<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, 2000
------------------
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
-------
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, 2000
------------------- -------------------------------
Common Stock, par value $.01 18,602,527
<PAGE>
NEWSEDGE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page Number
<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds
Item 6(a) Exhibits 24
Item 6(b) Reports on Form 8-K 24
Signature 25
Exhibit Index 26
</TABLE>
2
<PAGE>
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,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,905 $ 20,278
Accounts receivable 11,469 11,280
Due from WinStar (Note 3) 2,000 --
Prepaid expenses and deposits 5,549 5,132
------------ ------------
Total current assets 38,923 36,690
------------ ------------
Property and equipment, net 7,891 9,398
------------ ------------
Other assets 1,122 1,766
------------ ------------
Total assets $ 47,936 $ 47,854
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,924 $ 2,869
Accrued expenses 13,200 14,837
Deferred revenue, current 24,322 23,010
Current portion of long-term obligations 24 303
------------ ------------
Total current liabilities 42,470 41,019
------------ ------------
Deferred revenue, noncurrent 77 124
------------ ------------
Stockholders' equity:
Common stock 190 181
Additional paid-in capital 132,581 130,136
Cumulative translation adjustment (184) (58)
Accumulated deficit (124,472) (120,822)
Treasury stock, at cost; 432,000 shares (2,726) (2,726)
------------ ------------
Total stockholders' equity 5,389 6,711
------------ ------------
Total liabilities & stockholders' equity $ 47,936 $ 47,854
============ ============
</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,
-------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 17,868 $ 18,749 $ 52,869 $ 55,550
Costs and expenses:
Cost of revenues 6,736 7,387 21,907 22,723
Customer support expenses 1,265 1,182 4,108 3,701
Development expenses 2,313 2,012 7,940 6,497
Sales and marketing expenses 7,634 7,493 25,085 23,237
General and administrative expenses 966 735 4,979 2,185
Merger, disposition and other charges -- -- (453) --
---------- ---------- ----------- -----------
Total costs and expenses 18,914 18,809 63,566 58,343
---------- ---------- ----------- -----------
Loss from operations (1,046) (60) (10,697) (2,793)
Interest income and other, net 284 389 788 1,277
---------- ---------- ----------- -----------
Income (loss) from continuing operations before
provision for income taxes (762) 329 (9,909) (1,516)
Provision for income taxes 127 15 166 67
---------- ---------- ----------- -----------
Net income (loss) from continuing operations (889) 314 (10,075) (1,583)
Loss from discontinued operations, net -- (4,056) (1,859) (7,956)
Net gain on disposal of Individual.com, Inc. 2,017 -- 8,284 --
---------- ---------- ----------- -----------
Income (loss) from discontinued operations 2,017 (4,056) 6,425 (7,956)
---------- ---------- ----------- -----------
Net income (loss) $ 1,128 $ (3,742) $ (3,650) $ (9,539)
========== ========== =========== ===========
Basic and diluted net income (loss) per share
Continuing operations $ (0.05) $ 0.02 $ (0.56) $ (0.09)
Discontinued operations 0.11 (0.24) 0.36 (0.46)
---------- ---------- ----------- -----------
Total $ 0.06 $ (0.22) $ (0.20) $ (0.55)
========== ========== =========== ===========
Weighted average common shares outstanding - Basic 18,251 17,333 17,877 17,330
========== ========== =========== ===========
Weighted average common shares outstanding - Diluted 18,303 17,333 17,877 17,330
========== ========== =========== ===========
</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>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,650) $ (9,539)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,333 2,965
Gain on disposal of Individual.com, Inc. (8,284) --
Changes in assets and liabilities:
Accounts receivable (966) 1,824
Prepaid expenses and deposits (417) (3,561)
Accounts payable and accrued expenses 1,006 (418)
Deferred revenue 1,293 (1,938)
-------- --------
Net cash used in operating activities (7,685) (10,667)
-------- --------
Cash flows from investing activities:
Net proceeds from disposal of Individual.com, Inc. 7,385 --
Purchases of property and equipment (2,080) (3,318)
Decrease (increase) in other assets 5 (536)
Decrease in investments, net -- 3,782
-------- --------
Net cash provided by (used in) investing activities 5,310 (72)
-------- --------
Cash flows from financing activities:
Proceeds from private placement, net of issuance costs 1,782 --
Proceeds from issuances related to stock plans, including tax benefits 672 1,500
Principal payments under capital leases (279) (340)
Decrease in long-term obligations (47) (415)
Purchase of treasury stock -- (675)
-------- --------
Net cash provided by financing activities 2,128 70
-------- --------
Effect of exchange rate on cash and cash equivalents (126) (85)
-------- --------
Decrease in cash and cash equivalents (373) (10,754)
Cash and cash equivalents, beginning of period 20,278 37,808
-------- --------
Cash and cash equivalents, end of period $ 19,905 $ 27,054
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 55 $ 60
-------- --------
Cash paid for interest $ 8 $ 56
======== ========
</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 ("the Company" or "NewsEdge") is a leading provider of
eContent applications for business web sites and enterprise intranets. The
Company's mission is to make news and information 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.
