<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 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
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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) (Zip Code)
Registrant's telephone number, including area code: (781) 229-3000
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
----------------------------
Title of Class
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 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 11, 1999, was approximately $88.5 million (based upon
the closing bid price of the Registrant's Common Stock on March 11, 1999, of
$8.75 per share).
The number of shares outstanding of the Registrant's $.01 par value Common
Shares as of March 11, 1999 was 17,310,349.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1998. Portions of such proxy statement are incorporated by reference into Part
III of this report.
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PART I
Item 1. Business
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NewsEdge Corporation (the "Company") (Nasdaq: NEWZ) is the leading
independent provider of global news and current awareness solutions for
business. The Company's mission is to make news valuable for business.
NewsEdge services provide access to value added news over the Internet or
customer Intranets. The Company aggregates and adds value to news and
information from over 2,000 sources published by over one hundred global content
providers. This information is customized and filtered so that users can
readily find the most important, relevant stories from the overwhelming volume
of daily news that is available.
The Company is headquartered in Burlington, Massachusetts, with sales
offices and distributors throughout North America, South America, Europe, Japan
and the Middle East. The Company was formed as Desktop Data, Inc. in 1988,
acquired Investment Software Systems, Inc. ("ISS") from ADP Financial Services,
Inc. in January 1998, and upon the closing of the February 1998 merger (the
"Merger") with Individual, Inc. ("Individual") changed its name to NewsEdge
Corporation.
The Company addresses the market for news and current awareness through two
primary lines of business: the Enterprise business and the NewsPage business.
The Enterprise business involves selling the Company's services directly to
large organizations. The Company's Enterprise services deliver news and
information to large numbers of users within organizations through corporate
Intranets or local area networks (LAN). As of December 31, 1998, the Company
had over 1,300 Enterprise customers, an increase of 29% from the previous year-
end, with approximately 600,000 users. These organizations included 81 of
Business Week's 100 largest global companies (based upon market capitalization).
The Company's NewsPage business operates NewsPage.com, an Internet web site
that offers customized, business-oriented news and information. Through a series
of strategic relationships, the NewsPage business also provides news and
information for a number of other Internet web sites. During 1998, these
relationships included Netscape Business Journal and Yahoo! Small Business. The
NewsPage service is supported in part by targeted advertising and electronic
commerce, and is offered to end users as either a free service for a basic
package or as a subscription service for premium packages. As of December 31,
1998, NewsPage had over 900,000 paid or registered users.
In addition to the Enterprise business and the NewsPage business, the Company
also reports a segment of "other" revenue, which consists of services which are
being phased out by the Company, and which the Company expects to be immaterial
beyond 1999.
Industry Background and Target Market
Increasingly, businesspeople are turning to Internet technology for the news
they need to be competitive and effective in their jobs. Analysts estimate that
the number of users of Internet technology at work reached a worldwide total of
50 million in 1998. The analysts project that the number of business web users
will grow at a rate of 25% per year through the year 2001, about doubling the
number of Internet workers over the next three years.
At the same time some businesspeople consider the Internet a free-form and
undisciplined resource for business information. Single workers and their
employers are often frustrated by information overload (too much information)
and information overlook (missing the right information). Additionally, they
are concerned about the authority of content retrieved, the lack of
personalization in information alerting and monitoring and the amount of time it
takes to find the information needed to be successful in their jobs. Business
people who use the Internet at work are becoming more value conscious,
particularly about the use of their time, while enterprises continue to seek
efficient ways to leverage the large investments in computer networks, Internet
connectivity and information access that they have made in recent years.
The NewsEdge Solution
The Company's services are designed to meet the needs of businesspeople for
authoritative news and current information that is delivered in a personalized,
easy-to-use format that solves the twin problems of information overload and
information overlook.
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Both the Company's Enterprise business and NewsPage business have services
which provide users with a concentrated briefing at the beginning of each day,
distilled from the previous day's business news and customized to meet their
personal interests. These services also offer periodic updates of the news
during the day for monitoring specific topics of interest. For workers who are
on the front lines of information analysis and decision making such as CEOs,
corporate communications personnel, reporters and securities traders, the
Enterprise business offers services which scroll news stories in real-time and
automatically alert the user to relevant stories that meet their personal
interests immediately as they break. In addition to briefing, monitoring and
alerting, many of the Company's services offer a search and retrieval function
to help research historical information needs.
Some Company services have direct internet links from stories of interest to
certain partner information services for reference information such as company
descriptions, summary financial statistics, SEC filings, stock quotations and
charts and in many cases direct connections to the web sites of companies
mentioned in the story.
All interactive news service offerings across both of the Company's business
lines are available through common Internet browsers. Enterprise customers have
the choice of accessing their news service by installing dedicated NewsEdge
servers inside their firewalls on their own LAN or accessing their news service
by connecting to similar servers maintained at the Company's headquarters via
private connections or the public Internet itself. NewsPage customers access
their NewsPage news service over the public Internet.
Three key components of the Company's competitive advantage are the
NewsEdge Refinery /TM/ (the "Refinery"), the Company's editorial and review
staff and the Company's contractual relationships with news and information
providers. These competitive advantages are leveraged across both the
Enterprise and NewsPage business lines, providing end-users various levels of
customized, filtered news from authoritative sources.
The NewsEdge Refinery/TM/
The NewsEdge Refinery/TM/ filters news stories from more than 500 global
news sources, eliminating redundancies while prioritizing and summarizing
only the relevant stories into targeted NewsEdge Review/TM/ topics ("Review
Topics"). As stories are received into the Refinery from various content
providers around the world in their native format, an automated software
editor program is used to consistently format, tag and code the stories to
allow for enhanced indexing throughout the remainder of the process. The
stories are then fed from the software editor through refined filtering
software (see discussion on SMART technology in "Certain Factors Affecting
Future Operating Results" Dependence on Proprietary Technology) to
eliminate obvious redundancies and categorize the remaining stories into a
first draft of the 1,400 Review Topics maintained by the Company. A staff
of professional editors and reviewers then work with the results generated
from the filtering software to further eliminate redundancies incapable of
detection through the filtering software, while continuing to enhance the
summarization and prioritization of the stories contained within the final
delivered Review Topics. Finally, a proprietary software application
distributes the resulting Review Topics to various servers for ultimate
consumption by the end user of any topical news service offered by the
Company.
Updated stories released throughout the day are delivered to these same
servers to be distributed to customers in real-time, through once a day
briefings or both. These updates provide users with the ability to monitor
and to be alerted to breaking news of personalized interest all day long.
The portion of the Refinery that delivers continuous news operates twenty-
four hours a day, seven days a week, every day of the year.
NewsEdge Review Topics, Editors and Reviewers
Using the automated capabilities of the Refinery plus an experienced
professional editorial staff, the Company produces a news service called
NewsEdge Review topics. Each night, a staff of more than two dozen
business and industry experts personally reviews the news that has been
electronically filtered, categorized, ranked and assembled from more than
500 global news sources into approximately 1,400 business topics. The
reviewers pick the top new stories, discarding duplicates and stories
covered on previous days, and then prioritize the stories into a briefing
for each of the 1,400 business topics. In the early morning hours of every
business day, the Review Topics are transmitted to servers at NewsEdge and
customer sites.
The knowledge sets that define the Review Topics have been honed by an
aggregate of more than 200 person-years of experience in news selection and
review. In addition, the editors consult with customers on paid knowledge
management assignments to help such customer's users make better use of
their services.
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News and Information Providers
The Company has contracted with over 100 global content providers to make
available through its services news and information from over 2,000
sources. News and information sources currently available on NewsEdge
include newswires from AFX News Limited, The Associated Press, Inc.,
Bloomberg, Bridge, Dow Jones & Company, Inc., Knight-Ridder/Tribune
Information Services, L.P., Nihon Shimbun America, Inc. and Reuters
America, Inc., as well as the text of stories in The Financial Post
(Toronto), The Financial Times (London), The New York Times, London Daily
Telegraph/Telegraph Group Limited and The Wall Street Journal. Also
available for use within select NewsEdge services are the business sections
of over 100 North American newspapers, over 30 major metropolitan business
journals, periodicals such as Business Week, Forbes, Fortune, InfoWorld,
MacWeek and PCWeek, newsletters such as those distributed by American
Banker and Phillips Business Information Services, Inc. and international
wire services and publications such as Agence France Presse, Deutsche
Press-Agentur GmbH, Het Financieele Dagblad B.V. and the Economist.
The majority of these news services are received by the Refinery. Stories
processed through the Refinery receive the benefit of enhanced tagging and
coding procedures which improve the relative ease with which customers are
able to create custom profiles to capture only the stories relevant to
their interests. Of the thousands of sources available for use with select
Company services, approximately 500 global sources are used to create the
Review Topics. Customers may purchase access to individual sources or
packages of sources including individual newswires and select Review
Topics. Access to individual news sources and select Review Topics may be
controlled by the customer at the individual user level.
Certain of the Company's news source offerings are written and distributed
in their native languages such as English, Dutch, German and French.
Contracts with information providers typically require the Company to remit
royalties to information providers related to the Company's sale of their
content on a per customer or per user basis. The Company has negotiated
fixed fee arrangements with certain news providers and is pursuing
additional arrangements of this type with other information providers.
NewsEdge Service Offerings
During 1998, the Company defined and provided four categories of service
offerings for news users. All four of these service offerings are Internet
browser enabled.
. NewsEdge Live/TM/ provides and processes an up-to-the-second news broadcast
for immediate scrolling news views and user alerting. NewsEdge Live version
4.0 was released to customers in November 1998.
. NewsEdge Insight/TM/ combines the monitoring of real-time news with
briefings from NewsEdge Review topics. NewsEdge Insight version 4.1 was
released to customers in July 1998.
. NewsEdge NewsPage is the Company's public Internet offering generally
available to all Internet users and supported by advertising and e-
commerce. NewsEdge NewsPage was last revised in November 1998.
. NewsEdge NewsObjects(R) is a set of news components used by customers to
build their own applications; by the NewsEdge partner companies to news-
enable off-the-shelf products to make them even more valuable; and by the
NewsEdge Solutions Team to customize services for customers. NewsObjects is
available as both ActiveX and HTML toolkits. The most recent release of
NewsObjects, NewsEdge NewsObjects ActiveX Toolkit 2.0, was made available
in August 1998.
In connection with the NewsEdge Live and NewsEdge Insight service
offerings, a telecommunications service known as the NewsEdge Network/TM/
provides a high availability frame-relay network that synchronizes the delivery
of news stories to certain customer-based servers from the Company's
headquarters. NewsEdge Network has sufficient bandwidth to deliver news stories
with minimal delay. One of the primary advantages of this enhanced service
offering is the automatic monitoring of stories received by the customer's
systems and automatic retransmission of any missed stories which may have
resulted from a business interruption at the customer's site.
In addition to the news service offerings, the Company builds news
processing software for servers to be located at both customer sites and
NewsEdge hosted facilities. NewsEdge Server/TM/ version 4.1 was released to
customers in April 1998.
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The Enterprise Business
Strategy
The Enterprise business model focuses on providing high quality service to its
customers. Management believes that the personal attention of the Company's
sales and support professionals is an essential ingredient to servicing the
demands and varied news requirements of the largest and most sophisticated
news users in the world. The Enterprise business will concentrate on the
steady, predictable, accountable characteristics that give organizations
confidence in NewsEdge as their business partner. It is management's goal to
have the Enterprise business reach profitability and to grow it steadily and
profitably, gaining share in the Enterprise market.
Business Detail
The Company sells Enterprise services directly to corporations, financial
institutions, non-profit organizations and government agencies via its own
Enterprise sales organization that included over 100 employees at the end of
1998. The Company maintains sales offices and distributors in North America,
South America, Europe, Asia and the Middle East to be close to its customers
and to provide regional field engineering support.
To further increase the value of the Company's Enterprise services to
customers, the Company offers application consulting through a professional
services group. Furthermore, the Company offers knowledge management services
to assist customers in defining their business information needs and then
structuring their NewsEdge news service to achieve the highest level of
satisfaction.
At the end of 1998, the Company counted more than 1,300 enterprises as
customers. This represents a 29% increase over the last year. Included in
this group of NewsEdge customers are 81 of the 100 largest global companies
listed by Business Week, ranked by market capitalization. By December 31,
1998, these Enterprise customers had authorized more than 600,000 NewsEdge
users within their organizations, representing more than 100% growth over
December 31, 1997.
