-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NdSd4aecy+2dEwDyG3sOa9EkCUpK7nDmSUWTMzUYjj5+19zZFtyEwKpYovGbqvks DlCYebflxrQIp8+wng359A== 0000927016-00-001111.txt : 20000331 0000927016-00-001111.hdr.sgml : 20000331 ACCESSION NUMBER: 0000927016-00-001111 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWSEDGE CORP CENTRAL INDEX KEY: 0000858912 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 043016142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26540 FILM NUMBER: 589130 BUSINESS ADDRESS: STREET 1: 80 BLANCHARD RD CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 7812293000 MAIL ADDRESS: STREET 1: DESKTOP DATA INC STREET 2: 80 BLANCHARD RD CITY: BURLINGTON STATE: MA ZIP: 01803 FORMER COMPANY: FORMER CONFORMED NAME: DESKTOP DATA INC DATE OF NAME CHANGE: 19950629 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 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 NEWSEDGE CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 04-3016142 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 80 Blanchard Road, Burlington, Massachusetts 01803 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (781) 229-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Title of Class Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 20, 2000, was approximately $77.0 million (based upon the closing bid price of the Registrant's Common Stock on March 20, 2000, of $4.25 per share). The number of shares outstanding of the Registrant's $.01 par value Common Shares as of March 20, 2000 was 18,127,493. 1 DOCUMENTS INCORPORATED BY REFERENCE The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 1999. Portions of such proxy statement are incorporated by reference into Part III of this report. 2 PART I Item 1. Business NewsEdge Corporation (the "Company") (Nasdaq: NEWZ) is the leading independent provider of global news and current awareness solutions for business. The Company's mission is to make news valuable for business. NewsEdge services provide access to value added news over the Internet or customer Intranets. The Company aggregates and adds value to news and information from over 2,000 sources published by over one hundred global content providers. This information is customized and filtered so that users can readily find the most important, relevant stories from the overwhelming volume of daily news that is available. The Company is headquartered in Burlington, Massachusetts, with sales offices and distributors throughout North America, South America, Europe, Japan and the Middle East. The Company was formed as Desktop Data, Inc. in 1988, acquired Investment Software Systems, Inc. ("ISS") from ADP Financial Services, Inc. in January 1998, and upon the closing of the February 1998 merger (the "Merger") with Individual, Inc. ("Individual") changed its name to NewsEdge Corporation. In fiscal 1999 the Company addressed the market for news and current awareness through two primary lines of business: the Enterprise business and the Individual.com (formerly NewsPage) business. The Enterprise business involves selling the Company's services directly to large organizations. The Company's Enterprise services deliver news and information to large numbers of users within organizations through corporate Intranets or local area networks (LAN). As of December 31, 1999, the Company had over 1,400 Enterprise customers, an increase of 8% from the previous year-end, with approximately 700,000 users. These organizations included 81 of Business Week's 100 largest global companies (based upon market capitalization). The Company's Individual.com business operated Individual.com, an Internet web site that offers customized, business-oriented news and information. Through a series of strategic relationships, the Individual.com business also provided news and information for a number of other Internet web sites. During 1999, these relationships included Netscape Business Journal and Yahoo! Small Business. The Individual.com service was supported in part by targeted advertising and electronic commerce, and was offered to end users as either a free service for a basic package or as a subscription service for premium packages. On February 18, 2000, the Company, Office.com Inc. and Individual.com entered into a Stock Purchase Agreement, providing for the sale by the Company of all the issued and outstanding capital stock of Individual.com, Inc. to Office.com, Inc. The initial closing of the purchase and sale for 80% of the outstanding shares of Individual.com, Inc.'s common stock, $.01 par value (the "Shares") occurred on February 18, 2000. The closing of the remaining 20% of Individual.com's common stock shall occur no later than February 28, 2001. The aggregate purchase price for all of the outstanding shares of Individual.com's stock was $10,000,000 in cash, payable in installments on February 18, 2000, May 1, 2000, December 31, 2000 and February 28, 2001. 