On December 7, 1999, the Company entered into a purchase and sale agreement
with RoweCom, Inc., whereby RoweCom would purchase all of the outstanding shares
of common stock of the Company for approximately $227 million. The acquisition
was subject to the approval of the stockholders of both companies. On March 6,
2000, the agreement was mutually terminated by both parties. The Company
incurred costs of $1.4 million, comprised of legal, employee retention and
acquisition-related expenses charged to operations during the first quarter of
2000. During the second quarter of 2000, the Company incurred an additional
$668,000 relating to remaining employee retention expenses.
In March 2000, the Company's Board of Directors approved, and in early May
2000, the Company announced a strategic expansion of its traditional business
focus. In order to capitalize on its media sources, personalization strategy,
and international sales and support infrastructure, the Company has moved into
the eContent business marketplace by offering competitive eContent applications
for business web sites and enterprise intranets. eContent is the constantly
changing information required for web-sites to encourage and foster high
frequency usage and support other web-based interactions. The Company believes
that syndicated eContent and contextual commerce (the ability to map business
content to transaction opportunities) offerings, in addition to providing
infrastructure and solution applications to the Company's clients, will allow
the Company to drive traffic and commerce on its client web sites. The Company
incurred $2.1 million of non-recurring expenses during the nine months ended
September 30, 2000 related to transitioning the Company to its new strategic
direction. These costs were comprised primarily of asset write-offs and
reserves.
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, 1999 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.
6
<PAGE>
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
Cash equivalents consist of highly-liquid investments purchased with an
original maturity of three months or less.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year's presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
This SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective in the fourth quarter 2000. The Company does
not expect the adoption of SAB 101 to have a material impact on the Company's
results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of
Accounting Principles Board (APB), Opinion No. 25. The interpretation clarifies
the application of APB Opinion No. 25 in certain situation, as defined. The
interpretation is effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998, but before the effective date. To the
extent that events covered by this interpretation occur during the period after
December 15, 1998 but before the effective date, the effects of applying this
interpretation would be recognized on a prospective basis from the effective
date. Accordingly, upon initial application of the final interpretation, (i) no
adjustments would be made to the financial statements for periods before the
effective date and (ii) no expense would be recognized for any additional
compensation cost measured that is attributable to periods before the effective
date. The Company expects that the adoption of this interpretation would not
have any effect on the accompanying financial statements.
7
<PAGE>
3. Discontinued Operations
On February 18, 2000, the Company entered into a purchase and sale
agreement to sell its ownership interest in its wholly owned subsidiary,
Individual.com, Inc. Upon the initial closing, the Company sold 80% of its
ownership interest in Individual.com, Inc. for a purchase price of $8.0 million
payable in installments receivable through December 2000, of which the Company
received $2.5 million in February 2000 and $2.5 million in May 2000. The
purchase and sale of the remaining 20% of Individual.com, Inc., which was due to
be completed on February 28, 2001, was completed on August 1, 2000, under the
terms of an amended agreement, pursuant to which the Company received a $3.0
million payment in September 2000 and is due to receive final payments of $1.0
million on December 26, 2000 and $1.0 million on February 28, 2001.
In the third quarter of 2000, the Company recorded the remaining $2.0
million gain on the sale transaction based on the sale of the remaining 20% of
Individual.com, Inc. The Company has recorded a net gain on the sale of
Individual.com totaling $6.3 million in prior quarters. The Company also made
payments to retain the Individual.com workforce, which along with other
transaction fees, have been included as a reduction in the gain on the sale.
The Company has presented the operating results of Individual.com, Inc. as
discontinued operations for all periods presented. Included in these results are
revenues from the Individual.com business for the three- and nine-month periods
ending September 30, 2000 of $0 and $297,000, respectively, as compared to
$945,000 and $3.1 million, respectively for the same periods in 1999. The
Company has not restated the consolidated balance sheet for the net assets of
Individual.com, Inc., which total $1.2 million at December 31, 1999.
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 continuing operations in two product segments:
Enterprise and Other.
The Company pursues the market for news and current awareness through one
primary line of business: the Enterprise business. The Enterprise business uses
direct selling and telesales efforts and targets large organizations and
individual websites. The Enterprise services deliver news and information to
large numbers of users within organizations through their corporate intranet or
local area networks and to destination websites as a content service for
visitors of those sites.
