<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: September 30, 1999
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-26540
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NEWSEDGE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3016142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Blanchard Road
Burlington, Massachusetts 01803
(Address of principal executive offices)
(781) 229-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 60 days. Yes X . No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at October 31, 1999
- ------------------- -------------------------------
Common Stock, par value $.01 17,396,150
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998
Notes to the Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 6(a) Exhibits
Item 6(b) Reports on Form 8-K
Signature
Exhibit Index
Exhibit
2
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PART I - FINANCIAL INFORMATION
ITEM 1
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- ----------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,054 $ 37,808
Short-term investments - 3,782
Accounts receivable 11,287 13,112
Prepaid expenses and deposits 8,598 5,037
------------ ----------------
Total current assets 46,939 59,739
------------ ----------------
Property and equipment, net 9,642 9,138
------------ ----------------
Other assets 1,264 277
------------ ----------------
Total assets $ 57,845 $ 69,154
============ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,623 $ 2,864
Accrued expenses 15,676 17,853
Deferred revenue, current 25,899 27,837
Current portion of long-term obligations 551 891
------------ ----------------
Total current liabilities 46,749 49,445
------------ ----------------
Long-term obligations, less current portion 24 303
------------ ----------------
Deferred revenue, noncurrent 21 157
------------ ----------------
Stockholders' equity:
Common stock 178 175
Additional paid-in capital 126,988 124,890
Cumulative translation adjustment (22) 63
Accumulated deficit (113,367) (103,828)
Treasury stock, at cost; 432,000 and 345,000 shares at
September 30, 1999 and December 31, 1998, respectively (2,726) (2,051)
------------ ----------------
Total stockholders' equity 11,051 19,249
------------ ----------------
Total liabilities & stockholders' equity $ 57,845 $ 69,154
============ ================
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues $ 19,694 $ 19,795 $ 58,651 $ 58,752
Costs and expenses:
Cost of revenues 8,001 8,117 24,646 24,133
Customer support expenses 1,277 1,387 4,007 4,461
Development expenses 2,755 2,782 8,704 9,054
Sales and marketing expenses 10,509 7,976 28,900 24,403
General and administrative expenses 1,268 1,011 3,143 3,645
Merger, disposition and other charges - - - 11,093
------------ ------------ ------------ ------------
Total costs and expenses 23,810 21,273 69,400 76,789
------------ ------------ ------------ ------------
Loss from operations (4,116) (1,478) (10,749) (18,037)
Interest income and other, net 389 564 1,277 1,836
------------ ------------ ------------ ------------
Net loss before provision for income taxes (3,727) (914) (9,472) (16,201)
Provision for income taxes 15 27 67 114
------------ ------------ ------------ ------------
Net loss $ (3,742) $ (941) $ (9,539) $(16,315)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.22) $ (0.05) $ (0.55) $ (0.95)
============ ============ ============ ============
Weighted average common shares outstanding 17,333 17,378 17,330 17,199
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
Nine Months Ended
September 30,
----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,539) $ (16,315)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,965 3,018
Gain on disposal of property and equipment - (144)
Changes in assets and liabilities:
Accounts receivable 1,824 4,787
Prepaid expenses and deposits (3,561) 1,977
Accounts payable and accrued expenses (418) 2,517
Deferred revenue (1,938)
(5,264)
-------------- ---------------
Net cash used in operating activities (10,667) (9,424)
-------------- ---------------
Cash flows from investing activities:
Decrease (increase) in investments, net 3,782 (15,219)
Purchases of property and equipment (3,318) (3,023)
Contingent purchase price payment - (3,918)
Increase in other assets (536) (32)
-------------- ---------------
Net cash used in investing activities (72) (22,192)
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuances related to stock plans, including tax
benefits 1,500 3,610
Purchase of treasury stock (675) (771)
Decrease in long-term obligations (415) (639)
Principal payments under capital leases (340) (328)
-------------- ---------------
Net cash provided by financing activities 70 1,872
-------------- ---------------
Effect of exchange rate on cash and cash equivalents (85) 42
-------------- ---------------
Decrease in cash and cash equivalents (10,754) (29,702)
Cash and cash equivalents, beginning of period 37,808 45,854
-------------- ---------------
Cash and cash equivalents, end of period $ 27,054 $ 16,152
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 60 $ 95
============== ==============
Cash paid for interest $ 56 $ 161
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of the Business
NewsEdge Corporation is the independent leader in global news and current
awareness solutions for business. The Company's mission is to make news valuable
for business by helping business people find the most important, relevant
stories from an overwhelming volume of daily news and enabling them to act on
the most current information possible. NewsEdge's Enterprise business serves
approximately 1,450 organizations including 81 of Business Week's 100 largest
global companies. The Company's wholly-owned subsidiary, Individual.com, Inc.
