Merger.
<TABLE>
<CAPTION>
Total Vote for Total Vote Against Abstentions from Broker Non-votes
Proposal IV Proposal IV Proposal IV
<S> <C> <C> <C>
4,740,177 717,297 13,425 310,090
</TABLE>
PROPOSAL V. To approve amendments to the Company's 1995 Employee Stock Purchase
Plan, including the increase in the number of shares of Company Common Stock
reserved for issuance thereunder from 175,000 to 500,000 shares, subject to and
upon consummation of the Merger.
<TABLE>
<CAPTION>
Total Vote for Total Vote Against Abstentions from Broker Non-votes
Proposal IV Proposal IV Proposal IV
<S> <C> <C> <C>
5,040,778 416,481 13,640 310,090
</TABLE>
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K.
- ------------------------------------------------
6(a) Exhibits.
27.1 - Financial Data Schedule for the three months ended
March 31, 1998
27.2 - Restated Financial Data Schedule for the three months ended
March 31, 1997
6(b) REPORTS ON FORM 8-K
A Form 8-K was filed by the Company on March 6, 1998, which reported
that the Merger provided for in the Agreement and Plan of Merger and
Reorganization dated November 2, 1997 between the Company and
Individual was effected on February 24, 1998.
19
<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: May 14, 1998 /s/ Edward R. Siegfried
----------------------------------
Edward R. Siegfried
Vice President - Finance and CFO,
Treasurer and Assistant Secretary
20
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
27.1 -- Financial Data Schedule for March 31, 1998 22
27.2 -- Restated Financial Data Schedule for March 31, 1997 24
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 27,723
<SECURITIES> 20,013
<RECEIVABLES> 15,277
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,947
<PP&E> 17,455
<DEPRECIATION> 8,371
<TOTAL-ASSETS> 79,358
<CURRENT-LIABILITIES> 56,421
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 21,926
<TOTAL-LIABILITY-AND-EQUITY> 79,358
<SALES> 19,749
<TOTAL-REVENUES> 19,749
<CGS> 8,018
<TOTAL-COSTS> 34,193
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (13,816)
<INCOME-TAX> 33
<INCOME-CONTINUING> (13,849)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,849)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,711
<SECURITIES> 33,225
<RECEIVABLES> 15,136
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 78,754
<PP&E> 14,934
<DEPRECIATION> 5,193
<TOTAL-ASSETS> 97,608
<CURRENT-LIABILITIES> 47,488
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 47,733
<TOTAL-LIABILITY-AND-EQUITY> 97,608
<SALES> 18,518
<TOTAL-REVENUES> 18,518
<CGS> 7,275
<TOTAL-COSTS> 22,874
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (3,565)
<INCOME-TAX> 580
<INCOME-CONTINUING> (4,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,145)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