In addition to the Enterprise business, the Company also reports a segment
of Other, which consists of services which were phased out by the Company during
1999.
Segment data excludes information pertaining to the discontinued operations
of Individual.com, Inc. (see Note 3).
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. Noncash
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.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------------------- ---------------------
(in thousands)
<S> <C> <C>
Revenues:
Enterprise $ 17,868 $ 18,465 $ 52,869 $ 54,235
Other -- 284 -- 1,315
---------------------- ---------------------
Total revenues $ 17,868 $ 18,749 $ 52,869 $ 55,550
====================== =====================
Loss from continuing operations before mergers,
dispositions and other charges, interest and income taxes:
Enterprise $ (1,046) $ 94 $(10,697) $ (2,567)
Other -- (154) -- (226)
Noncash expenses by segment:
Enterprise $ 898 $ 806 $ 3,333 $ 2,389
Other -- 21 -- 69
</TABLE>
5. 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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands)
---------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss $ 1,128 $(3,742) $(3,650) $(9,539)
Other comprehensive income (loss):
Foreign currency adjustment (97) 29 (126) (85)
---------------------------------------------------------------
Comprehensive loss $(1,031) $(3,713) $(3,776) $(9,624)
===============================================================
</TABLE>
9
<PAGE>
6. 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 nine months of 2000 and
1999. Diluted earnings per share for the three months ended September 30, 2000
was computed by dividing net income by the diluted weighted average number of
common shares outstanding. Diluted earnings per share for the nine months ended
September 30, 2000 excludes shares issuable from the assumed exercise of
5,337,200 and 4,121,673 of stock options and warrants as of September 30, 2000
and 1999, respectively, as their effect would be antidilutive.
7. Private Placement
On August 4, 2000, the Company consummated a sale of 868,234 shares of its
common stock for an aggregate purchase price of $1,845,000. The purchase price
was reduced by fees paid in connection with the private placement in the amount
of $63,000. The sale was accomplished by a private placement of the Common Stock
to primarily officers, directors and affiliates of the Company. In connection
with the private placement, the Company also issued warrants to purchase
approximately 492,000 shares of Common Stock with an exercise price of $4.00 per
share.
10
<PAGE>
ITEM 2
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"
contained herein.
Introduction and Overview
NewsEdge Corporation (the "Company" or "NewsEdge") is a leading provider of
eContent applications for business web sites and enterprise intranets. The
Company's mission is to make news and information 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
its Enterprise business, which 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 and to destination websites as a content service for visitors of
those sites. The Company's Enterprise revenues consist primarily of subscription
fees related to the various Enterprise service offerings and eContent products
and services. 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.
Individual.com, Inc. operated the Company's single-worker news service
business unit, which derived its revenues from targeted advertising and
electronic commerce. On February 18, 2000, the Company, Office.com and
Individual.com, Inc. entered into the purchase and sale agreement providing for
the sale by the Company of all the issued and outstanding capital stock of
Individual.com, Inc. to Office.com. An initial purchase and sale of 4.0 million
of the shares occurred on February 18, 2000. The purchase and sale of the
remaining 1.0 million shares, or 20% of Individual.com, Inc. occurred on August
1, 2000. Under the terms of the amended stock purchase agreement, the Company,
which had received installment payments of $2.5 million in February 2000 and
$2.5 million in May 2000, received a $3.0 million payment in September 2000, and
the Company is due to receive a $1.0 million payment on December 26, 2000 and a
final payment of $1.0 million on February 28, 2001. In the third quarter of
2000, the Company recorded the remaining $2.0 million gain on the sale
transaction based on the sale of the remaining 20% of Individual.com, Inc. The
Company has recorded a net gain on the sale of Individual.com totaling $6.3
million in prior quarters. The Company also made payments to retain the
Individual.com workforce, which along with other transaction fees, have been
included as a reduction in the gain on the sale.
In addition to the Enterprise business, the Company also reports a segment
of "other" revenue, which consists of services which were phased out by the
Company during 1999. The Company's "other" revenues consist primarily of
subscription fees generated from sales of services. The Company now reports the
Individual.com business as discontinued operations.
Subscription agreements across all product segments are primarily 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.
11
<PAGE>
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.
On December 7, 1999, the Company entered into a purchase and sale agreement
with RoweCom, Inc., whereby RoweCom would purchase all of the outstanding shares
of common stock of the Company for approximately $227 million. The acquisition
was subject to the approval of the stockholders of both companies. On March 6,
2000, the agreement was mutually terminated by both parties. The Company
incurred costs of $2.1 million, comprised of legal, retention and acquisition
related expenses charged to operations for the nine-month period ended September
30, 2000.