(formerly NewsPage.com, Inc.), is a leader in delivering personalized news and
information to business people on the Web. NewsEdge is headquartered in
Burlington, Massachusetts with sales offices and distributors throughout North
America, South America, Europe, Japan and the Middle East.
On October 25, 1999, the Company changed the name of its wholly owned
subsidiary, NewsPage.com, Inc. to Individual.com, Inc. ("Individual.com"). The
change reflects the Company's vision to deliver "individualized content" to its
fast growing community of business users.
2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements of the Company presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company and its subsidiaries.
Quarterly operating results are not necessarily indicative of the results that
would be expected for the full year.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
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.
Cash Equivalents and Investments
The Company applies Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company's investments are classified as held-to-maturity and
are recorded at amortized cost. Cash equivalents consist of highly-liquid
investments purchased with an original maturity of three months or less. Those
securities with maturities of three months to twelve months as of the balance
sheet date are classified as short-term investments and securities with
maturities of greater than twelve months are classified as long-term
investments.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year's presentation.
6
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3. 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,
Individual.com 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 Individual.com
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. The Individual.com business operates an Internet site that offers
customized, business-oriented news and information free on the Internet.
Individual.com is supported by targeted advertising and electronic commerce.
In addition to the Enterprise business and Individual.com business, the
Company also reports a segment of "other" revenue, which consists of services
which will be completely phased out by the Company by the end of 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, disposition 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>
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
Revenue: 1999 1998 1999 1998
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Enterprise $ 18,465 $ 17,052 $ 54,235 $ 49,404
Individual.com 945 1,478 3,101 4,529
Other 284 1,265 1,315 4,819
--------------- --------------- -------------- ---------------
Total revenue $ 19,694 $ 19,795 $ 58,651 $ 58,752
Profit (loss) before merger,
disposition and other charges:
Enterprise $ 94 $ (819) $ (2,567) $ (4,414)
Individual.com (4,058) (791) (7,958) (2,442)
Other (152) 132 (224) (88)
Non-cash expenses by segment:
Enterprise $ 806 $ 707 $ 2,389 $ 2,025
Individual.com 170 147 511 511
Other 21 111 69 410
</TABLE>
7
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4. Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 requires that items defined as other comprehensive
income, such as foreign currency translation adjustments, be separately
classified in the financial statements and that the accumulated balance of other
comprehensive income be reported separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
components of comprehensive income for the three and nine months ended September
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands) September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss $ (3,742) $ (941) $ (9,539) $ (16,315)
Other comprehensive income (loss):
Write down of investments to
amortized cost - - - (88)
Foreign currency adjustment 29 33 (85) 42
----------------- ---------------- ----------------- ----------------
Comprehensive loss $ (3,713) $ (908) $ (9,624) $ (16,361)
================= ================ ================= ================
</TABLE>
5. Earnings Per Share
In accordance with SFAS No. 128, Earnings per Share, basic and diluted
earnings per share were computed by dividing net loss by the weighted average
number of common shares outstanding during the first three and nine months of
1999 and 1998. Diluted earnings per share excludes shares issuable from the
assumed exercise of stock options, as their effect would be antidilutive.
8
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction and Overview
NewsEdge Corporation (the "Company") is the independent leader in 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 thousands of 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 Individual.com
business (formerly the NewsPage.com 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 September 30,
1999, the Company had over 1,450 Enterprise customers, up 15% from the previous
year, with approximately 670,000 authorized users.