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 are being phased out by the Company, and which the Company expects to be immaterial beyond 2000. The Company now reports the Individual.com business as discontinued operations. Industry Background and Target Market Increasingly, businesspeople are turning to Internet technology for the news they need to be competitive and effective in their jobs. Analysts estimate that the number of users of Internet technology at work reached a worldwide total of 50 million in 1999. The analysts project that the number of business web users will grow at a rate of 25% per year through the year 2001, about doubling the number of workers using the Internet over the next three years. At the same time some businesspeople consider the Internet a free-form and undisciplined resource for business information. Single workers and their employers are often frustrated by information overload (too much information) and information overlook (missing the right information). Additionally, they are concerned about the authority of content retrieved, the lack of personalization in information alerting and monitoring and the amount of time it takes to find the information needed to be successful in their jobs. Business people who use the Internet at work are becoming more value conscious, particularly about the use of their time, while enterprises continue to seek efficient ways to leverage the large investments in computer networks, Internet connectivity and information access that they have made in recent years. 3 The NewsEdge Solution The Company's services are designed to meet the needs of businesspeople for authoritative news and current information that is delivered in a personalized, easy-to-use format that solves the twin problems of information overload and information overlook. The Company's Enterprise business has services which provide users with a concentrated briefing at the beginning of each day, distilled from the previous day's business news and customized to meet their personal interests. These services also offer periodic updates of the news during the day for monitoring specific topics of interest. For workers who are on the front lines of information analysis and decision making such as CEOs, corporate communications personnel, reporters and securities traders, the Enterprise business offers services which scroll news stories in real-time and automatically alert the user to relevant stories that meet their personal interests immediately as they break. In addition to briefing, monitoring and alerting, many of the Company's services offer a search and retrieval function to help research historical information needs. Some Company services have direct Internet links from stories of interest to certain partner information services for reference information such as company descriptions, summary financial statistics, SEC filings, stock quotations and charts and in many cases direct connections to the web sites of companies mentioned in the story. All interactive news service offerings within the Company's business line are available through common Internet browsers. Enterprise customers have the choice of accessing their news service by installing dedicated NewsEdge servers inside their firewalls on their own LAN or accessing their news service by connecting to similar servers maintained at the Company's headquarters via private connections or the public Internet itself. Three key components of the Company's competitive advantage are the NewsEdge Refinery (TM) (the "Refinery"), the Company's editorial and review staff and the Company's contractual relationships with news and information providers. These competitive advantages are leveraged across the Enterprise business line, providing end-users various levels of customized, filtered news from authoritative sources. The NewsEdge Refinery(TM) The NewsEdge Refinery(TM) filters news stories from more than 500 global news sources, eliminating redundancies while prioritizing and summarizing only the relevant stories into targeted NewsEdge Review(TM) topics ("Review Topics"). As stories are received into the Refinery from various content providers around the world in their native format, an automated software editor program is used to consistently format, tag and code the stories to allow for enhanced indexing throughout the remainder of the process. The stories are then fed from the software editor through refined filtering software (see discussion on SMART technology in "Certain Factors Affecting Future Operating Results" - Dependence on Proprietary Technology) to eliminate obvious redundancies and categorize the remaining stories into a first draft of the 1,400 Review Topics maintained by the Company. A staff of professional editors and reviewers then work with the results generated from the filtering software to further eliminate redundancies incapable of detection through the filtering software, while continuing to enhance the summarization and prioritization of the stories contained within the final delivered Review Topics. Finally, a proprietary software application distributes the resulting Review Topics to various servers for ultimate consumption by the end user of any topical news service offered by the Company. Updated stories released throughout the day are delivered to these same servers to be distributed to customers in real-time, through once a day briefings or both. These updates provide users with the ability to monitor and to be alerted to breaking news of personalized interest all day long. The portion of the Refinery that delivers continuous news operates twenty-four hours a day, seven days a week, every day of the year. NewsEdge Review Topics, Editors and Reviewers Using the automated capabilities of the Refinery plus an experienced professional editorial staff, the Company produces a news service called NewsEdge Review topics. Each night, a staff of more than two dozen business and industry experts personally reviews the news that has been electronically filtered, categorized, ranked and assembled from more than 500 global news sources into approximately 1,400 business topics and over 30,000 companies. The reviewers pick the top new stories, discarding duplicates and stories covered on previous days, and then prioritize the stories into a briefing for each of the 1,400 business topics. In the early morning hours of every business day, the Review Topics are transmitted to servers at NewsEdge and customer sites. The knowledge sets that define the Review Topics have been honed by an aggregate of more than 200 person-years of experience in news selection and review. In addition, the editors consult with customers on paid knowledge management assignments to help such customer's users make better use of their services. 