In March 2000, the Company's Board of Directors approved, and in early May
2000, the Company announced a strategic expansion of its traditional business
focus. In order to capitalize on its media sources, personalization strategy,
and international sales and support infrastructure, the Company has moved into
the eContent business marketplace by offering competitive eContent applications
for business web sites and enterprise intranets. eContent is the constantly
changing information required for web-sites to encourage and foster high
frequency usage and support other web-based interactions. The Company believes
that syndicated eContent and contextual commerce (the ability to map business
content to transaction opportunities) offerings, in addition to providing
infrastructure and solution applications to the Company's clients, will allow
the Company to drive traffic and commerce on its client's web sites. The Company
incurred $2.1 million of non-recurring expenses charged to operations during the
nine months ended September 30, 2000, which relate to transitioning the Company
to its new strategic direction. These costs were comprised primarily of asset
write-offs and reserves.
Results of Operations for the Three- and Nine- Month Periods Ended
September 30, 2000 as Compared to the Three-and Nine- Month Periods Ended
September 30, 1999
Revenues
Total revenues for the three-month period ended September 30, 2000
decreased 4.3% to $17.9 million compared to $18.7 million for the same period in
1999. Total revenues for the nine months ended September 30, 2000 decreased 4.9%
to $52.9 million compared to $55.6 million during the same period in 1999. The
decrease is primarily due to declines in revenues from both the Company's
enterprise product line and other terminated lines.
Total revenue, excluding terminated lines, for the three-month period ended
September 30, 2000 decreased 3.2% to $17.9 million as compared to $18.5 million
in 1999. Total revenue, excluding terminated lines, for the nine months ended
September 30, 2000 decreased 2.4% to $52.9 million as compared to $54.2 million
for the same period in 1999. The decreases reflect disappointing new orders
rates at the end of the fourth quarter of 1999 when our sales force was
distracted by the then impending RoweCom merger transaction and the highly
competitive environments that has been affecting our enterprise business.
Other revenues consist of revenues from product lines being terminated or
de-emphasized by the Company. During the three- and nine-months ended September
30, 1999 the Company recorded $284,000 and $1.3 million in other revenues,
respectively. No amounts were recorded during the comparable period in 2000 as
these product lines have been completely terminated by the Company.
12
<PAGE>
Cost of revenues
Cost of revenues consists primarily of royalties paid to information
providers, payroll and related expense 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 for the three-month
period ended September 30, 2000 decreased to $6.7 million from $7.4 million for
the same period in 1999. Cost of revenues for the nine-month period ended
September 30, 2000 decreased to $21.9 million from $22.7 million for the same
period in 1999. As a percentage of total revenues, cost of revenues for the
three-month period ended September 30, 2000 decreased to 37.7% from 39.4% during
the same period in 1999. The percentage decrease in the three-month periods
ended September 30, 2000 and 1999 was primarily due to the impact of the higher
margin eContent business. As a percentage of total revenues, cost of revenues
for the nine-month period ended September 30, 2000 increased to 41.4% from 40.9%
for the same period in 1999. The percentage increase in the nine-month period
ended September 30, 2000 compared to the same period in 1999 was primarily due
to new fixed-price contracts with information providers.
On a sequential basis, the gross margin as a percentage of revenue increased
from 57.0% in the second quarter of 2000 to 62.3% in the third quarter of 2000,
reflecting the continued impact of a larger percentage of the Company's sales
coming from higher margin eContent business.
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, 2000 increased 8.3% to
$1.3 million as compared to $1.2 million for the same period in 1999. Customer
support expenses for the nine-month period ended September 30, 2000 increased
11% to $4.1 million as compared to $3.7 million for the same period in 1999. The
increase in customer support expenses resulted primarily from higher headcount
and related expenses. As a percentage of total revenues, customer support
expenses for the three-month period ended September 30, 2000 increased to 7.1%
from 6.3% in the same period in 1999. Excluding nonrecurring charges, customer
support expenses for the nine-month period ended September 30, 2000 were 7.7% of
total revenues. As a percentage of total revenues, customer support expenses for
the nine-month period ended September 30, 2000 increased to 7.8% from 6.7% in
the same period in 1999.
Development expenses
Development expenses consist primarily of costs associated with the design,
programming, and testing of the Company's software and services. Development
expenses for the three-month period ended September 30, 2000 increased 15% to
$2.3 million as compared to $2.0 million for the same period in 1999.