There was a substantial shift towards the Company's Internet technology-
enabled services during 1998. It is management's belief that the Internet
enablement was a significant ingredient in achieving increased numbers of
users per customer. Management estimates that while approximately 25% of
enterprise users of NewsEdge services were Internet enabled at the end of
1997, by the end of 1998 the Internet enabled percentage was greater than 75%.
The NewsPage Business
Strategy
The NewsPage business will invest to capture the vitality, excitement and
growth of the Web. Management intends to extend and enhance the NewsPage
service with broader information, more targeted business ads and related
business e-commerce. In an effort to gain market share, significant
investment will be made in the NewsPage business.
Business Detail
The NewsPage business is targeted at single workers. It operates
NewsPage.com, an Internet web site that offers customized, business-oriented
news and information. Through a series of strategic relationships, the
NewsPage business also provides news and information for a number of other
Internet web sites. During 1998, these relationships included Netscape
Business Journal and Yahoo! Small Business. The NewsPage service is supported
in part by targeted advertising and electronic commerce, and is offered to end
users as either a free service for a basic package or as a subscription
service for premium packages. As of December 31, 1998, NewsPage had over
900,000 paid or registered users.
A recent independent survey of NewsPage users revealed the Company's ability
to attract highly influential users. The survey showed that half of the
respondents have titles of manager or above, and nearly forty percent have
household incomes greater than $100,000.
Management believes that these attractive demographics, combined with the
precise news targeting, make NewsPage readers a highly desirable audience, and
allow NewsPage to enjoy banner advertising rates that are among the highest in
the industry.
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Furthermore, management believes that the combination of important business
readers and high ad rates are key ingredients in attracting content and e-
commerce strategic relationships, including those established in 1998 with Dow
Jones & Company, Hoovers, Inc. and Northern Light Technology, LLC.
News Operations and Support
The NewsEdge Refinery is staffed around the clock every day of the year.
This staff includes operators, technicians and systems engineers who monitor,
maintain and repair NewsEdge capabilities and contact news providers and
telecommunication vendors when services need attention. The goal is continuous,
real-time news services for customers.
The Company provides several layers of customer support. While every
Enterprise customer has a dedicated account executive and every NewsPage
customer has access to a dedicated support staff, the Company's multi-tiered
customer support organization also provides additional help for system
administrators with questions and problems that are more technical in nature.
The Company not only provides specialist help via 1-800 telephone support, but
also has field engineers available for travel to customer locations for
situations that require on-site support. Finally, in special circumstances,
high-attention teams are assembled for customer problems that are particularly
complex.
There were approximately 102 employees involved in news operations and
support at the end of 1998.
Development
The Company recognizes that the continued enhancement of its services and
the extension of its content offerings are critical to obtaining new customers
and to maintaining and growing sales from existing customers. Since its
inception, the Company has made substantial investments in research and
development, issuing frequent new releases of its various product offerings. The
NewsEdge software has been developed by the Company's internal development and
quality assurance staff. Product upgrades are included as part of the annual
subscription fees paid by customers.
Development efforts have also been focused on supporting additional desktop
operating platforms and LAN configurations, expanding the scalability of the
NewsEdge server, managing the increasing number of news sources, increasing
storage for news history, advancing the ease of programmatic access through
support for ActiveX, Java and HTML components, and providing enhanced precision
and functionality for user searches and profiles. The Company's development
expenses were $12.1 million, $12.5 million and $9.3 million in 1998, 1997 and
1996, respectively. The NewsEdge server is developed in modules according to the
primary NewsEdge functions: a news collection and alerting module; a news
database module for storing and retrieving the full text of the news stories; a
network module adaptable to the network protocols installed at customer sites;
and a module which allows customer administrators to configure newswire access
and monitor NewsEdge activity. The Company believes its decision to manage its
own software development internally creates a competitive advantage for the
Company by improving speed and flexibility in meeting market and technology
changes.
An important goal of the NewsEdge development staff is the continuing
enhancement of the Refinery, particularly, its coding and tagging capabilities
and its ability to manage an increasing number of newswires offered by the
Company. The Company's marketing personnel identify newswires to be added to the
NewsEdge offerings based on customer feedback and negotiate contracts with news
providers. The newswires are then integrated with NewsEdge services by
development and support personnel. The Company is currently seeking to expand
its content offerings with additional industry-specific information to increase
sales to customers in new vertical markets and with additional international
news sources to increase the availability of global, 24 -hour a day news
coverage.
Sales and Marketing
The Company's Enterprise business employs over 100 sales and sales
management professionals who are experts at helping large organizations derive
value from the Company's services. Enterprise salespeople, who are located in
offices in major cities created with the intention of being closer to customers,
call directly on knowledge managers, information technology professionals as
well as other senior management of customer and target companies.
The NewsPage business employs a dedicated sales staff who sell advertising on
NewsPage.com and partner websites. The highly targeted Review Topics create a
very attractive audience for advertisers who are trying to reach specific
audiences. The high level of stratification implicit in Review Topics has a
direct correlation to the advertising rates achieved by the Company, which are
believed by management to be among the highest in the industry.
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Competition
The business information services industry is intensely competitive and is
characterized by rapid technological change and entry into the field by
extremely large and well-capitalized companies as well as smaller competitors.
Enterprise Business Competition
The Company's Enterprise business competes or may compete directly or
indirectly with the following categories of companies:
. large, well-established news and information providers such as Dow Jones,
Lexis/Nexis, Pearson, Reuters and Thomson;
. market data services companies such as Bloomberg and Bridge;
. 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;
. large providers of LAN-based software systems such as Lotus/IBM, Netscape
and Microsoft, which could, in the future, ally with competing news and
information providers; and
. to a lesser degree, consumer-oriented, advertising-subsidized Web-based
services and Internet access providers.
Many of the market participants named above have substantially greater
financial, technical and marketing resources than the Company.
The Company believes that its services are differentiated from the news and
system services offered by large news and systems providers because of the
Company's ability to deliver news from many different, competing providers.
These services are delivered on an enterprise-wide basis directly to LAN-
connected personal computers, and customized to meet the needs of each
individual user at a relatively low cost per user. Although they may compete
with the Company in some respects, the Company attempts to establish
cooperative, mutually beneficial relationships with large information or
systems providers, many of whom are information providers enjoying
significant revenue streams from distribution through the Company's services,
customers, or current and potential joint marketing partners.
In addition, several smaller companies offer directly competitive services
that provide news to enterprises through the customer's computer network. The
Company believes that NewsEdge offers advantages over each of these competing
services. For example, certain of the competing services offer substantially
fewer real-time news sources than does NewsEdge. Furthermore, unlike
NewsEdge, certain competitors do not offer the combination of real-time
delivery of news stories and editorially-refined news briefs along with a
historical database to support searching, while others do not support Lotus
Notes or other groupware applications. Also, many competitors rely on
database engines developed by third parties while the Company manages its own
software development internally, creating a competitive advantage for the
Company in terms of improving its speed and flexibility in meeting market and
technology changes. Finally, many of these smaller competitors are owned by
larger organizations, which the Company believes restricts their ability to
attract a large variety of news sources and to fully respond to news
providers' delivery requirements making it difficult for them to provide the
same level and focus of sales, development and customer support as can be
provided by the Company. However, increased competition, on the basis of
price or otherwise, may require price reductions or increased spending on
marketing or software development, which could have a material adverse effect
on the Company's business and results of operations.
NewsPage Business Competition
The Company's NewsPage business competes directly with many other Web-based
news and information services. The market for Internet services is
relatively new, intensely competitive and rapidly changing. The number of Web
sites on the Internet competing for consumers' attention and spending has
proliferated and it is expected that competition will continue to intensify.
NewsPage competes, directly and indirectly, for advertisers, viewers, members
and content providers with the following categories of companies:
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. publishers and distributors of traditional off-line media, such as
television, radio and print, including those targeted to business, finance
and investing needs, many of which have established or may establish Web
sites, such as The Wall Street Journal, CNN and CNBC;
. general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to financial and
business-related content and services;
. online services or Web sites targeted to business, finance and investing
needs, such as TheStreet.com and Motley Fool; and
. Web search and retrieval and other online services, such as Excite, Inc.,
InfoSeek Corporation, Lycos, Inc., Yahoo! Inc., and other high-traffic Web
sites, such as those operated by Netscape Communications Corporation,
which offer quotes, financial news and other programming and links to
other business and finance related Web sites.
It is anticipated that the number of direct and indirect competitors will
increase in the future. This could result in price reductions for
advertising, reduced margins, greater operating losses or loss of market
share, any of which would materially adversely affect the business of the
Company, results of operations and financial condition.
Intellectual Property
The Company relies upon a combination of copyright, trademark and trade
secret laws and license agreements to establish and protect proprietary rights
in its technology. The NewsEdge software is licensed to customers on a non-
exclusive basis pursuant to license agreements containing provisions prohibiting
unauthorized use, copying and transfer of the licensed program. The source code
for the Company's software is protected both as a trade secret and as an
unpublished copyrighted work. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use the Company's software or
technology without authorization or to develop similar technology independently.
In addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. The Company does not hold any patents.
The proprietary SMART filtering software, which is used as the filtering
engine within the Refinery, is licensed from Cornell Research Foundations, Inc.
("Cornell") under the terms of such license. The Company had exclusive
worldwide rights in the SMART software until February 1999, at which point the
license continued but the Company's exclusivity to the technology terminated.
There can be no assurance that Cornell has not or will not license the SMART
technology to a third-party, or terminate the license upon any material breach
of the agreement which remains uncured for 60 days after notice of such breach.
Because the software development industry is characterized by rapid
technological change, the Company believes that factors such as the
technological and creative skills of its personnel, new software developments,
frequent software enhancements, name recognition and reliable maintenance are
more important to establishing and maintaining a technology leadership position
than the various legal protections of its technology.
The Company believes that its software, trademarks and other proprietary
rights do not infringe the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert such infringement by the
Company with respect to current or future software or services. Any such claims,
with or without merit, could be time-consuming, result in costly litigation,
cause software release delays or might require the Company to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company.
Employees
As of December 31, 1998, the Company had 412 full-time employees,
consisting of 172 employees in sales and marketing, 102 employees in editorial
and news operations (the costs of which are included in cost of revenues) and
customer support, 99 employees in development and 39 employees in general
administration. The Company's employees are not represented by any collective
bargaining organization. The Company has never experienced a work stoppage and
considers its relations with employees to be good.
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Item 2. Properties
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The Company's corporate headquarters are located in Burlington, Massachusetts.
As of December 31, 1998, the Company leased approximately 40,000 square feet
under a lease expiring in May 2003 and an additional 42,000 square feet in a
separate office building under a lease expiring in December 1999. The Company
also leases additional facilities and offices for sales and customer service and
support in New York, New Jersey, Washington D.C., Illinois, California, Toronto,
Canada, London, England and Tokyo. The Company believes that its existing
facilities and offices, along with additional alternative space available to it,
are adequate to meet its requirements for the foreseeable future.
Item 3. Legal Proceedings
- --------------------------
On November 13, 1996, 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.
Plaintiffs seek unspecified damages plus interest, costs and fees. On May 27,
1998, the U.S. District Court for the District of Massachusetts dismissed the
class action in its entirety. Plaintiffs appealed the dismissal to the U.S.
Court of Appeals for the First Circuit. Oral arguments were heard on December
10, 1998. On March 22, 1999, the United States Court of Appeals for the First
Circuit entered judgment affirming the District Court's dismissal of the class
action.
The Company is not currently a party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's results of operations or financial
position. From time to time, the Company may be involved in litigation relating
to claims arising out of its operations in the normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company effected its initial public offering of its Common Stock on August
11, 1995 at a price to the public of $15.00 per share. As of March 11, 1999,
there were approximately 203 holders of record of the Company's Common Stock.
The Company's Common Stock is listed for quotation on the Nasdaq National Market
under the symbol "NEWZ."
Based on the Nasdaq National Market daily closing price, the high and low
stock prices for each quarter for the past two years are shown below. The
quotations represent interdealer quotations, without adjustments for retail
markups, markdowns, or commissions, and may not necessarily represent actual
transactions.
Nasdaq National Market Daily Closing Price:
<TABLE>
<CAPTION>
Quarter Ended High Low
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<S> <C> <C>
March 31, 1997 $20.00 $12.25
June 30, 1997 14.25 5.00
September 30, 1997 12.50 9.75
December 31, 1997 13.13 6.44
March 31, 1998 14.13 7.84
June 30, 1998 17.13 8.75
September 30, 1998 12.25 6.38
December 31, 1998 11.63 4.63
</TABLE>
The Company has not paid any cash dividends on its Common Stock and currently
intends to retain any future earnings for use in its business. Accordingly, the
Company does not anticipate that any cash dividends will be declared or paid on
the common stock in the foreseeable future.