The Individual.com business operates an Internet web site that offers
customized, business-oriented news and information. Through a series of
strategic relationships, the Individual.com business also provides news and
information for a number of other Internet web sites. These relationships
include Netscape Business Journal and Yahoo! Small Business. The Individual.com
service is supported by targeted advertising and electronic commerce, and is
offered to end users as a free service. As of September 30, 1999, Individual.com
had approximately 1,030,000 registered users, up 23% from the previous
year. The Individual.com business has a history of significant losses. The
Company anticipates that such losses will increase as the Company anticipates
making a significant investment in the Individual.com business over the next
year, particularly relating to advertising, promoting and marketing of
Individual.com business.
In addition to the Enterprise business and the Individual.com business, the
Company also reports a segment of "other" revenue, which consists of services
which will be discontinued by the Company by the end of 1999.
While the Company's decision to increase its investment in the
Individual.com business has and will increase the losses reported for that
segment, the Company achieved its goal of break-even within the Enterprise
segment in the third quarter of 1999. The Company achieved this goal for the
three months ended September 30, 1999 through continued revenue growth as well
as improved operating margins achieved, primarily from savings from headcount
reductions and lower royalty costs negotiated with several information
providers. The Company has made headcount reductions in areas associated with
product lines the Company has discontinued within the last year. There can be no
assurance that the Enterprise segment's profitability will continue in the near
future. For an additional discussion of the risks affecting the Company's
profitability, see the Risk Factor section of this filing regarding Future
Operating Results Uncertain and Individual.com Has a History of Losses and the
Company Anticipates That Losses Will Continue.
The Company's Enterprise revenues consist primarily of subscription fees
related to the various Enterprise service 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 Individual.com revenues are
currently derived from advertising sales and revenues shared through business
arrangements with companies involved in electronic commerce. During the second
quarter of 1999, Individual.com converted its subscription based service to a
free service offering subsidized by advertising and e-commerce. The Company's
"other" revenues consist primarily of subscription fees generated from sales of
services being discontinued by the Company.
Subscription services offered through the Enterprise business 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 service.
Accordingly, a substantial portion of the Company's revenues is recorded as
deferred revenue.
9
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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,
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.
RESULTS OF OPERATIONS FOR THE THREE- AND NINE- MONTH PERIODS ENDED SEPTEMBER 30,
1999 AS COMPARED TO THE THREE- AND NINE- MONTH PERIODS ENDED SEPTEMBER 30, 1998
Revenues
Total revenues for the three months ended September 30, 1999 decreased slightly
to $19.7 million compared to $19.8 million for the same period in 1998. Total
revenues for the nine months ended September 30, 1999 remained constant at $58.7
million. For both periods, an increase in Enterprise revenues of approximately
8% and 10%, respectively, was offset by decreases in both Individual.com and
Other revenues.
Enterprise revenue for the three months ended September 30, 1999 increased 8.3%
to $18.5 million as compared to $17.1 million for the same period in 1998.
Enterprise revenue for the nine months ended September 30, 1999 increased 9.8%
to $54.2 million as compared to $49.4 million for the same period in 1998. The
increase in Enterprise revenue was due primarily to increases in subscription
revenues from new customers and the retention and growth of revenues from
existing customers.
Individual.com revenue for the three months ended September 30, 1999 decreased
36.1% to $945,000 as compared to $1.5 million for the same period in 1998.
Individual.com revenue for the nine months ended September 30, 1999 decreased
31.5% to $3.1 million as compared to $4.5 million for the same period in 1998.
The decrease in Individual.com revenue resulted primarily from reductions in
Individual.com subscription revenue caused by the introduction of a free
Individual.com service during the second quarter of 1999.
Terminated or harvested product line revenues decreased 77.5% to approximately
$284,000 and 72.7% to $1.3 million for the three- and nine-month periods ended
September 30, 1999, respectively. The decrease in revenues from terminated or
harvested product lines was due primarily to the spin out of the Clarinet
business unit effective March 31, 1998 and an overall reduced sales effort
directed at business lines that have been terminated or are being de-emphasized
by the Company. The Company expects that revenue from terminated or harvested
product lines will end by December 31, 1999.
Cost of revenues
Cost of revenues consists primarily of royalties paid to information providers,
payroll and related expenses for the editorial and news operations staff, as
well as data transmission and computer-related costs for the support and
delivery of the Company's services. Cost of revenues as a percentage of total
revenues for the three-month period ended September 30, 1999 decreased to 40.6%
from 41.0% for the same period in 1998. The percentage decrease in cost of
revenues was due primarily to an initiative started by the Company in 1999 to
negotiate reduced royalty costs with several third-party information providers.