Development expenses for the nine-month period ended September 30, 2000
increased 21.5% to $7.9 million as compared to $6.5 million for the same period
in 1999. The increase for the nine-month period ended September 30, 2000 was
primarily due to $600,000 of expenses, which represent a write-off of a software
asset, related to the Company's new strategic direction, and the remainder of
the increase was due to investment in new product development related to the
Company's new strategy. As a percentage of total revenues, development expenses
for the three-month period ended September 30, 2000 increased to 12.9% from
10.7% in the same period in 1999. Excluding nonrecurring charges, development
expenses for the nine-month period ended September 30, 2000 were 13.9% of total
revenues. As a percentage of total revenues, development expenses for the
nine-month period ended September 30, 2000 increased to 15.0% from 11.7% in the
same period in 1999.
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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, 2000 increased 1.3% to $7.6 million as compared to
$7.5 million for the same period in 1999. Sales and marketing expenses for the
nine-month period ended September 30, 2000 increased 8.2 % to $25.1 million as
compared to $23.2 million for the same period in 1999. The increase for the
nine-month period ended September 30, 2000, was primarily comprised of $1.0
million of expenses related to the non-recurring charges for transitioning the
Company to its new strategic direction, which included $400,000 for a reserve
for bad debts. The remaining $900,000 of the increase in sales and marketing
expenses was primarily due to increased investments and spending in domestic and
international sales force and sales management headcount, related payroll
expenses, events and direct mail campaigns. As a percentage of total revenues,
sales and marketing expenses for the three-month period ended September 30, 2000
increased to 42.7% from 40.0% in the same period in 1999. Excluding nonrecurring
charges, sales and marketing expenses for the nine-month period ended September
30, 2000 were 45.6% of total revenues. As a percentage of total revenues, sales
and marketing expenses for the nine-month period ended September 30, 2000
increased to 47.4% from 41.8% in the same period in 1999.
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, 2000
increased $231,000 to $966,000 as compared to $735,000 for the same period in
1999. General and administrative expenses for the nine-month period ended
September 30, 2000 increased $2.8 million to $5.0 million as compared to $2.2
million for the same period in 1999. The increase for the nine-month period
ended September 30, 2000 was primarily a result of costs related to the
terminated merger agreement with RoweCom amounting to $2.1 million. The
remainder of the increase was due to approximately $500,000 of expenses related
to the nonrecurring charge for transitioning the Company to its new strategic
direction. As a percentage of total revenues, general and administrative
expenses for the three-month period ended September 30, 2000 increased to 5.4%
from 3.9% in the same period in 1999. Excluding nonrecurring charges, general
and administrative expenses for the nine-month period ended September 30, 2000
were 4.7% of total revenues. As a percentage of total revenues, general and
administrative expenses for the nine-month period ended September 30, 2000
increased to 9.4% from 3.9% in the same period in 1999.
Loss from Operations
Operating loss for the quarter ended September 30, 2000 was $1.0 million
compared to a loss of $60,000 for the same period in 1999. The $1.0 million
operating loss in the third quarter of 2000 represents approximately a 50%
sequential reduction from the $2.1 million loss in the second quarter of 2000,
which excludes one-time items. This sequential reduction is due to approximately
$200,000 sequential revenue increase and approximately $850,000 reduction in
total expenses. The expense reduction is a result of the Company's cost
reduction efforts that began as part of its transition to the eContent strategy
and the improved gross margin from the Company's eContent business.
Merger, disposition and other expenses
Merger, disposition and other related expenses for the nine-month period
ended September 30, 2000 consist of the reversal of acquisition-related reserves
no longer deemed necessary by the Company. There were no merger, disposition and
other related expenses during the nine-month period ended September 30, 1999.
Interest income and other, net
Interest income and other, net for the three- and nine-month periods ended
September 30, 2000 decreased to $284,000 and $788,000, respectively from
$389,000 and $1,277,000, respectively for the same periods in 1999. The decrease
is due to a reduction in interest income associated with lower cash and
investment balances.
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Provision for income taxes
The provision for income taxes for the three- and nine-month periods ended
September 30, 2000 increased to $127,000 and $166,000, respectively from $15,000
and $67,000, respectively for the same period in 1999. 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 of 1986, as amended. 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.
Discontinued operations
In February 2000, the Company's Board of Directors decided to sell its
ownership interest in Indivdiual.com, Inc., due to the lack of growth in
revenue, increase in expenses and ongoing funding. The Company has reported the
historical operating results of its Individual.com business segment as
discontinued operations. Revenues from the discontinued operations for the
three-and nine month periods ending September 30, 2000 were $0 and $297,000,
respectively, (for January 1, 2000 to the February 18, 2000 disposal date) as
compared to $945,000 and $3,101,000, respectively for the same periods in 1999.
Expenses from discontinued operations for the three- and nine-month periods
ended September 30, 2000, were $0 and $2.2 million, respectively (for January 1,
2000 to the February 18, 2000 sale date to Winstar) compared to $5.0 million and
$11.1 million, respectively for the same periods in 1999. See Note 3 in the
accompanying Notes to Condensed Consolidated Financial Statements.