4 News and Information Providers The Company has contracted with over 100 global content providers to make available through its services news and information from over 2,000 sources. News and information sources currently available on NewsEdge include newswires from AFX News Limited, The Associated Press, Inc., Bloomberg, Bridge, Dow Jones & Company, Inc., Knight-Ridder/Tribune Information Services, L.P. and Nihon Shimbun America, Inc. , as well as the text of stories in The Financial Post (Toronto), The Financial Times (London), The New York Times, London Daily Telegraph/Telegraph Group Limited and The Wall Street Journal. Also available for use within select NewsEdge services are the business sections of over 100 North American newspapers, over 30 major metropolitan business journals, periodicals such as Business Week, Forbes, Fortune, InfoWorld, MacWeek and PCWeek, newsletters such as those distributed by American Banker and Phillips Business Information Services, Inc. and international wire services and publications such as Agence France Presse, Deutsche Press-Agentur GmbH, Het Financieele Dagblad B.V. and the Economist. The majority of these news services are received by the Refinery. Stories processed through the Refinery receive the benefit of enhanced tagging and coding procedures which improve the relative ease with which customers are able to create custom profiles to capture only the stories relevant to their interests. Of the thousands of sources available for use with select Company services, approximately 500 global sources are used to create the Review Topics. Customers may purchase access to individual sources or packages of sources including individual newswires and select Review Topics. Access to individual news sources and select Review Topics may be controlled by the customer at the individual user level. Certain of the Company's news source offerings are written and distributed in their native languages such as English, Dutch, German and French. Contracts with information providers require the Company to remit royalties to information providers on a revenue share basis or related to the Company's sale of their content on a per customer or per user basis. The Company has negotiated fixed fee arrangements with certain news providers and is pursuing additional arrangements of this type with other information providers. NewsEdge Service Offerings During 1999, the Company defined and provided three categories of service offerings for news users. All three of these service offerings are Internet browser enabled. o NewsEdge Live(TM) provides and processes an up-to-the-second news broadcast for immediate scrolling news views and user alerting. NewsEdge Live version 5.1 was released to customers in October 1999. o NewsEdge Insight(TM), offered in both a web interface and a Lotus Notes environment, combines the monitoring of real-time news with briefings from NewsEdge Review topics. NewsEdge released both a notes version and a web version in the second half of 1999. o NewsEdge NewsObjects(R) is a set of news components used by customers to build their own applications; by the NewsEdge partner companies to news-enable off-the-shelf products to make them even more valuable; and by the NewsEdge Solutions Team to customize services for customers. NewsObjects is available as both ActiveX and HTML toolkits. The most recent release of NewsObjects, NewsEdge NewsObjects - ActiveX Toolkit 2.1, was made available in October 1999. In connection with the NewsEdge Live and NewsEdge Insight service offerings, a telecommunications service known as the NewsEdge Network(TM) provides a high availability frame-relay network that synchronizes the delivery of news stories to certain customer-based servers from the Company's headquarters. NewsEdge Network has sufficient bandwidth to deliver news stories with minimal delay. One of the primary advantages of this enhanced service offering is the automatic monitoring of stories received by the customer's systems and automatic retransmission of any missed stories which may have resulted from a business interruption at the customer's site. In addition to the news service offerings, the Company builds news processing software for servers to be located at both customer sites and NewsEdge hosted facilities. NewsEdge Server(TM) version 5.0 was released to customers in October 1999. 