Cost of revenues as a percentage of total revenues for the nine-month period
ended September 30, 1999 increased to 42.0% from 41.1% for the same period in
1998. The percentage increase in cost of revenues period-to-period has narrowed
primarily due to negotiated reduced royalty costs with several third-party
information providers.
10
<PAGE>
Customer support expenses
Customer support expenses consist primarily of costs associated with technical
support of the Company's installed base of customers. Customer support expenses
for the three-month period ended September 30, 1999 decreased 7.9% to $1.3
million as compared to $1.4 million for the same period in 1998. Customer
support expenses for the nine months ended September 30, 1999 decreased 10.2% to
$4.0 million as compared to $4.5 million for the same period in 1998. The
decrease in customer support expenses resulted primarily from reductions in
headcount and related expenses. As a percentage of total revenues, customer
support expenses for the three- and nine-month periods ended September 30, 1999
decreased to 6.5% and 6.8%, respectively, from 7.0% and 7.6%, respectively, for
the same periods in 1998.
Development expenses
Development expenses consist primarily of costs associated with the design,
programming, and testing of the Company's software and services. Development
expenses for the three-month periods ended September 30, 1999 and 1998 remained
constant at $2.8 million. Development expenses for the nine months ended
September 30, 1999 decreased 3.9% to $8.7 million as compared to $9.1 million
for the same period in 1998. The decrease in development expenses for the nine
months ended September 30, 1999 resulted primarily from reductions in headcount
and related expenses associated with the spin out of the Clarinet business unit
effective March 31, 1998. As a percentage of total revenues, development
expenses for the three- and nine-month periods ended September 30, 1999
decreased to 14.0% and 14.8%, respectively, from 14.1% and 15.4%, respectively,
for the same periods in 1998.
Sales and marketing expenses
Sales and marketing expenses consist primarily of compensation costs (including
sales commissions and bonuses), travel expenses, trade shows and other marketing
programs. Sales and marketing expenses for the three-month period ended
September 30, 1999 increased 31.8% to $10.5 million as compared to $8.0 million
for the same period in 1998. Sales and marketing expenses for the nine months
ended September 30, 1999 increased 18.4% to $28.9 million as compared to $24.4
million for the same period in 1998. As a percentage of total revenues, sales
and marketing expenses for the three- and nine-month periods ended September 30,
1999 increased to 53.4% and 49.3%, respectively, as compared to 40.3% and 41.5%,
respectively, for the same periods in 1998. These increases in sales and
marketing expenses and as a percentage of total revenues resulted primarily from
increases in headcount and related expenses as well as the increased investment
in brand development of Individual.com related to marketing and advertising
costs.
General and administrative expenses
General and administrative expenses consist primarily of expenses for finance,
office operations, administration and general management activities, including
legal, accounting and other professional fees. General and administrative
expenses for the three-month period ended September 30, 1999 increased 25.4% to
approximately $1.3 million as compared to $1.0 million for the same period in
1998. The increase in General and Administrative expenses is due to increased
spending of the Individual.com segment in headcount and related expenses.
General and administrative expenses for the nine months ended September 30, 1999
decreased 13.8% to $3.1 million as compared to $3.6 million for the same period
in 1998. The decrease in general and administrative expenses was due primarily
to reductions in headcount and related expenses as well as a reduction in
professional fees associated with special business development efforts. As a
percentage of total revenues, general and administrative expenses for the three-
month period ended September 30, 1999 increased to 6.4% as compared to 5.1% for
the same period in 1998. As a percentage of total revenues, general and
administrative expenses for the nine-month period ended September 30, 1999
decreased to 5.4% as compared to 6.2% for the same period in 1998.
Merger, disposition and other charges
Merger, disposition and other charges consist primarily of the nonrecurring
costs related to the Company's business combinations. For the three- and
nine-month periods ended September 30, 1999, there were no additions to merger,
disposition and other charges. For the three- and nine- month periods ended
September 30, 1998, these costs, totaling $11.1 million, related primarily to
costs associated with the Merger with Individual and the purchase of ISS, the
11
<PAGE>
termination of the Clarinet business unit, severance and benefits for terminated
employees and the cost of terminating and settling certain contractual
obligations of the combined companies.