Net Income (Loss)
The net income for the three-month period ended September 30, 2000 was $1.1
million, or $0.06 per share which compares to a net loss of $3.7 million, or
$0.22 per share during the same period in 1999. The third quarter of 2000
results reflect the favorable impact of a $2.0 million net gain relating to the
sale of the remaining 20% of Individual.com, Inc. on August 1, 2000. In
addition, the results for the quarter ended September 30, 1999 include the
operating loss from discontinued operations of approximately $4.1 million. As a
result, the Company recorded a net loss from continuing operations of $889,000
for the quarter ended September 30, 2000, or $0.05 per share, compared to net
income from continuing operations of $314,000, or $0.02 per share for the same
period in 1999. The net loss from continuing operations was primarily due to
decreased revenue in from in the third quarter of 2000 compared to the third
quarter of 1999.
The net loss from continuing operations of $889,000, in the third quarter of
2000 improved on a sequential basis by approximately 50.0% from the $1.8
million, net loss from continuing operations in the second quarter of 2000,
excluding one-time items.
The net loss for the nine-month period ended September 30, 2000 was $3.7
million, or $0.20 per share, which compares to a net loss of $9.5 million, or
$0.55 per share, during the same period in 1999. The nine-month ended September
30, 2000 results reflect the favorable impact of the $8.3 million net gain on
the sale of the Company's equity interest in Individual.com, Inc., offset by
$1.9 million of operating loss from discontinued operations for the period prior
to the sale. The net loss from continuing operations for the nine-month period
ended September 30, 2000 increased to $10.1 million, or $0.56 per share,
compared to $1.6 million, or $0.09 per share for the same period in 1999. The
increase resulted from two nonrecurring charges taken in the first nine months
of 2000 totaling $4.1 million, of which $2.0 million was related to retention
payments, transaction costs, and expenses incurred as part of the termination of
the RoweCom, Inc. acquisition. An additional $2.1 million charge relates to
asset write-offs and reserves associated with costs to be incurred in
transitioning the Company to the new strategy. Excluding all the year-to-date
nonrecurring charges, net loss from continuing operations for the nine months
ended September 30, 2000 was $6.0 million, which compares to a net loss of $1.6
million for the same period in 1999. The increase in the net loss was due to
declines in revenue and interest income in addition to increased expenses
primarily within sales and marketing and development.
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Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $19.9 million at
September 30, 2000, as compared to $20.3 million at December 31, 1999, a
decrease of $400,000.
The Company's operations used $7.7 million of cash in the nine-months ended
September 30, 2000. The use of cash in operations primarily resulted from the
Company's net operating loss for the period, of which $1.9 million was from
Individual.com, Inc. (a discontinued business). These amounts were partially
offset by depreciation and amortization expense. The Company's investing
activities provided $5.3 million of cash for the period, due primarily to the
$7.4 million net cash proceeds from the sale of Individual.com, Inc., partially
offset by approximately $2.1 million fixed asset purchases. The Company's
financing activities provided $2.1 million for the period, derived primarily
from year-to-date stock option exercises and a sale of 868,234 shares of its
common stock consummated on August 4, 2000 in which the Company received
$1,782,000. The sale was accomplished by a private placement of the Common Stock
to primarily officers, directors and affiliates of the Company. In connection
with the private placement, the Company also issued warrants to purchase
approximately 492,000 shares of Common Stock with an exercise price of $4.00 per
share.
In connection with the sale of Individual.com Inc., the Company expects to
receive an additional $2.0 million of which $1.0 million is due on December 26,
2000 and the final $1.0 million is due on February 28, 2001.
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.
On August 4, 2000, the Company consummated a sale of 868,234 shares of its
Common Stock for an aggregate purchase price of $1,845,000. The purchase price
was reduced by fees paid in connection with the private placement in the amount
of $63,000. The sale was accomplished by a private placement of the Common Stock
to primarily officers, directors and affiliates of the Company. In connection
with the private placement, the Company also issued warrants to purchase
approximately 492,000 shares of Common Stock with an exercise price of $4.00 per
share.
The Company believes that its current cash and cash equivalents, the final
proceeds from the sale of Individual.com, Inc., and the impact of expense
reduction programs will be sufficient to satisfy working capital and capital
expenditure requirements for at least the next twelve months.
Certain Factors Affecting Future Operating Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. Actual results
could differ materially as a result of a variety of factors. 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 its new eContent 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 results and financial condition.