5 The Enterprise Business Strategy The Enterprise business model focuses on providing high quality service to its customers. Management believes that the personal attention of the Company's sales and support professionals is an essential ingredient to servicing the demands and varied news requirements of the largest and most sophisticated news users in the world. The Enterprise business will concentrate on the steady, predictable, accountable characteristics that give organizations confidence in NewsEdge as their business partner. It is management's goal to have the Enterprise business reach profitability and to grow it steadily and profitably, gaining share in the Enterprise market. Business Detail The Company sells Enterprise services directly to corporations, financial institutions, non-profit organizations and government agencies via its own Enterprise sales organization that included over 100 employees at the end of 1999. The Company maintains sales offices and distributors in North America, South America, Europe, Asia and the Middle East to be close to its customers and to provide regional field engineering support. To further increase the value of the Company's Enterprise services to customers, the Company offers application consulting through a professional services group. Furthermore, the Company offers knowledge management services to assist customers in defining their business information needs and then structuring their NewsEdge news service to achieve the highest level of satisfaction. At the end of 1999, the Company counted more than 1,400 enterprises as customers. This represents a 8% increase over the last year. Included in this group of NewsEdge customers are 81 of the 100 largest global companies listed by Business Week, ranked by market capitalization. By December 31, 1999, these Enterprise customers had authorized more than 700,000 NewsEdge users within their organizations, representing almost a 20% growth over December 31, 1998. There was a continued shift towards the Company's Internet technology-enabled services during 1999. It is management's belief that the Internet enablement was a significant ingredient in achieving increased numbers of users per customer. Management estimates that while approximately 75% of enterprise users of NewsEdge services were Internet enabled at the end of 1998, by the end of 1999 the Internet enabled percentage was approximately 100%. The Individual.com Business During 1999 the Individual.com business was targeted at single workers. It operated Individual.com, an Internet web site that offered customized, business-oriented news and information. Through a series of strategic relations, the Individual.com business also provided news and information for a number of other Internet web sites. During 1999, these relationships included Netscape Business Journal and Yahoo! Small Business. Pursuant to that certain Stock Purchase Agreement, the Company sold Individual.com to Office.com Inc. on February 18, 2000. News Operations and Support The NewsEdge Refinery(TM) is staffed around the clock every day of the year. This staff includes operators, technicians and systems engineers who monitor, maintain and repair NewsEdge capabilities and contact news providers and telecommunication vendors when services need attention. The goal is continuous, real-time news services for customers. The Company provides several layers of customer support. While every Enterprise customer has a dedicated account executive and account manager, the Company's multi-tiered customer support organization also provides additional help for system administrators with questions and problems that are more technical in nature. The Company not only provides specialist help via 1-800 telephone support, but also has field engineers available for travel to customer locations for situations that require on-site support. Finally, in special circumstances, high-attention teams are assembled for customer problems that are particularly complex. There were approximately 102 employees involved in news operations and support at the end of 1999. 6 Development The Company recognizes that the continued enhancement of its services and the extension of its content offerings are critical to obtaining new customers and to maintaining and growing sales from existing customers. Since its inception, the Company has made substantial investments in research and development, issuing frequent new releases of its various product offerings. The NewsEdge software has been developed by the Company's internal development and quality assurance staff. Product upgrades are included as part of the annual subscription fees paid by customers. Development efforts have also been focused on supporting additional desktop operating platforms and LAN configurations, expanding the scalability of the NewsEdge server, managing the increasing number of news sources, increasing storage for news history, advancing the ease of programmatic access through support for ActiveX, Java and HTML components, and providing enhanced precision and functionality for user searches and profiles. The Company's development expenses were $8.5 million, $10.7 million and $10.7 million in 1999, 1998 and 1997, respectively. The NewsEdge server is developed in modules according to the primary NewsEdge functions: a news collection and alerting module; a news database module for storing and retrieving the full text of the news stories; a network module adaptable to the network protocols installed at customer sites; and a module which allows customer administrators to configure newswire access and monitor NewsEdge activity. The Company believes its decision to manage its own software development internally creates a competitive advantage for the Company by improving speed and flexibility in meeting market and technology changes. An important goal of the NewsEdge development staff is the continuing enhancement of the Refinery, particularly, its coding and tagging capabilities and its ability to manage an increasing number of newswires offered by the Company. The Company's marketing personnel identify newswires to be added to the NewsEdge offerings based on customer feedback and negotiate contracts with news providers. The newswires are then integrated with NewsEdge services by development and support personnel. The Company is currently seeking to expand its content offerings with additional industry-specific information to increase sales to customers in new vertical markets and with additional international news sources to increase the availability of global, 24 -hours a day news coverage. Sales and Marketing The Company's Enterprise business employs over 100 sales and sales management professionals who are experts at helping large organizations derive value from the Company's services. Enterprise salespeople, who are located in offices in major cities created with the intention of being closer to customers, call directly on knowledge managers, information technology professionals as well as other senior management of customer and target companies. 