11
<PAGE>
Item 6. Selected Consolidated Financial Data
- ---------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 79,532 $ 77,471 $ 61,838 $ 42,122 $ 24,469
Cost of revenues 32,394 30,245 23,186 15,187 8,463
Customer support expenses 5,679 5,275 2,983 2,315 1,656
Development expenses 12,073 12,477 9,268 5,610 3,177
Sales and marketing expenses 33,217 36,402 26,769 19,207 13,257
General and administrative expenses 4,445 5,535 7,124 4,338 2,167
Mergers, dispositions and other charges 11,094 5,084 39,422 - -
------------------------------------------------------
Total costs and expenses 98,902 95,018 108,752 46,657 28,720
Loss from operations (19,370) (17,547) (46,914) (4,535) (4,251)
Interest income and other, net 2,308 2,983 1,672 653 (17)
------------------------------------------------------
Loss before provision for income taxes (17,062) (14,564) (45,242) (3,882) (4,268)
Provision for income taxes 166 1,297 614 183 -
------------------------------------------------------
Net loss (17,228) (15,861) (45,856) (4,065) (4,268)
Accretion of dividends on preferred stock - - (463) (1,743) (2,187)
Discount on redemption of preferred stock - - - 1,232 -
------------------------------------------------------
Net loss to common stockholders $(17,228) $(15,861) $(46,319) $ (4,576) $ (6,455)
======================================================
Basic and diluted net loss per share (1) $ (1.00) $ (0.95) $ (3.12) $ (0.53) $ (1.63)
======================================================
Pro forma net loss per share (1) $ (2.95) $ (0.32) $ (0.35)
==============================
<CAPTION>
December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $ 10,294 $ 29,530 $ 35,303 $ 32,815 $ (6,902)
Total assets 69,154 92,246 97,644 67,239 16,201
Senior subordinated notes - - - 10,000 -
Redeemable preferred stock - - - 23,999 16,791
Total stockholders' equity (deficit) 19,249 38,445 51,531 3,394 (19,460)
</TABLE>
(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's business; (iii) the Company's ability
to expand its service offerings; and (iv) the Company's ability to satisfy
working capital requirements. These forward-looking statements are based
largely on the Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual
results could differ materially from these forward-looking statements as a
result of a number of factors including, but not limited to, those factors
described in "Certain Factors Affecting Future Operating Results."
Introduction and Overview
NewsEdge Corporation is the leading independent provider of global news and
current awareness solutions for business. The Company's mission is to make news
valuable for business. NewsEdge services provide access to value added news
over the Internet or customer Intranets. The Company aggregates and adds value
to news and information from over 2,000 sources published by over one hundred
global content providers. This information is customized and filtered so that
users can readily find the most important, relevant stories from the
overwhelming volume of daily news that is available.
The market for news and current awareness is pursued by the Company through
two primary lines of business: the Enterprise business and the NewsPage
business. The Enterprise business uses a direct selling effort and targets
large organizations. The Enterprise services deliver news and information to
large numbers of users within organizations through their corporate Intranet or
local area networks. As of December 31, 1998, the Company had over 1,300
Enterprise customers, up 29% from the previous year-end, with approximately
600,000 users.
The NewsPage business operates NewsPage.com, an Internet web site that offers
customized, business-oriented news and information. Through a series of
strategic relationships, the NewsPage business also provides news and
information for a number of other Internet web sites. During 1998, these
relationships included Netscape Business Journal and Yahoo! Small Business. The
NewsPage service is supported in part by targeted advertising and electronic
commerce, and is offered to end users as either a free service for a basic
package or as a subscription service for premium packages. As of December 31,
1998, NewsPage had over 900,000 paid or registered users. In an effort to gain
market share, significant investment will be made in the NewsPage business over
the next year.
In addition to the Enterprise business and the NewsPage business, the Company
also reports a segment of "other" revenue, which consists of services which are
being phased out by the Company, and which the Company expects to be immaterial
beyond 1999.
The Company's Enterprise revenues consist primarily of subscription fees
related to the various Enterprise product offerings. Additionally, Enterprise
revenues include royalty revenues generated from content sales billed directly
by third party information providers to customers, revenue generated from
professional consulting services and revenue generated from installations and
related computer hardware sales. The Company's Newspage revenues consist
primarily of subscription fees generated from the premium NewsPage service
offering, advertising sales and electronic commerce. The Company's "other"
revenues consist primarily of subscription fees generated from sales of services
being phased out by the Company.
Subscription agreements across all product segments 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.
Subscription revenues associated with these agreements are recognized ratably
over the subscription term, beginning upon installation of the product.
Accordingly, a substantial portion of the Company's revenues is recorded as
deferred revenue.
Certain newswires offered by the Company for use within its services are
purchased by the customer directly from the news provider and payments are made
directly from the NewsEdge customer to the provider. For some of these
newswires, the Company receives royalty revenue based on payments made by the
customer to the news provider. For other newswires that are resold by the
Company to the NewsEdge customer, the Company bills the customer for the
newswire directly and then pays a royalty to the news provider. Such royalty
expenses are included in the Company's cost of revenues.
The Company is headquartered in Burlington, Massachusetts, with sales offices
and distributors throughout North America, South America, Europe, Asia and the
Middle East. The Company was formed as Desktop Data, Inc. in 1988,
13
<PAGE>
acquired Investment Software Systems, Inc. from ADP Financial Services, Inc. in
January 1998, and upon the closing of the February 1998 merger with Individual,
Inc. changed its name to NewsEdge Corporation.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of total revenues:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Enterprise 84.7% 76.1% 80.0%
NewsPage 8.0 7.5 4.7
Other 7.3 16.4 15.3
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost of revenues 40.7 39.0 37.5
Customer support expenses 7.1 6.8 4.8
Development expenses 15.2 16.1 15.0
Sales and marketing expenses 41.8 47.0 43.3
General and administrative expenses 5.6 7.1 11.5
Mergers, dispositions and other expenses 14.0 6.6 63.8
----- ----- -----
Total costs and expenses 124.4 122.6 175.9
----- ----- -----
Loss from operations (24.4) (22.6) (75.9)
Interest income and other, net 2.9 3.9 2.7
----- ----- -----
Loss before provision for income taxes (21.5) (18.7) (73.2)
Provision for income taxes 0.2 1.7 1.0
----- ----- -----
Net loss (21.7) (20.4) (74.2)
Accretion of dividends on redeemable preferred
stock - - (0.7)
----- ----- -----
Net loss to common stockholders (21.7)% (20.4)% (74.9)%
===== ===== =====
</TABLE>
Year Ended December 31, 1998, as Compared to the Year Ended December 31, 1997
Revenues
Total revenues for the year ended December 31, 1998 increased 2.7% to $79.5
million compared to $77.5 million for the same period in 1997. This increase
was due primarily to growth in revenues from the Company's Enterprise and
NewsPage product lines, which exceeded the declines in other revenues. Other
revenues consist of revenues from product lines being phased out by the Company.
Enterprise revenue for the year ended December 31, 1998 increased 14.3% to $67.4
million as compared to $58.9 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.
NewsPage revenue for the year ended December 31, 1998 increased 9.5% to $6.4
million as compared to $5.8 million for the same period in 1997. The increase
in NewsPage revenue resulted primarily from higher advertising revenue offset by
a decline in subscription revenue generated from the NewsPage product.
Other revenues decreased 54.4% to $5.8 million as compared to $12.7 million for
the same period in 1997. The decrease in other revenues was due primarily to
the spin off of the Clarinet business unit effective March 31, 1998 and an
overall reduced sales effort directed at business lines that have been
terminated or de-emphasized by the Company. The Company expects that other
revenues 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
14
<PAGE>
of the Company's services. Cost of revenues as a percentage of total revenues
for the year ended December 31, 1998 increased to 40.7% from 39.0%, for the same
period in 1997. The percentage increase in cost of revenues was 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 year ended December 31, 1998 increased 7.7% to $5.7 million as compared
to $5.3 million for the same period in 1997. This increase resulted primarily
from higher payroll costs needed to attract and retain qualified personnel to
support the Company's growing customer base. As a percentage of total revenues,
customer support expenses for the year ended December 31, 1998 increased to 7.1%
from 6.8% 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 year ended December 31, 1998 decreased 3.2% to $12.1 million as
compared to $12.5 million for the same period in 1997. A decrease of
approximately $870,000 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
development efforts previously maintained by Individual. Approximately 50% of
this decline was offset by higher payroll costs related to increases in
headcount associated with ongoing development efforts. As a percentage of total
revenues, development expenses for the year ended December 31, 1998 decreased to
15.2% from 16.1% 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 year ended December 31, 1998
decreased 8.7% to $33.2 million as compared to $36.4 million for the same period
in 1997. The overall decrease in sales and marketing expenses resulted from
reductions in customer acquisition costs. In addition, product management and
advertising sales costs incurred during 1997 to promote the NewsPage product
were not incurred during 1998. This decrease was partially offset by increases
in payroll and commission costs associated with increased headcount and sales in
the Enterprise business. Additionally, twelve months of sales and marketing
costs for the Clarinet business unit were included as part of total sales and
marketing costs for 1997, but only three months were included in 1998 as a
result of the spin off of the Clarinet business unit effective March 31, 1998.
As a percentage of total revenues, sales and marketing expenses for the year
ended December 31, 1998 decreased to 41.8% from 47.0% 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 year ended December 31, 1998 decreased 19.7% to $4.4 million as
compared to $5.5 million for the same period in 1997. The decrease in general
and administrative expenses was due primarily to a reduction in professional
fees associated with special business development efforts and a reduction in
senior management following the Merger. Additionally, twelve months of general
and administrative costs for the Clarinet business unit were included as part of
total general and administrative costs for 1997, but only three months were
included in 1998 as a result of the spin off of the Clarinet business unit
effective March 31, 1998. As a percentage of total revenues, general and
administrative expenses for the year ended December 31, 1998 decreased to 5.6%
from 7.1% 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 business combinations and dispositions. For the
year ended December 31, 1998, these costs, totaling $11.1 million, related
primarily to costs associated with the Merger with Individual, the purchase of
ISS, the spin off of the Clarinet business unit, the severance and benefits for
terminated employees and the cost of terminating and settling certain
contractual obligations of the combined companies. For the year ended December
31, 1997, merger, disposition and other charges totaling $5.1 million related
primarily to product development expenses, goodwill amortization and other
charges associated with companies previously acquired by Individual.
15
<PAGE>
Interest income and other, net
Interest income and other, net for the year ended December 31, 1998, decreased
to $2.3 million from $3.0 million for the same period in 1997, due to a
reduction in interest income associated with lower cash and investment balances.
Provision for income taxes
The provision for income taxes for the year ended December 31, 1998 decreased to
$166,000 from $1.3 million for the same period in 1997. The higher tax
provision for the year ended December 31, 1997 resulted from the profitable
operations of Desktop Data when operating as a separate entity. Components of
the provision for income taxes include state taxes due in states in which the
Company did 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.
Year Ended December 31, 1997, as Compared to the Year Ended December 31, 1996
Revenues
Total revenues for the year ended December 31, 1997 increased 25.3% to
$77.5 million compared to $61.8 million for the same period in 1996.
Approximately two-thirds of this increase was due to growth in revenues from the
Company's Enterprise business. The remaining increase resulted from growth in
the NewsPage business and the inclusion of 12 months of other revenue generated
from the Hoover product line in 1997 versus only 2.5 months in 1996.
Enterprise revenue for the year ended December 31, 1997 increased 19.1% to
$58.9 million as compared to $49.5 million for the same period in 1996. 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.
NewsPage revenue for the year ended December 31, 1997 increased 102.2% to $5.8
million as compared to $2.9 million for the same period in 1996. The increase
in NewsPage revenue resulted primarily from higher advertising and subscription
revenue generated from the NewsPage product.
Other revenues increased 34.2% to $12.7 million as compared to $9.5 million for
the same period in 1996. The increase in other revenues was due primarily to
increased revenue from the Hoover product line offset by decreases in revenues
from other product lines that have been terminated or are being de-emphasized by
the Company. The Hoover Business Intelligence Services unit was acquired by the
Company on October 17, 1996. The acquisition was accounted for as a purchase.
As a result, only 2.5 months of revenue from the Hoover product line was
included in the Company's revenues for 1996.