Interest income (expense), net
Interest income (expense), net during the three- and nine-month periods ended
September 30, 1999, decreased to approximately $389,000 and $1.3 million,
respectively, from approximately $564,000 and $1.8 million, respectively, for
the same periods in 1998, due to the interest earned on lower cash and
investment balances.
Provision for income taxes
The provision for income taxes for the three- and nine-month periods ended
September 30, 1999 decreased to approximately $15,000 and $67,000, respectively,
as compared to approximately $27,000 and $114,000, respectively, for the same
periods in 1998. Components of the provisions include state taxes due in states
that do not have net operating loss carry-forwards available, foreign tax
liabilities and the alternative minimum tax due under the Internal Revenue Code.
The Company has not recorded a deferred tax benefit in the periods presented for
the potential future benefit of its tax loss carry-forwards as the Company has
concluded that it is not likely such deferred tax asset would be realized.
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments totaled $27.1 million
at September 30, 1999, as compared to $41.6 million at December 31, 1998, a
decrease of $14.5 million. Net cash of approximately $10.7 million was used in
operations for the nine months ended September 30, 1999 primarily resulting from
the Company's net loss for the period. Net cash used by investing activities for
the nine months ended September 30, 1999 was approximately $72,000, resulting
primarily from a net decrease in short-term investments of $3.8 million offset
by purchases of $3.3 million made up primarily of property and equipment. Net
cash provided by financing activities for the nine months ended September 30,
1999 was approximately $70,000 resulting from cash proceeds of $1.5 million from
stock issuances made pursuant to the Company's employee stock plans, offset by
approximately $755,000 in payments related to reducing current and long-term
obligations, and approximately $675,000 in payments related to treasury stock
purchases.
The Company continues to investigate the possibility of investments in or
acquisitions of complementary businesses, products or technologies. The Company
has continued to make a significant cash investment in its wholly-owned
subsidiary, Individual.com, Inc. ,while at the same time the Company is actively
pursuing both strategic and financial investors to allow it to continue the
development of the Individual.com business.
The Company believes that its current cash and cash equivalents 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.
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. Service offerings. The Company continues to test released services offered,
as needed, for Year 2000 compliance. As of September 30, 1999, the Company
had successfully completed testing on approximately 98% of its supported
services and estimates completion of this test process by November 30,
1999. The Company, through testing and development efforts, has determined
that such service offerings are Year 2000 compliant. 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 have Year 2000 qualification as part of the
products' test plans. None of these development projects have been
materially delayed or impacted by the Company's Year 2000 readiness
efforts.
. Third-party information providers. The Company relies on content provided
by third-party information providers. As of September 30, 1999, the Company
had contacted all of its information providers with respect to their Year
2000 compliance status. Approximately 99% of the information providers
contacted returned their compliance responses and the Company has
identified issues with sixteen. The Company expects that these issues will
be addressed by the end of the year. The Company's goal is to have all
information providers' compliance responses complete by November 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 September 30, 1999. The Company's
goal is to have all business partners' compliance responses received by
November 30, 1999. Additionally, the Company has an arrangement with WAVO
Corporation, 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. WAVO has stated that the
replacement or remediation of its critical IT and Business Systems will be
completed by December 31, 1999. While the Company is committed to taking
every reasonable action to obtain assurances from such business partners
that their software is Year 2000 compliant, it can not guarantee the
performance of such business partners or predict whether any of the
assurances provided by them may be accurate and realistic.
. Internal Systems. Except as set forth below, the Company has completed its
inventory and assessment of its business and internal systems. The scope of
business systems ranges from accounting, payroll, communications, internet
access and internal production. The Company believes such systems are Year
2000 compliant. The Company only has one remaining system which is
currently undergoing testing. The Company anticipates completing this
testing by November 15, 1999.