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: o large, well-established news and information providers such as Dow Jones, Lexis/Nexis, Pearson and Thomson; o market data services companies such as Bloomberg and Bridge; o 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; o large providers of LAN-based software systems such as Lotus/IBM, Netscape and Microsoft, which could, in the future, ally with competing news and information providers; and o 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. 7 The Company believes that its services are differentiated from the news and system services offered by large news and systems providers because of the Company's ability to deliver news from many different, competing providers. These services are delivered on an enterprise-wide basis directly to LAN-connected personal computers, and customized to meet the needs of each individual user at a relatively low cost per user. Although they may compete with the Company in some respects, the Company attempts to establish cooperative, mutually beneficial relationships with large information or systems providers, many of whom are information providers enjoying significant revenue streams from distribution through the Company's services, customers, or current and potential joint marketing partners. Intellectual Property The Company relies upon a combination of copyright, trademark and trade secret laws and license agreements to establish and protect proprietary rights in its technology. The NewsEdge software is licensed to customers on a non-exclusive basis pursuant to license agreements containing provisions prohibiting unauthorized use, copying and transfer of the licensed program. The source code for the Company's software is protected both as a trade secret and as an unpublished copyrighted work. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's software or technology without authorization or to develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The proprietary SMART filtering software, which is used as the filtering engine within the Refinery, is licensed from Cornell Research Foundations, Inc. ("Cornell") under the terms of such license. The Company had exclusive worldwide rights in the SMART software until February 1999, at which point the license continued but the Company's exclusivity to the technology terminated. There can be no assurance that Cornell has not or will not license the SMART technology to a third-party, or terminate the license upon any material breach of the agreement which remains uncured for 60 days after notice of such breach. Because the software development industry is characterized by rapid technological change, the Company believes that factors such as the technological and creative skills of its personnel, new software developments, frequent software enhancements, name recognition and reliable maintenance are more important to establishing and maintaining a technology leadership position than the various legal protections of its technology. The Company believes that its software, trademarks and other proprietary rights do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert such infringement by the Company with respect to current or future software or services. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause software release delays or might require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company. Employees As of December 31, 1999, the Company had 350 full-time employees within its continuing operations, consisting of 154 employees in sales and marketing, 102 employees in editorial and news operations (the costs of which are included in cost of revenues) and customer support, 63 employees in development and 31 employees in general administration. The Company's employees are not represented by any collective bargaining organization. The Company has never experienced a work stoppage and considers its relations with employees to be good. 8 Recent Developments On December 7, 1999, the Company, RoweCom Inc., ("RoweCom"), and RoweCom Merger Corporation, a wholly-owned subsidiary of RoweCom ("Merger Sub") entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), providing for the merger of Merger Sub with and into the Company, after which the separate corporate existence of Merger Sub would cease and the Company would continue as the surviving corporation and a wholly-owned subsidiary of RoweCom. On March 6, 2000 the Company, RoweCom and Merger Sub agreed to terminate the Merger Agreement, by mutual consent. At the same time, the Company and RoweCom entered into an agreement to combine and jointly market to business customers the companies' respective catalog. As a result of this joint marketing agreement, the Company will provide all on-line news and current awareness services ordered by either parties' business clients and RoweCom will provide all magazine, journal, books