Cost of revenues
Cost of revenues as a percentage of total revenues for the year ended December
31, 1997 increased to 39.0% from 37.5%, for the same period in 1996. The
percentage increase in cost of revenues was due primarily to increased royalties
paid to third-party information providers.
Customer support expenses
Customer support expenses for the year ended December 31, 1997 increased 76.8%
to $5.3 million as compared to $3.0 million for the same period in 1996. This
increase resulted primarily from higher staffing levels needed to support new
product lines and a growing customer base for existing product lines. As a
percentage of total revenues, customer support expenses for the year ended
December 31, 1997 increased to 6.8% from 4.8% for the same period in 1996.
Development expenses
Development expenses for the year ended December 31, 1997 increased 34.6% to
$12.5 million as compared to $9.3 million for the same period in 1996. The
increase in development expenses resulted from higher staffing levels needed to
continue developing new features and enhancing existing features for multiple
product lines. As a percentage of total revenues, development expenses for the
year ended December 31, 1997 increased to 16.1% from 15.0% for the same period
in 1996.
16
<PAGE>
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 1997 increased
36.0% to $36.4 million as compared to $26.8 million for the same period in 1996.
The increase in sales and marketing expenses resulted primarily from increases
in customer acquisition costs and nonrecurring product management and
advertising sales costs incurred in 1997 to promote the NewsPage product.
Additionally, higher payroll and commission costs associated with growing
headcount in sales and marketing and higher revenues contributed to the overall
increase. As a percentage of total revenues, sales and marketing expenses for
the year ended December 31, 1997 increased to 47.0% from 43.3% for the same
period in 1996.
General and administrative expenses
General and administrative expenses for the year ended December 31, 1997
decreased 22.3% to $5.5 million as compared to $7.1 million for the same period
in 1996. The decrease in general and administrative expenses was due primarily
to a decrease in headcount and a reduction of professional fees and related
costs associated with business acquisitions and other non-recurring events which
took place in 1996. As a percentage of total revenues, general and
administrative expenses for the year ended December 31, 1997 decreased to 7.1%
from 11.5% for the same period in 1996.
Merger, disposition and other charges
For the year ended December 31, 1997, merger, disposition and other charges
totaling $5.1 million related primarily to product development expenses,
goodwill amortization and other charges associated with companies previously
acquired by Individual. For the year ended December 31, 1996, merger,
disposition and other charges totaled $39.4 million, of which $35.6 million was
a non-cash charge related to purchased technology. The remaining charge related
to goodwill amortization and other costs associated with companies previously
acquired by Individual.
Interest income and other, net
Interest income and other, net for the year ended December 31, 1997, increased
to $3.0 million from $1.7 million for the same period in 1996, due to an
increase in interest income associated with higher cash and investment balances.
Provision for income taxes
The provision for income taxes for the year ended December 31, 1997 increased to
$1.3 million from $614,000 for the same period in 1996. The higher tax
provision for the year ended December 31, 1997 related to the tax provision
generated from the profitable operations of Desktop Data when operating as a
separate entity. Components of the provision for income taxes include state
taxes due in states in which the Company did 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 $41.6 million at
December 31, 1998, as compared to $58.5 million at December 31, 1997, a decrease
of $16.9 million.
The Company's operations used $8.5 million, $5.7 million, and $2.2 million of
cash in 1998, 1997, and 1996, respectively. The use of cash in operations
primarily resulted from the Company's operating losses.
The Company's investing activities used $404,000 in 1998. This net use of cash
included a $3.9 million contingent purchase price payment made to founders of a
former subsidiary of Individual, $3.8 million in capital expenditures and $1.5
million related to the Company's acquisition of ISS. These expenditures were
partially offset by $8.9 million in proceeds resulting from decreases in the
short-term investment balances caused by the reinvestment of cash from maturing
investments into new investments with an original maturity of less than three
months (i.e. cash equivalents). The Company's investing activities provided
$17.1 million in 1997. This net cash inflow resulted primarily from decreases
in the short-term and long-term investment balances caused by the reinvestment
of cash from maturing investments into new investments with an original maturity
of less than three months (i.e. cash equivalents). These cash inflows were
partially offset by $4.7 million in capital expenditures. In 1996, the
Company's investing activities used $28.1 million. This net use of cash was
primarily made for investments in marketable securities of $21.2 million,
investments in equipment and investments in a Japanese joint venture. These
expenditures were partially offset by the proceeds from the sale of a former
Individual business unit.
17
<PAGE>
The Company's net financing activities provided approximately $800,000,
$1.6 million and $25.9 million in 1998, 1997, and 1996, respectively. In 1998
and 1997, cash inflows were derived primarily from employee stock option
exercises (including tax benefits) and purchases under the employee stock
purchase plan. In 1996, a majority of the cash inflows resulted from the
completion of Individual's initial public offering. In 1998, the Company used
$2.1 million of its $4.0 million in proceeds received from employee stock
purchases to re-acquire 345,000 shares of its own stock in the open market.
In 1996, the Company spent $10.0 million towards the repayment of senior
subordinated notes.
The Company continues to investigate the possibility of investments in or
acquisitions of complementary businesses, services 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. The Company has
been performing Year 2000 tests for the past three years and a formal
organization structure of senior management and quality assurance personnel for
support of Year 2000 initiatives has been in place since April 1997. While the
Company anticipates that its services and internal systems should operate
correctly at the turn of the century, unforeseen "bugs" or "glitches" with
respect to the Company's services or services of its vendors may arise.
Compliance Program: The scope of the Company's compliance program focuses on
four key areas: service offerings, 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.
. Service offerings. Since the Merger in February 1998, the Company has taken
an inventory of existing services from its predecessor companies to review
its overall compliance status. The Company is testing certain released
services offered by the Company, but has decided not to test those services
that will be discontinued before the Year 2000. As of December 31, 1998, the
Company had completed testing on approximately 50% of its supported services
and estimates completion of this test process by June 30, 1999. When testing
services 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 services 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 services 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 December 31, 1998. The Company's goal is to have all
information providers' compliance responses complete by June 30, 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. While the Company is committed to taking every reasonable action to
obtain assurances from such third-party information providers that their
software is Year 2000 compliant, it can not guarantee the performance of such
providers or predict whether the assurances provided by them may be accurate
and realistic.
. 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 December 31, 1998. The Company's goal is to have all business
partners' compliance responses received by June 30, 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 stated that it intended 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.
18
<PAGE>
. Internal Systems. The Company has completed its inventory of its internal
systems and its assessment of such systems' compliance status is 60%
complete, with an anticipated completion date of June 30, 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 services or testing for Year 2000 related issues. The Company is
utilizing internal personnel to identify Year 2000 readiness in its supported
services, 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 $1,000,000. The total time
estimated for the project for internal employees would equate to approximately
nine person years. As of December 31, 1998, the Company had spent approximately
$150,000. 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 deliver 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 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 services
and internal systems for Year 2000 compliance will be an ongoing effort
throughout the remainder of this year. The information contained herein is the
product of conclusions made from the information and test results available to
the Company at this time.
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 highlights
some of the risks which may affect future operating results.
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 difficulty in recruiting and retaining
qualified personnel. 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
19
<PAGE>
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 1989. At the time of this
filing, the Company had not identified a successor for Mr. Siegfried.
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, communications 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. In addition, as of December 31, 1998, the
Company had an accumulated deficit of approximately $103.8 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. As a result, 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 the Company
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 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 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 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 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
20
<PAGE>
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 entry into the field by
extremely large and well-capitalized companies as well as smaller competitors.
Enterprise Business
The Company's Enterprise business competes or may compete directly or
indirectly with the following categories of companies:
. large, well-established news and information providers such as Dow Jones,
Lexis/Nexis, Pearson, Reuters and Thomson;
. market data services companies such as ADP, Bloomberg and Bridge;
. 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;
. large providers of LAN-based software systems such as Lotus/IBM and
Microsoft, which could, in the future, ally with competing news and
information providers; and
. to a lesser degree, consumer-oriented, advertising-subsidized Web-based
services and Internet access providers.
Many of the market participants 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 and results of
operations.
NewsPage Business
The Company's NewsPage business competes directly with many other Web-based
news and information services. The market for Internet services is
relatively new, intensely competitive and rapidly changing. The number of Web
sites on the Internet competing for consumers' attention and spending has
proliferated and it is expected that competition will continue to intensify.
NewsPage competes, directly and indirectly, for advertisers, viewers, members
and content providers with the following categories of companies:
. publishers and distributors of traditional off-line media, such as
television, radio and print, including those targeted to business, finance
and investing needs, many of which have established or may establish Web
sites, such as The Wall Street Journal, CNN and CNBC;
. general purpose consumer online services such as America Online and Microsoft
Network, each of which provides access to financial and business-related
content and services;
. online services or Web sites targeted to business, finance and investing
needs, such as TheStreet.com and Motley Fool; and
. Web search and retrieval and other online services, such as Excite, Inc.,
InfoSeek Corporation, Lycos, Inc., Yahoo! Inc., and other high-traffic Web
sites, such as those operated by Netscape Communications Corporation, which
offer quotes, financial news and other programming and links to other
business and finance related Web sites.
21
<PAGE>
It is anticipated that the number of direct and indirect competitors will
increase in the future. This could result in price reductions for
advertising, reduced margins, greater operating losses or loss of market
share, any of which would materially adversely affect the business of the
Company, 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 services, expand its customer base or obtain other
competitive advantages. Such acquisitions involve potential risks, including
difficulties in assimilating the acquired company's operations, technology,
services 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, Netscape, Yahoo! and Dow Jones. 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 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 appealed the dismissal to the U.S. Court of
Appeals for the First Circuit. Oral arguments were heard on December 10, 1998.
On March 22, 1999, the United States Court of Appeals for the First Circuit
entered judgment affirming the District Court's dismissal of the class action.
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 services is
transmitted using one or more of four methods: leased telephone lines,
satellites, FM radio transmission or the Internet. 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
22
<PAGE>
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 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 services 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 services 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 services
obsolete or require significant unanticipated investments in research and
23
<PAGE>
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 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.
Proprietary Rights and Intellectual Property
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. The Company licensed the proprietary SMART
filtering software, which is used as the filtering engine within the Company's
news Refinery, from Cornell Research Foundation, Inc. ("Cornell University").
Under the terms of the license agreement with Cornell University, the Company
had 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 does not default on the license 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 has not or will not license
the SMART software to a third-party, including a competitor of the Company. 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 for the SMART technology were to terminate, there can be no assurance
that a replacement solution 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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign currency exchange rates.
As of December 31, 1998, the Company did not use derivative financial
instruments for speculative or trading purposes.
24
<PAGE>
Interest Rate Risk
The Company maintains a short-term investment portfolio consisting of U.S.
treasury notes, U.S. Government agencies and corporate bonds. These held-to-
maturity securities are subject to interest rate risk and will fall in value if
market interest rates increase. The Company has the ability to hold its fixed
income investments until maturity, and therefore the Company would not expect
its operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on its securities
portfolio.