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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, timing and renewal of contracts with corporate customers and
content providers;
. the effects of new service announcements by the Company and its
competitors;
. the performance of the Company's technology;
. 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, increase sales to new customers and penetration into
existing customers, as well as its ability to successfully implement its plans
to provide digital eContent to business web-sites. In addition, as of September
30, 2000, the Company had an accumulated deficit of approximately $124.5
million. The time required for the Company to reach profitability is highly
uncertain and there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. 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.
On May 31, 2000, the Company received a notice from the NASDAQ Stock
Market, Inc. ("NASDAQ") indicating that, as of March 31, 2000, the Company was
not in compliance with the net tangible assets maintenance standards required
for continued listing on the NASDAQ National Market System. The Company attended
a hearing before a NASDAQ panel to evaluate the Company's ability to satisfy the
maintenance standards established by NASDAQ. On August 24, 2000, the Company
received notice that the Company's stock will continue to be traded on the
NASDAQ National Market System.
Limited Operating History in eContent Business
Because the Company commenced its strategic expansion into its eContent
line of business in May 2000, it has limited financial and operating data and a
limited operating history relevant to its eContent business. Accordingly, it is
difficult to evaluate the prospects of the Company's eContent business. The
Company's eContent business model is unproven, which creates a risk that its
performance will not meet the expectations of investors and that the value of
the Company's common stock will decline.
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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 Lotus Notes and
other groupware products and electronic mail. Because the Company recently
expanded its strategic focus to target operators of commercial web-sites, demand
for its services will depend in large part on continued growth in the use of the
Internet. There are critical issues concerning the commercial use of the
Internet that remain unresolved. 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, timely development and commercialization of performance
improvements or delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity. 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.
Legal Uncertainties and Governmental Regulation of the Internet Could Inhibit
Growth of the Internet and E-Commerce
Many legal questions relating to the Internet remain unsettled and these
areas of uncertainty may be resolved in ways that damage the Company's business.
It may take years to determine whether and how existing laws governing matters
such as intellectual property, privacy, libel and taxation apply to the
Internet. In addition, new laws and regulations that address issues such as user
privacy, commerce, advertising and the characteristics of and quality of
products or services are becoming more prevalent. As use of the Internet and the
prevalence of e-commerce grow, there may be calls for further regulation such as
more stringent consumer protection laws. In addition, the Company's distribution
arrangements and customer contracts could subject it to the laws of foreign
jurisdictions in unpredictable ways. These possibilities could affect the
Company adversely in a number of ways. New regulation could make the Internet
less attractive to users, resulting in slower growth in its use and acceptance
than the Company expects. Complying with new regulations could result in
additional cost to the Company, which could reduce its margins, or it could
leave the Company at risk of potentially costly legal action. The Company may be
affected indirectly by legislation that fundamentally alters the practicality or
cost-effectiveness of utilizing the Internet, including the cost of transmitting
over various forms of network architecture, such as telephone networks or cable
systems, or the imposition of various forms of taxation on Internet-related
activities. Regulators continue to evaluate the best telecommunications policy
regarding the transmission of Internet traffic.
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.
The Company 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, and Thomson;
. eContent providers such as ScreamingMedia.com, Inc., iSyndicate and
WAVO:
. 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 web sites on the Internet;
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. 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.
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 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.
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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
and information 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:
. an arrangement between the Company and WAVO Corporation, a common
carrier communications vendor; or
. 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, 2002. 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 the 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.
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. 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. 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.
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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.
Protection and Potential Loss of the Company's 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.
Potential Litigation of Third Party Claims Concerning the Infringement of
Proprietary Right
There has been substantial litigation in the information services industry
involving intellectual property rights. Although the Company believes that it is
not infringing the intellectual property rights of others, there can be no
assurance that such claims, if asserted, would not have a material adverse
effect on the Company's business, results of operations, and financial
condition. In addition, inasmuch as the Company licenses the informational
content that is included in its services from third parties, its exposure to
copyright infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of such
licensed content. Although the Company generally obtains representations as to
the origins and ownership of such licensed informational content and generally
obtains indemnification to cover any breach of any such representations, there
can be no assurance that such representations will be accurate or that such
indemnification will provide adequate compensation for any breach of such
representations. In the future, litigation may be necessary to enforce and
protect trade secrets, copyrights and other intellectual property rights of the
Company. The Company may also be subject to litigation to defend against claimed
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. Any such litigation would be costly
and divert management's attention, either of which would have a material adverse
effect on the Company's business, results of operations, and financial
condition. Adverse determinations in such litigation could result in the loss of
the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties, and
prevent the Company from selling its services, any one of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
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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 through its services. These types of claims have been brought,
sometimes successfully, against online services as well as print publications in
the past. The Company's insurance may not adequately protect it against these
claims. In addition, the Company's proprietary software technologies enable it
to deliver content received from participating content providers only to
customers who have been authorized to access that content. The Company might
inadvertently distribute content to a customer who is not authorized to receive
it, which could subject it to a claim for damages from the information provider
or harm to its reputation in the market place.