Costs: The Company has contracted with outside consulting expertise to
assist in its Year 2000 compliance efforts. It is anticipated that this cost
will not exceed $125,000. The Company continues to utilize 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 internal Year 2000
compliance efforts will be approximately $1.5 million. The total time estimated
for the project for internal employees would equate to approximately twelve
person years. As of September 30, 1999, the Company had spent approximately $1.0
million. 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
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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 WAVO 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
Certain of the above statements in this report are forward-looking
statements that involve risks and uncertainties. The Company operates in a
rapidly changing environment that involves a number of risks, some of which are
beyond the Company's control. Actual results could differ materially as a result
of a variety of factors. The discussion below and in the Company's other SEC
reports highlights some of the risks which may affect future operating results.
Individual.com Has a History of Losses and the Company Anticipates That Losses
Will Continue
The Individual.com business has a history of operating losses and the
Company expects losses and negative cash flow in this business to continue for
the foreseeable future. The Company plans to invest in the continued development
of its Individual.com business and, as a result, anticipates it will incur
significant additional expenses relating to brand development, advertising,
marketing and promotional activities. Although the Company intends to increase
spending in connection with its Individual.com business, its efforts may not
prove successful in increasing user traffic on the Individual.com Web site. The
operations of Individual.com may place a strain on the Company's financial
resources if Individual.com is unable to raise capital through alternative
mechanisms and may detract capital from otherwise profitable operations.
Additionally, the Company believes that maintaining and growing awareness about
the Individual.com brand is an important aspect of its efforts to continue to
attract users and advertisers. The Company cannot be certain that its effort to
build such brand awareness through its increased spending will be successful.
Management of Growth and Hiring of Additional Personnel
The Company has experienced growth in revenues and expansion of its
operations, which have placed significant demands on the Company's management,
development, sales and customer support staff. Continued growth will require the
Company to hire and retain more development, selling and customer support
personnel. The Company has at times experienced, and is currently experiencing,
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
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ability to satisfy customer demand in a timely fashion or to support
satisfactorily its customers and operations, which could in turn, materially
adversely affect its business, operating results and financial condition.
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 and advertisers,
as well as increase penetration into existing customers. In addition, as of
September 30, 1999, the Company had an accumulated deficit of approximately $113
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 the Internet, private networks based on a variety of
groupware products, electronic mail, and facsimile. 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. As a result, there can be no assurance
that communication or commerce over the Internet will continue to develop at
historical rates 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 or timely development and commercialization of performance
improvements. 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. Laws and regulations may be adopted in the future that address
issues such as user privacy, pricing and the characteristics of and quality of
products or services. 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 Individual.com service.
Individual.com's revenues are generated from the sale of advertisements and
e-commerce on its Web page. 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
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and broadcast media. The Company's ability to generate significant advertising
and e-commerce revenues from its Individual.com service 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;
. the Company's ability to work with its advertisers' varying sales
cycles;
. the resolution of Internet security concerns;
. the determination of government regulation and the law governing
the Internet; and
. the ability of the Company to develop and update effective
advertising delivery and measurement systems.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that such
standards will develop sufficiently to support Web-based advertising as a
significant advertising medium. In addition, there is intense competition in the
sale of advertising on the Internet, which has resulted in a wide range of rates
quoted by different vendors for a variety of advertising services, which makes
it difficult to project future levels of Internet advertising revenues that will
be realized generally or by any specific company. Competition among current and
future Web sites, as well as competition with other traditional media for
advertising placements, could result in significant price competition and
reductions in advertising revenues. As a result of these factors, there can be
no assurance that the Company will sustain or increase current advertising sales
levels. Failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition.
Competition
The business information services industry is intensely competitive and is
characterized by rapid technological change and 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.
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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.
Individual.com Business
The Company's Individual.com 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. Individual.com 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.
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.
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
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information providers compete with one another and, to some extent, with the
Company. Termination of one or more significant news provider agreements, or
problems receiving news from providers as a result of Year 2000 issues, 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
communications networks using one or more of these four 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 one of two methods: 1)
an arrangement between the Company and WAVO Corporation, a common carrier
communications vendor, or 2) the Company's own NewsEdge Network, a proprietary
entitlement and delivery system launched in the fall of 1998 that takes
advantage of both leased line and Internet delivery. WAVO presently also markets
services that compete directly with those of the Company. WAVO is also the
communications provider for many newswires offered by the Company through
NewsEdge services. The Company's agreement with WAVO expires on December 31,
2000. This agreement can be terminated earlier in the event of a material breach
by the Company of the agreement. If the agreement with WAVO were terminated on
short notice, or if WAVO 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 WAVO were unable to fulfill its obligations, other
sources of retransmission would be available to the Company including NewsEdge
Network, although the transition from WAVO 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. WAVO 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. WAVO has stated that
the replacement or remediation of its critical IT and Business Systems will be
completed by December 31, 1999.