Foreign Currency Exchange Risk
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial results. Historically, the Company's primary exposures have been
related to nondollar-denominated operating expenses in Canada. The majority of
Company sales are denominated in U.S. dollars. The Company has not determined
what impact, if any, the introduction of the Euro will have on its foreign
exchange exposure. The Company is prepared to hedge against fluctuations in the
Euro if this exposure becomes material. As of December 31, 1998, the assets and
liabilities of the Company related to nondollar-denominated currencies was not
material.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NewsEdge Corporation:
We have audited the accompanying consolidated balance sheets of NewsEdge
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1997 and 1996 financial
statements of Individual, Inc., a company acquired during 1998 in a transaction
accounted for as a pooling of interests, as discussed in Note 5. Such
statements are included in the consolidated financial statements of NewsEdge
Corporation and reflect total assets of approximately 34 percent in 1997 and
total revenues of approximately 46 percent and 45 percent in 1997 and 1996,
respectively, of the related consolidated totals. These statements were audited
by other auditors whose report has been furnished to us and our opinion, insofar
as it relates to amounts included for Individual, Inc., is based solely upon the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of NewsEdge Corporation and subsidiaries as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 29, 1999
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Individual, Inc:
We have audited the consolidated balance sheet of Individual, Inc. as of
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1997 and 1996, not presented separately herein. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Individual, Inc. as
of December 31, 1997, and the consolidated results of its operations and its
cash flows for the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 30, 1998, except as to the information in
Note 15, for which the date is February 27, 1998
27
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 37,808 $ 45,854
Short-term investments 3,782 12,685
Accounts receivable, net of allowance
for doubtful accounts of $306 and $508
in 1998 and 1997, respectively 13,112 17,903
Prepaid expenses and deposits 5,037 5,718
--------- --------
Total current assets 59,739 82,160
--------- --------
Property and Equipment, at cost:
Computer equipment 17,534 14,374
Furniture and fixtures 1,116 1,163
Leasehold improvements 842 840
Equipment under capital leases 852 871
--------- --------
20,344 17,248
Accumulated depreciation (11,206) (7,751)
--------- --------
9,138 9,497
--------- --------
Other Assets 277 589
--------- --------
$ 69,154 $ 92,246
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,864 $ 5,639
Accrued expenses 17,853 13,319
Deferred revenue, current 27,837 32,374
Current portion of long-term obligations 891 1,298
--------- --------
Total current liabilities 49,445 52,630
--------- --------
Long-term obligations, less current portion 303 1,132
--------- --------
Deferred Revenue, noncurrent 157 39
--------- --------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Common stock, $.01 par value;
35 million shares authorized,
17.5 and 16.9 million shares issued, and
17.2 and 16.9 million shares outstanding at
December 31, 1998 and 1997, respectively 175 169
Additional paid-in capital 124,890 124,853
Cumulative translation adjustment 63 23
Accumulated deficit (103,828) (86,600)
Treasury stock, at cost; 345,000 shares at
December 31, 1998 (2,051) -
--------- --------
Total stockholders' equity 19,249 38,445
--------- --------
$ 69,154 $ 92,246
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues $ 79,532 $ 77,471 $ 61,838
Costs and Expenses:
Cost of revenues 32,394 30,245 23,186
Customer support expenses 5,679 5,275 2,983
Development expenses 12,073 12,477 9,268
Sales and marketing expenses 33,217 36,402 26,769
General and administrative expenses 4,445 5,535 7,124
Mergers, dispositions and other charges 11,094 5,084 39,422
-------- -------- --------
Total costs and expenses 98,902 95,018 108,752
-------- -------- --------
Loss from operations (19,370) (17,547) (46,914)
Interest Income and Other, net 2,308 2,983 1,672
-------- -------- --------
Loss before provision for income taxes (17,062) (14,564) (45,242)
Provision for Income Taxes 166 1,297 614
-------- -------- --------
Net loss (17,228) (15,861) (45,856)
Accretion of Dividends on Redeemable Preferred Stock - - (463)
-------- -------- --------
Net loss to common stockholders $(17,228) $(15,861) $(46,319)
======== ======== ========
Earnings Per Share (Note 3):
Basic and diluted net loss per common share $(1.00) $(0.95) $(3.12)
======== ======== ========
Pro forma net loss per common share $(2.95)
========
Weighted average common shares outstanding 17,194 16,729 14,827
======== ======== ========
Pro forma weighted average common shares outstanding 15,543
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ---------------------- Additonal Cumulative
Number of Par Number of Par Paid-In Translation
shares Value shares Value Capital Adjustment
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 306 $ 3 9,996 $ 100 $ 34,105 $ 5
Conversion of redeemable preferred
stock to common stock (306) (3) 3,813 38 17,730 -
Net proceeds from issuance of common stock - - 1,338 13 33,796 -
Stock issued in acquisition of Freeloader - - 757 8 33,974 -
Stock issued related to options,
warrants and ESPP including tax benefits - - 584 6 1,758 -
Employee stock compensation - - - - 400 -
Cummulative translation adjustment - - - - - 65
Net loss - - - - - -
Comprehensive net loss for the year
ended December 31, 1995
-------------------------------------------------------------------------
Balance at December 31, 1996 - - 16,488 165 121,763 70
Stock issued related to options, warrants
and ESPP, including tax benefits - - 303 3 1,827 -
Warrants issued in acquisition of CompanyLink - - - - 117 -
Common stock issued for consulting services - - 109 1 1,149 -
Dissenter shares - - - - (3) -
Cummulative translation adjustment - - - - - (47)
Net loss - - - - - -
Decrease in retained earnings from changing
fiscal year of combining enterprise - - - - - -
Comprehensive net loss for the year
ended December 31, 1996
-------------------------------------------------------------------------
Balance at December 31, 1997 - - 16,900 169 124,853 23
Stock issued related to options, warrants
and ESPP including tax benefits - - 622 6 3,955 -
Purchase of treasury stock - - - - - -
Contingent purchase price payment - - - - (3,918) -
Cummulative translation adjustment - - - - - 40
Net loss - - - - - -
Comprehensive net loss for the year
ended December 31, 1997
-------------------------------------------------------------------------
Balance at December 31, 1998 - $ - 17,522 $ 175 $ 124,890 $ 63
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Dividends on Treasury Stock Total
Redeemable Accumulated Number of Stockholder's Comprehensive
Preferred Stock Deficit Shares Cost Equity Loss
--------------- ------- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ (6,234) $ (24,580) 79 $ (5) $ 3,394 $ -
Conversion of redeemable preferred
stock to common stock 6,234 - - - 23,999
Net proceeds from issuance of common stock - - - - 33,809
Stock issued in acquisition of Freeloader - - - - 33,982
Stock issued related to options,
warrants and ESPP including tax benefits - - (63) (26) 1,738
Employee stock compensation - - - - 400
Cummulative translation adjustment - - - - 65 65
Net loss - (45,856) - - (45,856) (45,856)
Comprehensive net loss for the year
ended December 31, 1995 $ (45,791)
--------------------------------------------------------------------- =========
Balance at December 31, 1996 - (70,436) 16 (31) 51,531
Stock issued related to options, warrants
and ESPP, including tax benefits - - (16) 31 1,861
Warrants issued in acquisition of CompanyLink - - - - 117
Common stock issued for consulting services - - - - 1,150
Dissenter shares - (78) - - (81)
Cummulative translation adjustment - - - - (47) $ (47)
Net loss - (15,861) - - (15,861) (15,861)
Decrease in retained earnings from changing
fiscal year of combining enterprise - (225) - - (225)
Comprehensive net loss for the year
ended December 31, 1996 $ (15,908)
--------------------------------------------------------------------- =========
Balance at December 31, 1997 - (86,600) - - 38,445
Stock issued related to options, warrants
and ESPP including tax benefits - - - - 3,961
Purchase of treasury stock - - 345 (2,051) (2,051)
Contingent purchase price payment - - - - (3,918)
Cummulative translation adjustment - - - - 40 $ 40
Net loss - (17,228) - - (17,228) (17,228)
Comprehensive net loss for the year
ended December 31, 1997 $ (17,188)
--------------------------------------------------------------------- =========
Balance at December 31, 1998 $ - $ (103,828) 345 $ (2,051) $ 19,249
=====================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(17,228) $(15,861) $(46,319)
Adjustments to reconcile net loss to
net cash used in operating activities--
Depreciation and amortization 5,707 4,042 2,932
Accretion of dividends on redeemable
preferred stock - - 463
Gain on sale of Bookwire business - - (766)
(Gain)loss on disposal of property and
equipment (139) 487 27
Compensation recognized under employee
stock plans - - 400
Loss on joint venture - - 1,883
Purchased incomplete technology - - 35,564
Common stock issued for consulting
services - 1,150 -
Decrease in retained earnings from
changing fiscal year of combining
enterprise - (225) -
Changes in assets and liabilities--
Accounts receivable 4,423 (1,005) (6,648)
Prepaid expenses and deposits 639 (2,265) (1,399)
Accounts payable (2,724) (134) 1,956
Accrued expenses 4,862 4,181 1,505
Deferred revenue (4,021) 3,898 8,248
-------- -------- --------
Net cash used in operating activities (8,481) (5,732) (2,154)
Cash Flows from Investing Activities:
Decrease (increase) in investments, net 8,902 21,661 (21,217)
Purchases of property and equipment (3,812) (4,681) (5,976)
Contingent purchase price payment (3,918) - -
Investment in joint venture - - (1,884)
Cash acquired from (paid for) acquisition (1,544) (280) 928
(Increase) decrease in other assets (32) 439 6
-------- -------- --------
Net cash provided by (used in)
investing activities (404) 17,139 (28,143)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock,
net of related expenses - - 33,809
Proceeds from issuances related to stock
plans, including tax benefits 3,961 1,896 1,940
Purchase of treasury stock (2,051) - -
Deferred financing costs - - (9)
(Decrease) increase in long-term obligations (711) (150) 500
Payment of senior subordinated notes - - (10,000)
Principal payments under capital leases (401) (105) (376)
-------- -------- --------
Net cash provided by financing
activities 798 1,641 25,864
Effect of Exchange Rate on Cash 41 (47) 65
-------- -------- --------
(Decrease) Increase in Cash and
Cash Equivalents (8,046) 13,001 (4,368)
Cash and Cash Equivalents, beginning of year 45,854 32,853 37,221
-------- -------- --------
Cash and Cash Equivalents, end of year $ 37,808 $ 45,854 $ 32,853
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 148 $ 352 $ 443
======== ======== ========
Cash paid for income taxes $ 191 $ 629 $ 816
======== ======== ========
Supplemental Disclosure of Noncash Transactions:
Equipment acquired under capital lease
obligations $ - $ - $ 49
======== ======== ========
Conversion of redeemable preferred stock
to common stock $ - $ - $ 23,999
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) Nature of the Business
NewsEdge Corporation is the leading independent provider of global news and
current awareness solutions for business. The Company's mission is to make
news valuable for business. NewsEdge services provide access to value added
news over the Internet or customer Intranets. The Company aggregates and
adds value to news and information from over 2,000 sources published by
over one hundred global content providers. This information is customized
and filtered, so that users can readily find the most important, relevant
stories from the overwhelming volume of daily news that is available.
NewsEdge Corporation is headquartered in Burlington, Massachusetts, with
sales offices and distributors throughout North America, South America,
Europe, Asia and the Middle East. The Company was formed as Desktop Data,
Inc. in 1988, acquired Investment Software Systems, Inc. ("ISS") from ADP
Financial Services, Inc. in January 1998, and upon the closing of the
February 1998 merger (the "Merger") with Individual, Inc. ("Individual")
changed its name to NewsEdge Corporation.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The accompanying 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.
(b) Cash and Cash Equivalents
Cash and cash equivalents, which have original maturities of less than
three months, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash $ 4,308 $ 5,144
Money market accounts 1,320 4,774
Securities purchased under agreements to
resell - 2,644
U.S. Government agencies obligations 32,180 27,842
Commercial paper - 5,450
------- -------
$37,808 $45,854
======= =======
</TABLE>
(c) Investments
As of December 31, 1998, all of the Company's investments are
classified and accounted for as held-to-maturity and reported at
amortized cost. As of December 31, 1998 and 1997, the amortized cost
of the Company's investments, which approximates fair market value, is
as follows:
32
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Short-term
U.S. Treasury notes $3,782 $ 7,982
U.S. Government agencies - 4,193
Corporate Bonds - 510
------- -------
$3,782 $12,685
======= =======
</TABLE>
Any security that experiences a decline in value that management
believes is other than temporary is reduced to its net realizable
value by a charge to income. Realized gains and losses from the sale
of investment securities are recorded on the trade date by specific
identification of the security sold. Realized gains and losses were
not material during any year presented.
(d) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(e) Depreciation and Amortization
The Company provides for depreciation using the straight-line method
by charges to operations in amounts that allocate the cost of assets
over their estimated useful lives of three to seven years, except for
leasehold improvements, which are depreciated over the shorter of the
lease term or life of the asset. Depreciation expense was
approximately $3.9 million, $3.5 million and $2.9 million for 1998,
1997 and 1996, respectively.
(f) Research and Development and Software Development Costs
Research and development costs are expensed as incurred. Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs
of Computer Software To Be Sold, Leased or Otherwise Marketed,
requires the capitalization of certain computer software development
costs incurred after technological feasibility is established. The
Company has not capitalized software development costs to date, as the
costs incurred after technological feasibility of a software product
has been established have not been significant.
(g) Revenue Recognition
The majority of the Company's services are sold on a subscription
basis. Subscription revenues are recognized ratably over the term of
the agreement, generally 12 months, beginning upon installation. The
unearned portion of revenue is shown as deferred revenue in the
accompanying consolidated balance sheets. Royalty revenues are
recognized as they are earned under agreements with certain
information providers. Advertising revenue is recognized ratably based
on contractual terms which are typically either over the advertising
period or as advertisements are delivered. Other miscellaneous
revenues, generated from hardware sales or professional consulting
services, are recognized at the time of shipment or when services are
rendered.