Maintenance of Reputation and Name Recognition
The Company believes that establishing and maintaining a good reputation
and name recognition are critical for attracting and retaining customers and
employees. The Company also believes that the importance of reputation and name
recognition is increasing and will continue to increase due to the growing
number of providers of Internet services. If the Company's reputation is damaged
or if potential customers are not familiar with the Company, it may be unable to
attract new, or retain existing, customers and employees. Promotion and
enhancement of NewsEdge's name will depend largely on its success in continuing
to provide effective services. If customers do not perceive NewsEdge services to
be effective or of high quality, the Company's brand name and reputation will
suffer.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
This SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective in the fourth quarter 2000. The Company does
not expect the adoption of SAB 101 to have a material impact on the Company's
results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of
Accounting Principles Board (APB), Opinion No. 25. The interpretation clarifies
the application of APB Opinion No. 25 in certain situation, as defined. The
interpretation is effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998 but before the effective date. To the
extent that events covered by this interpretation occur during the period after
December 15, 1998 but before the effective date, the effects of applying this
interpretation would be recognized on a prospective basis from the effective
date. Accordingly, upon initial application of the final interpretation, (i) no
adjustments would be made to the financial statements for periods before the
effective date and (ii) no expense would be recognized for any additional
compensation cost measured that is attributable to periods before the effective
date. We expect that the adoption of this interpretation would not have any
effect on the accompanying financial statements.
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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 June 30, 2000, 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 non-dollar-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, 2000, the
assets and liabilities of the Company related to non-dollar-denominated
currencies was not material.
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NEWSEDGE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On August 4, 2000 the Company consummated a sale of 868,234 shares of
its common stock for an aggregate purchase price of $1,845,000 or $2.125 per
share, such amount being equal to the last reported sale price reported on the
Nasdaq National Market on August 4, 2000. In connection with the sale of its
common stock, the Company also issued a series of warrants for a total of
approximately 492,000 shares of Common Stock at an exercise price of $4.00 per
share. The common stock and warrants were issued primarily to officers,
directors and affiliates of the Company. The purchasers were (i) Regan Partners,
LP, (ii) Regan International Fund, Ltd., (iii) The Wellcome Trust, (iv) Basil
Regan , (v) Murat H. Davidson, Jr., (vi) H.G. Wellington, Custodian for the
benefit of the Murat H Davidson, Jr. Rollover IRA, (vii) Michael Kolowich,
(viii) Clifford M. Pollan, (ix) Ronald Benanto, (x) Bart Farber and (xi) Rory
Cowan. The common stock and warrants were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended. The
warrants were fully vested at the time of issuance and shall be void on
August 4, 2004.
Item 6. Exhibits and Reports Filed on Form 8-K.
6(a) Exhibits.
4.1, 10.1 - Form of Common Stock Warrant, dated August 4, 2000, issued
by the Company to certain investors and schedule of warrant holders.
10.2 - Form of Common Stock Purchase Agreement, dated August 4, 2000,
between the Company and certain investors and schedule of investors.
27.1 - Financial Data Schedule for the three-month period ended
September 30, 2000.
6(b) REPORTS ON FORM 8-K
On August 7, 2000, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission , disclosing under Item 5
that the Company consummated a sale of 868,234 shares of its common
stock on August 4, 2000 for an aggregate purchase price of
approximately $1,845,000. The sale was accomplished by a private
placement of the common stock primarily to officers, directors and
affiliates of the Company. In connection with the private placement,
the Company also issued warrants to purchase approximately 492,000
shares of Common Stock with an exercise price of $4.00 per share.
On August 8, 2000, the Company filed a Current Report on Form 8-K/A
with the Securities and Exchange Commission, disclosing under Item 5
that the Company, Office.com Inc and Individual.com, Inc., entered into
an amendment to that certain stock purchase agreement, dated as of
February 18, 2000, for the sale by the Company of its remaining 20%
interest in Individual to Office.com, Inc on August 1, 2000, rather
than February 28, 2001 as originally contemplated.
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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 14, 2000 /s/ Ronald Benanto
--------------------------------
Ronald Benanto
Vice President - Finance and CFO
25
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NEWSEDGE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
4.1, 10.1 Form of Common Stock Warrant, dated August 4, 2000, issued by the
Company to certain investors and schedule of warrant holders.
10.2 Form of Common Stock Purchase Agreement, dated August 4, 2000,
between the Company and certain investors and schedule of
investors.
27.1 Financial Data Schedule for September 30, 2000.