In addition, the Company's customers depend on Internet service providers,
online service providers and other Web site operators for access to the
Company's products. Many of these Internet service providers have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to the Company's systems.
Furthermore, the Company's Individual.com Web site must accommodate a high
volume of traffic and deliver frequently updated information. The Individual.com
Web sites may experience slower response times or decreased traffic for a
variety of reasons. These types of occurrences in the future could cause users
to perceive the Individual.com Web site as not functioning properly and
therefore cause them to use another Web site or other method to obtain
information.
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. These
systems and operations are vulnerable to damage or interruption from human
error, natural disasters, telecommunication failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar events. Similarly,
the Company's ability to track, measure and report the delivery of
advertisements on its Web site depends on the efficient and uninterrupted
operation of a third-party system. Although the Company has limited back-up
capability, this measure does not eliminate the significant risk to the
Company's operations from a
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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. The Company's insurance policies may not adequately
compensate us for any losses that it may incur because of any failures in its
system or interruptions in delivery of content. The Company's business, results
of operations and financial condition could be materially adversely affected by
any event, damage or failure that interrupts or delays our 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 has currently
tested the majority of 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 has sought 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 WAVO, 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
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
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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. Since February 1999, the Company
has retained 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.
Potential Liability For Information Transmitted
The Company may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to the information it
publishes either though its Enterprise services or on its Web site. These types
of claims have been brought, sometimes successfully, against online services as
well as print publications in the past. The Company could also be subject to
claims based upon the content that is accessible from its Web site through links
to other Web sites. The Company's insurance may not adequately protect it
against these claims.
Privacy Concerns
Web sites typically place "cookies" on a user's hard drive without the
user's knowledge or consent. The Company uses cookies for a variety of reasons,
including the collection of data derived from the user's Internet activity. Most
currently available Web browsers allow users to remove cookies at any time or to
prevent cookies from being stored on their hard drives. In addition, some
commentators, privacy advocates and governmental bodies have suggested limiting
or eliminating the use of cookies. Any reduction or limitation in the use of
cookies could limit the effectiveness of the Individual.com business' sales and
marketing efforts. In addition, the European Union recently adopted a directive
addressing data privacy that may limit the collection and use of certain
information regarding Internet users. This directive may limit the Company's
ability to target advertising or collect and use information in certain European
countries.
Any penetration of the Company's network security or other
misappropriation of users' personal information could subject the Company to
liability. These claims could result in litigation. In addition, the Federal
Trade
20
<PAGE>
Commission and several states have investigated the use by certain
Internet companies of personal information. The Company could incur expenses if
new regulations regarding the use of personal information are introduced or if
its privacy practices were investigated.
ITEM 3. 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 September 30, 1999, the Company did not use derivative financial
instruments for speculative or trading purposes.
Interest Rate Risk
The Company invests in short-term and cash equivalent investment
instruments such as 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 September 30, 1999, the assets and
liabilities of the Company related to nondollar-denominated currencies was not
material.
21
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NEWSEDGE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports Filed on Form 8-K.
6(a) Exhibits.
27.1 - Financial Data Schedule for the three- and nine- month periods
ended September 30, 1999
6(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
22
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NEWSEDGE CORPORATION
(Registrant)
Date: November 12, 1999 /s/ Ronald Benanto
--------------------------------
Ronald Benanto
Vice President - Finance and CFO
23
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description
27.1 -- Financial Data Schedule for September 30, 1999
24
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 27,054 27,054
<SECURITIES> 0 0
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<DEPRECIATION> 14,021 14,021
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0 0
0 0
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<TOTAL-COSTS> 23,810 69,400
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,727) (9,472)
<INCOME-TAX> 15 67
<INCOME-CONTINUING> (3,742) (9,539)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,742) (3,742)
<EPS-BASIC> (0.22) (0.55)
<EPS-DILUTED> (0.22) (0.55)
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