(h) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement requires the Company to
recognize deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities and net operating loss carryforwards available for tax
reporting purposes, using the
33
<PAGE>
applicable tax rates for the years in which the differences are
expected to reverse. A valuation allowance is recorded on deferred tax
assets unless realization is more likely than not.
(i) Foreign Currency Translation
Revenues and expenses are translated using an average of exchange
rates in effect during the year. The majority of asset and liability
accounts of foreign consolidating entities are translated using the
year-end exchange rates. Historical exchange rates are used for
certain accounts where applicable. Cumulative translation adjustments
related to the Company's operations in the United Kingdom and Japan
are reflected on a separate line in the equity section of the
Company's consolidated balance sheet. Gains or losses from foreign
currency transactions are expensed as incurred. There were no
significant gains or losses from foreign currency transactions during
any year presented.
(j) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any significant
off-balance-sheet and credit risk concentrations. The Company has no
significant off-balance-sheet concentration of credit risk, such as
foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company maintains the majority of its cash, cash
equivalent and investment balances with one financial institution, and
its accounts receivable balances are primarily domestic.
(l) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. For all years presented, the
only difference between net loss and comprehensive net loss relates to
the cumulative translation adjustment.
(m) Reclassifications
Certain prior year amounts have been reclassified to conform with
current year's presentation.
(n) Long-Lived Assets
The Company has adopted SFAS No. 121, Accounting for Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of. SFAS No. 121 requires
that long-lived assets be reviewed for impairment by comparing the
fair value of the assets with their carrying amount. Any write-downs
are to be treated as permanent reductions in the carrying amount of
the assets. Accordingly, the Company evaluates the possible impairment
of long-lived assets at each reporting period. As a result of its
review, the Company does not believe that any impairment currently
exists related to its long-lived assets.
(3) Basic and Diluted Net Loss per Common Share
In accordance with SFAS No. 128, Earnings Per Share, basic and diluted net
loss per common share is calculated by dividing the net loss to common
stockholders by the weighted average number of common shares outstanding
for all periods presented. Pro forma basic and diluted net loss per share
is calculated by dividing net loss by the weighted average number of vested
shares of common stock and preferred stock, on an as-converted basis,
outstanding during the period.
The following common stock equivalents were excluded from the calculation
of dilutive earnings per share because their inclusion would be
antidilutive to net loss per share.
34
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Preferred stock - - 953
Options 3,506 2,859 2,366
Warrants 1,164 970 1,087
----- ----- -----
Total 4,670 3,829 4,406
===== ===== =====
</TABLE>
In the 1996 earnings per share calculations, the difference of
approximately 716,000 shares between weighted average common shares
outstanding and pro forma weighted average common shares outstanding
results from the assumed conversion of redeemable preferred stock under the
pro forma method.
(4) Income Taxes
The provision for income taxes for the years ended December 31, 1998, 1997
and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current--
Federal $ - $1,098 $ 1,853
State 76 122 328
International 90 45 67
---- ------ -------
166 1,265 2,248
Deferred--
Federal - 29 (1,385)
State - 3 (249)
---- ------ -------
- 32 (1,634)
---- ------ -------
Total $166 $1,297 $ 614
==== ====== =======
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate at December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax provision at
federal statutory rate (34.0)% (34.0)% (34.0)%
Increase (decrease) in
tax resulting from--
State tax provision,
net of federal benefit 0.4 0.8 0.7
Research and development
credits - (0.6) -
Change in valuation
allowance 38.9 43.5 34.3
Other (4.3) (0.8) 0.3
----- ---- ----
Effective tax rate 1.0% 8.9% 1.3%
===== ==== ====
</TABLE>
35
<PAGE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 21,774 $ 17,703
Financial reserves not yet deductible 3,871 1,359
Research and development and alternative
minimum tax credit carryforwards 903 1,057
Deferred revenue 481 371
Depreciation (730) (894)
Valuation allowance (26,299) (19,596)
-------- --------
$ - $ -
======== ========
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards
(NOLs) and other credit carryforwards related to research and development
and alternative minimum tax, available to offset future taxable income, if
any, of approximately, $54 million and $903,000, respectively. These
carryforwards expire through 2013 and are subject to review and possible
adjustment by the Internal Revenue Service. Additionally, the mergers and
dispositions discussed in Note 5 raise additional doubt as to the
realizability of the deferred tax assets, as the acquired companies have
considerable NOLs. As a result, management believes that it is more likely
than not that the net deferred tax asset will not be realized.
During the years ended December 31, 1997 and 1996, a tax benefit related to
disqualifying dispositions from stock option exercises of approximately
$970,000 and $933,000, respectively, was realized and credited to
additional paid-in capital. No tax benefit was realized in 1998 due to the
uncertainty related to the future realizability of the NOLs generated from
disqualifying dispositions from stock option exercises.
(5) Mergers and Dispositions
Merger, disposition and other charges, totaled $11.1 million, $5.1 million
and $39.4 million in 1998, 1997 and 1996, respectively. For the year ended
December 31, 1998, these costs related primarily to costs associated with
the Merger with Individual, the purchase of ISS, the termination of the
Clarinet business unit, the severance and benefits for terminated employees
and the cost of terminating and settling certain contractual obligations of
the combined companies. For the year ended December 31, 1997, these costs
related primarily to product development expenses, goodwill amortization
and other charges associated with companies previously acquired by
Individual. For the year ended December 31, 1996, these costs related
primarily to a $35.6 million non-cash charge related to purchased
technology. The remaining charge related to goodwill amortization and other
costs associated with companies previously acquired by Individual. As of
December 31, 1998 and 1997, accrued but unpaid amounts associated with the
above merger costs totaled $2.3 million and $0, respectively.
Freeloader, Inc.
On June 28, 1996, the Company completed the acquisition of FreeLoader, Inc.
("FreeLoader") by a subsidiary merger pursuant to the terms of the
Agreement and Plan of Reorganization dated as of May 30, 1996 among
Individual, FL Merger Corp., a wholly-owned subsidiary of the Company,
FreeLoader, and certain stockholders of FreeLoader (the "Merger
Agreement"). As a result of the merger, FreeLoader became a wholly-owned
subsidiary of the Company.
Pursuant to the Merger Agreement dated June 1996, the Company issued
approximately 937,245 shares of its Common Stock to the stockholders of
FreeLoader as consideration for the merger (including up to 180,090 shares
of Common Stock reserved for issuance upon exercise of outstanding
FreeLoader stock options assumed by the Company in the merger). The
aggregate estimated purchase price of approximately $35,600,000 was based
on the fair market value of the Company's Common Stock and options and
includes estimated accrued transaction costs of approximately $950,000 and
the net identifiable liabilities assumed of approximately $633,000. The
transaction was accounted for as a purchase. Approximately $35,600,000 of
the purchase price has been allocated to purchased technology. This charge
for purchased technology,
36
<PAGE>
determined to be in-process, in addition to all operating expenses of
FreeLoader, predominantly product development expenses, are reflected in
mergers, disposition and other charges.
As of May 31, 1997 the Company ceased operations of FreeLoader. Certain
expenses related to FreeLoader, primarily terminated product development
projects of approximately $2,000,000, are included in mergers, dispositions
and other charges in 1997. In addition, the Company made payments of $1.3
million to the FreeLoader founders as settlement of the $2 million balloon
payment required in the merger agreement. The Company also guaranteed the
value of certain shares issued to the two founders in the transaction. In
February 1998, the two founders of Freeloader exercised their value
guarantee resulting in a payment by the Company of $3,918,000.
Hoover
On October 17, 1996, the Company acquired certain assets and liabilities of
the Hoover Business Intelligence Services unit from the Information Access
Company (IAC), a unit of The Thomson Corporation (Toronto, Canada). Hoover
is an intelligent software agent that provides real-time and archival
electronic news and information services. The acquisition, financed through
cash and installment payments, was accounted for as a purchase. The
purchase price was $1,650,000, including $500,000 in acquisition related
costs, of which $1,085,000 was paid in cash, and $565,000 in notes payable
over 36 months. Approximately $672,000 of the purchase price was allocated
to the net identifiable assets acquired, and approximately $978,000 of the
purchase price was allocated to goodwill. At December 31, 1997 there was no
remaining goodwill due to amortization of $187,000 and adjustments
resulting from the realization of net asset value in excess of net
identifiable assets acquired.
Bookwire
The Company sold its Bookwire business on November 1, 1996 for
approximately $1,000,000 in cash. The sale resulted in a pretax gain of
$766,000. The results of BookWire were not significant to the consolidated
results of the Company in 1996.
CompanyLink
In June 1997, the Company acquired certain assets and liabilities of the
CompanyLink service from Knowledge Factory Partners, L.L.C., a subsidiary
of Delphi Internet Services Corporation. The CompanyLink service detects
corporate-specific references and detailed market statistics on more than
65,000 companies and dynamically links those references to related news and
information on the Web. The purchase price for the acquisition included
$280,000 in cash, a Common Stock Purchase Warrant exercisable for the
purchase of 25,000 shares of the Company's common stock at an exercise
price of $10.50 per share and certain monthly contingent payments payable
for a period of twelve months after the closing of the acquisition. The
Company also recognized $50,000 of legal and accounting expenses in
connection with the acquisition. The acquisition has been recorded using
the purchase method of accounting. The total estimated purchase price of
$447,000 was originally recorded as an intangible asset. Amortization
expense of $273,000 and $174,000 for 1998 and 1997, respectively, is
included in mergers, dispositions and other charges.
Clarinet Communications Corp.
In June 1997, the Company completed the acquisition of ClariNet
Communications Corp. ("ClariNet") through a subsidiary merger, whereby a
wholly-owned subsidiary of the Company was merged with and into ClariNet,
with ClariNet continuing as the surviving corporation and a wholly-owned
subsidiary of the Company. ClariNet publishes a global electronic newspaper
on the Internet called ClariNews, which is distributed through internet
service providers and to corporations, educational institutions and
individual subscribers. Under the terms of the ClariNet merger agreement,
each share of ClariNet Communications Corp. common stock was exchanged for
0.10977437 shares of the Company's common stock. Approximately 737,500
shares of the Company's common stock were issued in exchange for all of the
outstanding common stock of ClariNet (including approximately 69,256 shares
reserved for issuance upon exercise of outstanding ClariNet stock options
assumed by the Company in the merger). 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.
37
<PAGE>
Effective March 31, 1998, the Company spun off the Clarinet business unit
to its management and received 750,000 shares of Series A Preferred Stock
in the newly formed corporation, NaviLinks, Inc. The investment was
accounted for using the equity method of accounting. The carrying value of
the investment as of December 31, 1998 was zero.
ISS
On January 6, 1998, the Company acquired the assets, customers, and
personnel of ISS, a former business unit of ADP Financial Services, Inc.,
for approximately $1.5 million in cash. The acquisition has been recorded
using the purchase method of accounting. The management and staff of ISS
joined the Company to form the nucleus of the Company's new professional
services initiative.
Individual, Inc.
On February 24, 1998, the Company completed its merger with Individual,
Inc. Under the terms of the merger agreement, each share of Individual,
Inc. common stock was exchanged for 0.50 shares of the Company's common
stock. Approximately 8,230,000 shares of the Company's common stock were
issued in exchange for all of the outstanding common stock of Individual.
Approximately 2,873,000 shares were reserved for issuance upon exercise of
outstanding Individual stock options and warrants assumed by the Company in
the merger. 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 accordance with APB No. 16, the following pro forma financial data are
presented for the Company and Individual:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
--------------
(in thousands)
<S> <C>
NewsEdge Corporation:
Revenues $11,787
Net loss (8,487)
Individual, Inc.:
Revenues $ 7,962
Net loss (5,362)
</TABLE>
(6) Joint Venture
On May 31, 1996 the Company acquired, for approximately $1,883,000 in cash,
44% of the shares of NewsWatch, Inc. ("NewsWatch"), a joint venture
established by the Company, Toshiba Corporation and Mitsui & Co. Ltd. The
joint venture was established to provide customized electronic information
services in Japan. The investment is being accounted for using the equity
method of accounting. The Company's share of undistributed losses of
NewsWatch, included in interest income and other, net, has reduced the
investment in the joint venture to zero.
The Company had entered into certain software and know-how license
agreements with the joint venture in exchange for an initial lump sum
royalty payment to the Company of approximately $1,032,000, net of
intercompany profits, received in May 1996, and continuing royalties based
on revenue of the joint venture over a twenty-year period.
(7) Stockholders' Equity
(a) Common Stock
During 1998, the stockholders authorized an increase in the number of
authorized shares of Common Stock from 15,000,000 to 35,000,000. Common
stockholders are entitled to one vote for each share held.
38
<PAGE>
(b) Preferred Stock
As of December 31, 1995, Individual had approximately 306,000 shares
and 2,185,000 shares of convertible preferred stock and redeemable
preferred stock (collectively, Individual Preferred Stock),
respectively. All series of Individual Preferred Stock were converted
into an aggregate of approximately 3,813,000 shares of common stock
upon the closing of Individual's initial public offering.
On June 26, 1995, the Company's stockholders authorized 1,000,000
shares of undesignated preferred stock. At December 31, 1998, no such
shares were issued or outstanding.
(c) Stock Repurchase Program
In September 1998, the Board of Directors authorized a program to
repurchase up to 1,500,000 shares of the Company's common stock on the
open market. As of December 31, 1998, 345,000 shares had been
repurchased at a cost of approximately $2,051,000.
(8) Warrants
In connection with the acquisition of Individual, the Company assumed
963,516 outstanding and exercisable warrants. These warrants were issued
principally to employees of Individual in 1989 and 1991. As of December 31,
1998, the weighted average life of these warrants was 1.13 years and the
weighted average exercise price was $16.28 per share.
On November 6, 1998, the Board of Directors approved the issuance of
200,000 warrants at an exercise price of $8.50 per share to one of the
Company's vendors as part of an agreement for services. These warrants were
issued with an exercise price in excess of the fair market value of $7.25
at the time of grant. Vesting will occur over a three-year period beginning
on January 1, 1999. Typically these warrants would expire on November 6,
2003, but may be subject to an earlier expiration based upon the occurrence
of certain events discussed in the warrant agreement. Based on an estimated
value of $2.96 per share, an aggregate expense of $592,000 will be charged
to the Company's consolidated statements of operations over the three-year
vesting period beginning on January 1, 1999. The Company computed the fair
value per share of these warrants in accordance with SFAS No. 123, using
the Black-Scholes valuation model. The assumptions were as follows: risk-
free interest rate of 4.57%; contractual life of 3 years; volatility of
63%; and a dividend yield rate of 0%.
(9) Stock Plans
(a) 1989 Stock Option Plan
The Company has a stock option plan (the 1989 Plan) pursuant to which
622,222 shares of common stock are reserved for issuance. The 1989
Plan is administered by the Board of Directors and provides for the
granting of incentive stock options, nonqualified stock options, stock
awards and direct stock purchases. During 1995, the Board of Directors
terminated the 1989 Plan, such that no further options may be granted
under the 1989 Plan.
(b) 1995 Stock Plan
On June 26, 1995, the Company's stockholders approved the 1995 Stock
Plan (the 1995 Plan). The 1995 Plan is administered by the Board of
Directors and provides for stock awards, direct purchases and the
grant of options to purchase shares of the Company's common stock. A
maximum of 4,125,000 shares may be issued under this plan. Options
granted under the 1995 Plan expire 10 years from the date of grant.
(c) 1995 Non-Employee Director Stock Option Plan
On June 26, 1995, the Company's stockholders also approved the 1995
Non-Employee Director Stock Option Plan (the 1995 Director Plan), for
which 100,000 shares of the Company's common stock have
39
<PAGE>
been reserved. The purpose of the 1995 Director Plan is to attract and
retain qualified persons who are not also officers or employees of the
Company (the Eligible Directors) to serve as directors of the Company.
Under the 1995 Director Plan, any Eligible Director shall automatically
be granted an option to purchase 20,000 shares of common stock on the
effective date of election at an option price equal to the fair market
value on the date of grant, and an option to purchase 2,500 shares of
the common stock on the date of each successive annual meeting of the
stockholders, if such director has attended at least 75% of the
meetings of the Board of Directors during the past fiscal year. Options
granted under this plan expire 10 years from the date of grant.
(d) Former Stock Option Plans of Individual, Inc.
As of December 31, 1998, there were approximately 948,000 shares issued
and outstanding under former Individual stock option plans assumed by
the Company pursuant to its acquisition of Individual. No additional
options will be issued under any of these plans.
(e) Stock Option Plan Activity
The following schedule summarizes all stock option activity for the
three years ended December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 2,859 $7.51 2,366 $12.29 1,481 $ 6.63
Granted 1,955 9.37 2,113 9.71 1,964 17.41
Exercised (574) 6.48 (260) 1.49 (525) 0.73
Terminated (734) 8.42 (1,360) 16.01 (554) 17.45
----- ----- ----- ------ ------ ------
Outstanding, end of year 3,506 $8.56 2,859 $ 7.63 2,366 $12.29
===== ===== ===== ====== ====== ======
Exercisable, end of year 1,323 835 459
===== ===== ======
Weighted average fair
value of options
granted during the year $5.20 $5.36 $10.07
===== ===== ======
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Number Weighted
Outstanding Average Weighted Number Weighted
Exercise Price/ as of Remaining Average Exercisable Average
Range of December 31, Contractual Exercise at December Exercise
Exercise Prices 1998 Life (Years) Price 31, 1998 Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.02 -- $ 5.50 85 3.95 $ 1.58 83 $ 1.59
6.38 -- 8.25 1,519 8.49 6.69 804 6.52
8.63 -- 10.88 1,758 8.70 10.03 397 9.13
11.00 -- 16.00 123 7.65 12.21 18 13.25
24.00 -- 34.00 21 6.78 26.63 21 26.64
----- ---- ------ ----- ------
$ 0.02 -- $ 34.00 3,506 8.45 $ 8.56 1,323 $ 7.40
===== ==== ====== ===== ======
</TABLE>
40
<PAGE>
In February and June of 1997, the Company's Board of Directors
authorized the repricing of certain of its stock options to $14.13 and
$8.63, respectively. Each price was equal to or greater than the
closing price of the Company's common stock on the date of the
repricing.
During 1996 and 1997, Individual repriced certain of its stock options
to $12.50 and $6.50, respectively. Each price was equal to or greater
than the market value of the Company's common stock on the date of the
repricing.
(f) 1995 Employee Stock Purchase Plan
On June 26, 1995, the Company's stockholders approved the 1995 Employee
Stock Purchase Plan (the 1995 Purchase Plan). This plan permits
eligible employees to purchase up to 500 shares of the Company's common
stock at 85% of the fair market value of the stock on the first or last
date of each semiannual plan period, whichever is lower. The 1995
Purchase Plan covers substantially all employees, subject to certain
limitations. An eligible employee may elect to have up to 10% of his or
her total compensation, as defined, withheld and applied toward the
purchase of shares in such a plan period (not to exceed the $25,000
annual IRS limit). At December 31, 1998, 445,248 shares of common stock
were reserved for purchases under the 1995 Purchase Plan.
(g) Fair Value of Stock Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-
Based Compensation. SFAS No. 123 requires the measurement of the fair
value of stock options granted to employees to be included in the
statement of operations or disclosed in the notes to financial
statements. The Company has determined that it will continue to account
for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. The Company has computed the pro forma disclosures
required under SFAS No. 123 for options granted in 1998, 1997 and 1996
using the Black-Scholes option pricing model prescribed by SFAS No.
123. The weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 4.19-5.95% 5.59-6.80% 5.26-6.70%
Expected dividend yield None None None
Expected lives 2-5 years 3-6 years 3-6 years
Expected volatility 63% 65% 63%
Expected volatility
(options assumed in Individual merger) - 80% 80%
</TABLE>
Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net loss to common
stockholders and basic and diluted net loss per common share would have
resulted in the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net loss to common stockholders--
As reported $(17,228) $(15,861) $(46,319)
Pro forma (22,326) (22,624) (50,195)
Basic and diluted net loss per common
share--
As reported $ (1.00) $ (0.95) $ (3.12)
======== ======== ========
Pro forma $ (1.30) $ (1.35) $ (3.39)
======== ======== ========
</TABLE>
(10) 401K Plan
The Company maintains a 401(k) retirement savings plan (the "Plan"). All
employees of the Company are eligible to participate in the Plan after
completing at least three consecutive months of service with the
41
<PAGE>
Company as defined in the plan agreement. The Plan provides that each
participant may make voluntary contributions up to 15% of their eligible
compensation, limited to the maximum amount allowable by the IRS. The
Company may elect to make discretionary matching contributions and/or
profit sharing contributions. For the plan years ended December 31, 1998,
1997 and 1996, the employer matching contribution was 20% of the first 6%
of the participant contributions. No profit sharing contributions have
been made to the Plan since inception. Participants are fully vested in
the current value of their basic contributions and all earnings on such
contributions. They are vested in Company contributions and earnings
thereon after completion of one year of service.
(11) Commitments and Contingencies
(a) Operating Leases
The Company conducts its operations in facilities under operating
leases expiring through 2005. The Company's future minimum lease
payments under these leases as of December 31, 1998 are approximately
as follows:
Year Amount
--------------------------------------
(in thousands)
1999 $1,936
2000 887
2001 786
2002 794
2003 359
Thereafter 205
---------- ------
$4,967
======
Rent expense charged to operations was approximately $2,685,000,
$2,558,000 and $1,737,000 for the years ended 1998, 1997 and 1996,
respectively.
(b) Legal Actions
On November 13, 1996, 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.
Plaintiffs seek unspecified damages plus interest, costs and fees. On
May 27, 1998, the U.S. District Court for the District of
Massachusetts dismissed the class action in its entirety. Plaintiffs
appealed the dismissal to the U.S. Court of Appeals for the First
Circuit. Oral arguments were heard on December 10, 1998. On March 22,
1999, the United States Court of Appeals for the First Circuit
entered judgment affirming the District Court's dismissal of the
class action.
42
<PAGE>
(12) Long-term Obligations
At December 31, 1998 long-term obligations consisted of the following:
<TABLE>
<CAPTION>
Outstanding
Stated Effective Balance as of Available
Description Interest Rate Interest Rate Expiration December 31,1998 Portion
----------- ------------- ------------- ---------- ---------------- -------
<S> <C> <C> <C> <C> <C>
$748,000 equipment note 9.50% 9.50% 4/30/99 $ 235 N/A
$1,000,000 equipment line Prime +1.5% 9.25% 12/1/00 83 -
$2,000,000 equipment line Prime + 1.0% 8.75% 12/1/00 860 -
- ---------------------------------------------------------------------------------------------------------------------------
$1,178
Capital lease obligation 16
-------
Total obligations 1,194
Current obligations 891
-------
Long-term obligations $ 303
=======
</TABLE>
Borrowings under these lines are secured by substantially all the assets
of the Company.
The Company's long-term debt and credit arrangements contain financial
covenants relating to minimum tangible net worth, debt to cash flow,
minimum earned revenue, and certain financial ratios. At December 31,
1998, the Company was in compliance with these arrangements.
(13) Accrued Expenses
Accrued expenses in the accompanying consolidated balance sheets consist
of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Payroll and payroll-related $ 3,658 $ 3,978
Royalties 5,040 3,882
Other 9,155 5,459
------- -------
$17,853 $13,319
======= =======
</TABLE>
(14) Segment Reporting
On December 31, 1998, NewsEdge Corporation adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
pronouncement established standards for public companies relating to the
reporting of financial and descriptive information about their operating
segments in financial statements. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by management in deciding how to
allocate resources and in assessing performance of the business.
The Company evaluates its operations in three product segments:
Enterprise, NewsPage and Other.
The market for news and current awareness is pursued by the Company
through two primary lines of business: the Enterprise business and the
NewsPage business. The Enterprise business uses a direct selling effort
and targets large organizations. The Enterprise services deliver news and
information to large numbers of users within organizations through their
corporate Intranet or local area networks. As of December 31, 1998, the
Company had over 1,300 enterprise customers, up 29% from the previous
year-end, with approximately 600,000 users. The NewsPage business operates
NewsPage.com, an Internet site that offers customized, business-oriented
news and information free on the Internet and through several tiers of
paid subscription services. NewsPage.com is supported in part by targeted
advertising. As of December 31, 1998, NewsPage had over 900,000 paid or
registered users.
43
<PAGE>
In addition to the Enterprise business and the NewsPage business, the
Company also reports a segment of "other" revenue, which consists of
services which are being phased out by the Company, and which the Company
expects to be immaterial beyond 1999.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance of its segments based on revenues and segment profitability.
Segment profitability is defined by the Company as profit or loss from
operations before income taxes, interest and merger, dispositions and
other charges. Non-cash expenses included in the segment profitability
measure have been detailed separately in the table below. The Company does
not evaluate the assets of each operating segment separately as the
majority of such assets are commingled and transferable among the
different segments.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Enterprise $67,374 $58,938 $49,484
NewsPage 6,351 5,802 2,869
Other 5,807 12,731 9,485
------- ------- -------
Total revenues $79,532 $77,471 $61,838
Profit (loss) before income
taxes, interest and mergers,
dispositions and other charges:
Enterprise $(5,195) $(1,805) $ 513
NewsPage (2,935) (9,089) (7,504)
Other (146) (1,569) (501)
Non-cash expenses by segment:
Enterprise $ 2,731 $ 2,552 $ 1,782
NewsPage 644 455 525
Other 514 516 557
</TABLE>
(15) Valuation and Qualifying Accounts
A summary of the valuation and qualifying accounts of the Company related
to doubtful accounts and merger costs for the three years ended
December 31, 1998 is as follows (in thousands):
<TABLE>
<S> <C>
Reserve Balance at December 31, 1995 $ 85
Additions to reserves 40,360
Reductions in reserves (39,874)
--------
Reserve Balance at December 31, 1996 571
Additions to reserves 6,565
Reductions in reserves (6,629)
--------
Reserve Balance at December 31, 1997 507
Additions to reserves 11,094
Reductions in reserves (9,010)
--------
Reserve Balance at December 31, 1998 $ 2,591
========
</TABLE>
44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
45
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
Directors
- ---------
The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1998.
Executive Officers
- ------------------
The information concerning officers of the Company required under this item is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1998.
Item 11. Executive Compensation and Other Information
- ------------------------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1998.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's
fiscal year ended December 31, 1998.
46
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) List of documents filed as part of this report
(1) Financial Statements
--------------------
Financial Statements (Listed Under Part II, Item 8 and included herein
by reference).
(2) Financial Statement Schedules
-----------------------------
Schedules to the Financial Statements have been omitted because the
information required to be set forth therein is not applicable or is
shown in the accompanying Financial Statements or notes thereto.
(3) Exhibits
---------
<TABLE>
<CAPTION>
Exhibit Number Description of Document
-------------- -------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization by and among the Company, and
Individual, Inc. dated as of November 2, 1997 (attached as Annex A to the
Prospectus/Joint Proxy Statement contained in the Company's Registration
Statement on Form S-4, No. 333-44887)
3.1 Amended and Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year-ended
December 31, 1997 and incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1, No. 33-94054 and incorporated
herein by reference)
4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to
the Company's Annual Report on Form 10-K for the year-ended December 31, 1997
and incorporated herein by reference)
10.1 1995 Stock Plan, as amended (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4, No. 333-44887 and incorporated herein by
reference)
10.2 1995 Non-Employee Director Stock Option Plan, as amended (filed as Annex A to
the Company's Proxy Statement filed on April 29, 1996 and incorporated herein
by reference)
10.3 1989 Stock Plan (filed as Exhibit 10.3 to the Company's Registration Statement
on Form S-1, No. 33-94054 and incorporated herein by reference)
10.4 1995 Employee Stock Purchase Plan, as amended (filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-4, No. 333-44887 and incorporated
herein by reference)
10.5 Amended and Restated 1989 Stock Option Plan (filed as Exhibit 99.1 to the
Company's Registration Statement on Form S-8, No. 333-46863)
10.6 1995 Incentive Stock Option Plan (filed as Exhibit 99.2 to the Company's
Registration Statement on Form S-8, No. 333-46863)
10.7 1996 Non-Employee Director Stock Option Plan (filed as Exhibit 99.3 to the
Company's Registration Statement on Form S-8, No. 333-46863)
</TABLE>
47
<PAGE>
<TABLE>
<C> <S>
10.8 1996 Stock Option Plan (filed as Exhibit 99.4 to the Company's Registration
Statement on Form S-8, No. 333-46863)
10.9 1996 Amended and Restated Stock Plan (filed as Exhibit 99.5 to the Company's
Registration Statement on Form S-8, No. 333-46863)
10.10 Amended and Restated Registration Agreement dated as of October 20, 1992 by
and among the Company and certain stockholders named herein (filed as Exhibit
10.5 to the Company's Registration Statement on Form S-1, No. 33-94054 and
incorporated herein by reference)
10.11 Lease for 80 Blanchard Road (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference)
10.12 Data Transmission Agreement between the Company and Mainstream Data, Inc.
dated as of November 24, 1993, as amended (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1, No. 33-94054 and incorporated
herein by reference)
10.13 Software Development and Marketing Agreement between the Company and Reuters
America Inc. dated as of November 1, 1993, as amended (filed as Exhibit 10.10
to the Company's Registration Statement on Form S-1, No. 33-94054 and
incorporated herein by reference)
10.14 Letter Agreement between the Company and Teknekron Software Systems, Inc.
dated as of June 13, 1994 (filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-1, No. 33-94054 and incorporated herein by
reference)
10.15 Database License, Development and Delivery Agreement between the Company and
NBC Desktop, Inc. dated as of October 17, 1994 (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, No. 33-94054 and incorporated
herein by reference)
+ 10.16 Employment Agreement dated as of February 24, 1998 between Michael E. Kolowich
and the Company (filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for the year-ended December 31, 1997 and incorporated herein by reference)
10.17 Form of Common Stock Purchase Warrant (filed as Exhibit 10.4 to Individual,
Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated
herein by reference).
10.18 Second Amended and Restated Investors' Rights Agreement dated as of October 3,
1995 (filed as Exhibit 10.13 to Individual, Inc.'s Registration Statement on
Form S-1, No. 333-00792, and incorporated herein by reference).
10.19 Licensing Agreement with Cornell Research Foundation, Inc. dated as of March
22, 1989 (filed as Exhibit 10.14 to Individual, Inc.'s Registration Statement
on Form S-1, No. 333-00792, and incorporated herein by reference).
10.20 Letter Agreement dated as of July 2, 1992 between Individual, Inc. and Fleet
Bank of Massachusetts, N.A. (filed as Exhibit 10.15 to Individual, Inc.'s
Registration Statement on Form S-1, No. 333-00792, and incorporated herein by
reference).
</TABLE>
48
<PAGE>
<TABLE>
<C> <S>
10.21 Letter Agreement dated as of September 22, 1994 between Individual, Inc. and
Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.16 to Individual,
Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated
herein by reference).
10.22 Consent and Loan Modification Agreement dated as of November 29, 1995 between
Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.17
to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and
incorporated herein by reference).
10.23 Second Loan Modification Agreement dated as of December 29, 1995 between
Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.18
to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and
incorporated herein by reference).
10.24 Lease dated as of August 25, 1994 between Individual, Inc. and Trustees of New
England Executive Park Trust, 40 Spaulding Investment Company, Inc. (filed as
Exhibit 10.19 to the Individual Inc. Registration Statement on Form S-1, No.
333-00792, and incorporated herein by reference).
10.25 Third Loan Modification Agreement dated as of December 31, 1996 between
Individual, Inc. and Fleet National Bank (filed as Exhibit 10.24 to
Individual, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1996).
*21.1 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of PricewaterhouseCoopers LLP
*24.0 Power of Attorney (included on page 50)
*27.1 Financial Data Schedule for fiscal year ended 1998
*27.2 Restated Financial Data Schedule for fiscal year ended 1997
*27.3 Restated Financial Data Schedule for fiscal year ended 1996
</TABLE>
- ------------------------
* Filed herewith.
+ Indicates a management contract or a compensatory plan, contract or
arrangement
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the period for which this report
is filed.
(c) The exhibits required by this Item are listed under Item 14(a).
(d) The financial statement schedules required by this Item are listed under
Item 14(a).
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
NEWSEDGE CORPORATION
(Registrant)
Date: March 26, 1999 /s/ Donald L. McLagan
------------------------------------------------
Donald L. McLagan
Chairman, President and Chief Executive Officer
We, the undersigned officers and directors of NewsEdge Corporation, hereby
severally constitute and appoint Donald L. McLagan and Edward R. Siegfried, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities to do all
things in our names and on our behalf in such capacities to enable NewsEdge
Corporation to comply with the provisions of the Securities Exchange Act of
1934, as amended, and all requirements of the Securities Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- --------- -------- ----
<S> <C> <C>
/s/ Donald L. McLagan Chairman, President, Chief March 26, 1999
- ---------------------------- Executive Officer and
Donald L. McLagan Director (Principal
Executive Officer)
/s/ Michael E. Kolowich Vice-Chairman and Director March 26, 1999
- ----------------------------
Michael E. Kolowich
/s/ Edward R. Siegfried Vice President--Finance March 26, 1999
- ---------------------------- and Operations,
Edward R. Siegfried Treasurer and Assistant
Secretary (Principal
Financial and Accounting
Officer)
/s/ June Rokoff Director March 26, 1999
- ----------------------------
June Rokoff
/s/ Ellen Carnahan Director March 26, 1999
- ----------------------------
Ellen Carnahan
/s/ Rory J. Cowan Director March 26, 1999
- ----------------------------
Rory J. Cowan
/s/ William A. Devereaux Director March 26, 1999
- ----------------------------
William A. Devereaux
/s/ James D. Daniell Director March 26, 1999
- ----------------------------
James D. Daniell
</TABLE>
50
<PAGE>
Exhibit 21.1
- ------------
SUBSIDIARIES OF THE COMPANY
---------------------------
1. NewsEdge Canada Corporation, Toronto, Ontario, Canada
2. NewsEdge Securities Corporation, Massachusetts, United States of America
3. NewsEdge, K.K., Tokyo, Japan
4. NewsPage.com, Inc., Delaware, United States of America
<PAGE>
Exhibit 23.1
- ------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this Form 10-K, into the Company's previously filed Registration
Statements on Form S-8 File Nos. 33-98786, 333-46863 and 333-46899.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
Exhibit 23.2
- ------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
NewsEdge Corporation on Forms S-8 (File Nos. 33-98786, 333-46863, and 333-46899)
of our report dated January 30, 1998, except as to the information in Note 15,
for which the date is February 27, 1998, on our audit of the consolidated
financial statements of Individual, Inc. as of December 31, 1997 and for the
years ended December 31, 1997 and 1996, which report is included in this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
1998 FOR 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 37,808
<SECURITIES> 3,782
<RECEIVABLES> 13,418
<ALLOWANCES> 306
<INVENTORY> 0
<CURRENT-ASSETS> 59,739
<PP&E> 20,344
<DEPRECIATION> 11,206
<TOTAL-ASSETS> 69,154
<CURRENT-LIABILITIES> 49,445
<BONDS> 0
0
0
<COMMON> 175
<OTHER-SE> 19,074
<TOTAL-LIABILITY-AND-EQUITY> 69,154
<SALES> 79,532
<TOTAL-REVENUES> 79,532
<CGS> 32,394
<TOTAL-COSTS> 98,902
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,062)
<INCOME-TAX> 166
<INCOME-CONTINUING> (17,228)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (17,228)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 45,854
<SECURITIES> 12,685
<RECEIVABLES> 18,411
<ALLOWANCES> 508
<INVENTORY> 0
<CURRENT-ASSETS> 82,160
<PP&E> 17,248
<DEPRECIATION> (7,751)
<TOTAL-ASSETS> 92,246
<CURRENT-LIABILITIES> 52,630
<BONDS> 0
0
0
<COMMON> 169
<OTHER-SE> 38,276
<TOTAL-LIABILITY-AND-EQUITY> 92,246
<SALES> 77,471
<TOTAL-REVENUES> 77,471
<CGS> 30,245
<TOTAL-COSTS> 95,018
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,564)
<INCOME-TAX> 1,297
<INCOME-CONTINUING> (15,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,861)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 32,853
<SECURITIES> 26,443
<RECEIVABLES> 17,470
<ALLOWANCES> 571
<INVENTORY> 0
<CURRENT-ASSETS> 79,648
<PP&E> 13,145
<DEPRECIATION> (4,171)
<TOTAL-ASSETS> 97,644
<CURRENT-LIABILITIES> 44,345
<BONDS> 0
0
0
<COMMON> 165
<OTHER-SE> 51,366
<TOTAL-LIABILITY-AND-EQUITY> 97,644
<SALES> 61,838
<TOTAL-REVENUES> 61,838
<CGS> 23,186
<TOTAL-COSTS> 108,752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (45,242)
<INCOME-TAX> 614
<INCOME-CONTINUING> (45,856)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (463)
<NET-INCOME> (46,319)
<EPS-PRIMARY> (3.12)
<EPS-DILUTED> (3.12)
</TABLE>