and newspaper subscriptions ordered by either parties' business clients. Users may access the Company's and RoweCom's catalogs by means of links found in either of their web sites. On March 15, 2000, the Company further announced the resignation of Donald L. McLagan as Chief Executive Officer of the Company and its subsidiaries, NewsEdge Canada Corporation, NewsEdge Securities Corporation and NewsEdge, K.K., effective on March 14, 2000. In addition, Mr. McLagan resigned as a director of the Company, effective on March 14, 2000. The Board of Directors of the Company the appointed Clifford M. Pollan, previously the Company's President and Chief Operating Officer, as Chief Executive Officer and member of the Board of Directors. The Company also announced that it had received resignations dated March 14, 2000 from two members of the Board of Directors, Ms. Ellen Carnahan and Ms. June Rokoff, each effective immediately. Mr. Rory Cowan, a current member of the Board of Directors, was appointed Chairman of the Board. Basil Regan and Peter Woodward, each of the investment firm Regan Fund Management Ltd., a stockholder of the Company, were concurrently appointed members of the Board of Directors. A third member of the Board of Directors representing Regan Fund Management Ltd. will be nominated to an expanded Board of Directors at the next annual meeting of the stockholders of the Company. Item 2. Properties The Company's corporate headquarters are located in Burlington, Massachusetts. As of December 31, 1999, the Company leased approximately 40,000 square feet under a lease expiring in May 2003 and an additional 42,000 square feet in a separate office building under a lease expiring in January 2001. The Company also leases additional facilities and offices for sales and customer service and support in New York, New Jersey, Washington D.C., Illinois, California, Toronto, Canada, London, England, Geneva, Switzerland and Tokyo. The Company believes that its existing facilities and offices, along with additional alternative space available to it, are adequate to meet its requirements for the foreseeable future. Item 3. Legal Proceedings The Company is not currently a party to any other legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company's results of operations or financial position. From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of 1999. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company effected its initial public offering of its Common Stock on August 11, 1995 at a price to the public of $15.00 per share. As of March 20, 2000, there were approximately 172 holders of record of the Company's Common Stock. The Company's Common Stock is listed for quotation on the Nasdaq National Market under the symbol "NEWZ." Based on the Nasdaq National Market daily closing price, the high and low bid prices of shares of Company Common Stock for each quarter for the past two years are shown below. The quotations represent interdealer quotations, without adjustments for retail markups, markdowns, or commissions, and may not necessarily represent actual transactions.
Nasdaq National Market Daily Closing Price: Quarter Ended High Low - -------------------------------------------------------------------------------- March 31, 1998 $14.13 $7.84 June 30, 1998 17.13 8.75 September 30, 1998 12.25 6.38 December 31, 1998 11.63 4.63 March 31, 1999 14.25 8.00 June 30, 1999 11.50 6.63 September 30, 1999 9.50 6.50 December 31, 1999 12.88 8.31
The Company has not paid any cash dividends on its Common Stock and currently intends to retain any future earnings for use in its business. Accordingly, the Company does not anticipate that any cash dividends will be declared or paid on the common stock in the foreseeable future. On November 4, 1999, the Company issued a warrant ("the Warrant") for 50,000 shares of the Company's Common Stock at an exercise price of $7.125 per share to one of the Company's investment advisors as part of an agreement for services. The Warrant was issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The Warrant was fully vested at the time of issuance and shall be void on November 4, 2001. The estimated fair value of the Warrant totaled $303,000, and has been recorded as a charge to general and administrative expenses in 1999. 10 Item 6. Selected Consolidated Financial Data
Year Ended December 31, -------------------------------------------------------------- Statement of Operations Data: 1999 1998 1997 1996 1995 ------------- ------------ ------------ ----------- ---------- (in thousands) Total revenues $ 74,247 $ 73,180 $ 71,669 $ 58,969 $ 41,757 --------- --------- --------- --------- --------- Cost of revenues 29,838 29,830 27,785 21,158 15,065 Customer support expenses 4,903 5,383 4,832 2,901 2,315 Development expenses 8,541 10,673 10,666 7,888 5,558 Sales and marketing expenses 30,761 28,611 26,741 20,881 17,759 General and administrative expenses 2,812 4,024 5,018 6,128 4,274 Mergers, dispositions and other charges - 11,094 5,084 39,422 - --------- --------- --------- --------- --------- Total costs and expenses 76,855 89,615 80,126 98,378 44,971 --------- --------- --------- --------- --------- Loss from continuing operations (2,608) (16,435) (8,457) (39,409) (3,214) Interest income and other, net 1,541 2,308 2,983 1,672 653 --------- --------- --------- --------- --------- Loss from continuing operations before provision for income taxes (1,067) (14,127) (5,474) (37,737) (2,561) Provision for income taxes 83 166 1,297 614 183 --------- --------- --------- --------- --------- Loss from continuing operations (1,150) (14,293) (6,771) (38,351) (2,744) Accretion of dividends on preferred stock -- -- -- (463) (1,743) Discount on redemption of preferred stock -- -- -- -- 1,232 --------- --------- --------- --------- --------- Loss from continuing operations to common stockholders (1,150) (14,293) (6,771) (38,814) (3,255) --------- --------- --------- --------- --------- Loss from discontinued operations (15,843) (2,935) (9,090) (7,505) (1,321) --------- --------- --------- --------- --------- Net loss $ (16,993) $ (17,228) $ (15,861) $ (46,319) $ (4,576) ========= ========= ========= ========= ========= Basis and diluted net loss per common share: (1) Continuing operations $ (0.07) $ (0.83) $ (0.41) $ (2.61) $ (0.38) Discontinued operations (0.91) (0.17) (0.54) (0.51) (0.15) --------- --------- --------- --------- --------- Total basic and diluted net loss per share $ (0.98) $ (1.00) $ (0.95) $ (3.12) $ (0.53) ========= ========= ========= ========= ========= As of December 31, --------------------------------------------------------------- Balance Sheet Data: 1999 1998 1997 1996 1995 ------------- ------------ ------------- ---------- ----------- Cash and cash equivalents $ 20,278 $ 37,808 $ 35,175 $ 10,735 $ 19,301 Working capital (deficit) (4,632) 10,294 29,530 35,303 32,815 Total assets 47,854 69,154 92,246 97,644 67,239 Senior subordinated notes -- -- -- -- 10,000 Redeemable preferred stock -- -- -- -- 23,999 Total stockholders' equity (deficit) 6,711 19,249 38,445 51,531 3,394
- -------------------------------------------------------------------------------- (1) Calculated on the basis described in Note 4 of Notes to Consolidated Financial Statements. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Except for the historical information contained herein, this Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items, (i) the Company's growth strategies; (ii) anticipated trends in the Company's business; (iii) the Company's ability to expand its service offerings; and (iv) the Company's ability to satisfy working capital requirements. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of a number of factors including, but not limited to, those factors described in "Certain Factors Affecting Future Operating Results" contained in the Company's Annual Report on Form 10-K for the fiscal year ended 1999. Introduction and Overview NewsEdge Corporation is the leading independent provider of global news and current awareness solutions for business. The Company's mission is to make news valuable for business. NewsEdge services provide access to value added news over the Internet or customer Intranets. The Company aggregates and adds value to news and information from over 2,000 sources published by over one hundred global content providers. This information is customized and filtered so that users can readily find the most important, relevant stories from the overwhelming volume of daily news that is available. The market for news and current awareness is pursued by the Company through 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. As of December 31, 1999, the Company had over 1,400 Enterprise customers, up 8% from the previous year-end, with approximately 700,000 users. 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. 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, Inc. and Individual.com, Inc. entered into the Stock Purchase 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 4,000,000 of the shares occurred on February 18, 2000. The purchase and sale of the remaining 1,000,000 shares shall occur no later than February 28, 2001. Pursuant to the Stock Purchase Agreement, the aggregate purchase price for the total 5,000,000 shares was $10,000,000 in cash, payable in installments on February 18, 2000, May 1, 2000, December 31, 2000 and February 28, 2000. The Company estimates a gain on the sale of Individual.com, Inc. totaling approximately $7,600,000 before applicable income taxes. The Company will record $5,600,000 of the gain in February 2000 and the remainder in February 2001, as each of the two closings occur. In addition to the Enterprise business, the Company also reports a segment of "other" revenue, which consists of services that are being phased out by the Company, and that the Company expects to be immaterial beyond 1999. The Company's "other" revenues consist primarily of subscription fees generated from sales of services. Subscription agreements across all product segments are generally for an initial term of twelve months, payable in advance, and are automatically renewable for successive one-year periods unless the customer delivers notice of termination prior to the expiration date of the then current agreement. Subscription revenues associated with these agreements are recognized ratably over the subscription term, beginning upon installation of the service. Accordingly, a substantial portion of the Company's revenues is recorded as deferred revenue. Certain newswires offered by the Company for use within its services are purchased by the customer directly from the news provider and payments are made directly from the NewsEdge customer to the provider. For some of these newswires, the Company receives royalty revenue based on payments made by the customer to the news provider. For other newswires that are resold by the Company to the NewsEdge customer, the Company bills the customer for the newswire directly and then pays a royalty to the news provider. Such royalty expenses are included in the Company's cost of revenues. 12 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 Individual changed its name to NewsEdge Corporation. Results of Operations The following table sets forth certain consolidated financial data as a percentage of total revenues:
Percentage of Total Revenues Year Ended December 31, ----------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Enterprise 98.2% 92.1% 82.2% Other 1.8 7.9 17.8 ------------- ------------- ------------- Total revenues 100.0 100.0 100.0 Cost of revenues 40.2 40.8 38.8 Customer support expenses 6.6 7.4 6.7 Development expenses 11.5 14.6 14.9 Sales and marketing expenses 41.4 39.1 37.3 General and administrative expenses 3.8 5.5 7.0 Mergers, dispositions and other expenses -- 15.1 7.1 ------------- ------------- ------------- Total costs and expenses 103.5 122.5 111.8 ------------- ------------- ------------- Loss from continuing operations (3.5) (22.5) (11.8) Interest income and other, net 2.1 3.2 4.2 ------------- ------------- ------------- Loss from continuing operations before provision for income taxes (1.4) (19.3) (7.6) Provision for income taxes 0.1 0.2 1.8 ------------- ------------- ------------- Net loss from continuing operations (1.5) (19.5) (9.4) Loss from discontinued operations of Individual.com Inc., net of taxes (21.3) (4.0) (12.7) ------------- ------------- ------------- Net loss (22.9)% (23.5)% (22.1)% ============= ============= =============
Year Ended December 31, 1999, as Compared to the Year Ended December 31, 1998 Revenues Total revenues for the year ended December 31, 1999 increased 1.5% to $74.2 million compared to $73.2 million for the same period in 1998. This increase was due to growth in revenues from the Company's enterprise product line offset by a decline in other revenues. Other revenues consist of revenues from product lines being terminated or de-emphasized by the Company. Enterprise revenue for the year ended December 31, 1999 increased 8.2% to $72.9 million as compared to $67.4 million in 1998. The increase in enterprise revenue was due primarily to an increase in subscription revenues from new customers and the retention and growth of revenues from existing customers. Other revenues decreased 77.3% to $1.3 million as compared to $5.8 million in 1998. The decrease in other revenues was due primarily to the spin off of the Clarinet business unit effective March 31, 1998 and the continued overall reduced sales effort directed at business lines that have been terminated or de-emphasized by the Company. 13 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. While cost of revenues for both periods remained flat at $29.8 million, a $1.8 million decline from terminated product lines was offset by a similar dollar increase within Enterprise, commensurate with increased revenue. Cost of revenues as a percentage of total revenues for the year ended December 31, 1999 decreased to 40.2% from 40.8%, 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. Customer support expenses Customer support expenses consist primarily of costs associated with technical support of the Company's installed base of customers. Customer support expenses for the year ended December 31, 1999 decreased 8.9% to $4.9 million as compared to $5.4 million for the same period in 1998. This $500,000 decrease was attributable to the terminated product lines business and was primarily due to reductions in headcount and related payroll expenses. As a percentage of total revenues, customer support expenses for the year ended December 31, 1999 decreased to 6.6% from 7.4% for the same period 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 year ended December 31, 1999 decreased $2.2 million, or 20.0%, to $8.5 million as compared to $10.7 million for the same period in 1998. The decrease was primarily due to $800,000 saved from the terminated product lines and approximately $900,000 from a decrease in Enterprise business development efforts in 1999 versus 1998. As a percentage of total revenues, development expenses for the year ended December 31, 1999 decreased to 11.5% from 14.6% for the same period 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 year ended December 31, 1999 increased $2.2 million, or 7.5%, to $30.8 million as compared to $28.6 million for the same period in 1998. The $2.2 million increase resulted primarily from higher sales force and sales management headcount and related payroll expenses. As a percentage of total revenues, sales and marketing expenses for the year ended December 31, 1999 increased to 41.4% from 39.1% for the same period in 1998. General and administrative expenses General and administrative expenses consist primarily of expenses for finance, office operations, administration and general management activities, including legal, accounting and other professional fees. General and administrative expenses for the year ended December 31, 1999 decreased $1.2 million, or 30.2%, to $2.8 million as compared to $4.0 million for the same period in 1998. The $1.2 million decrease in expenses was due primarily to a $500,000 in savings associated with the terminated product lines as well as reductions in headcount and related payroll expenses. As a percentage of total revenues, general and administrative expenses for the year ended December 31, 1999 decreased to 3.8% from 5.5% 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 and dispositions. For the year ended December 31, 1998, these costs, totaling $11.1 million, related primarily to costs associated with the Merger with Individual, the purchase of ISS, the spin off of the Clarinet business unit, the severance and benefits for terminated employees and the cost of terminating and settling certain contractual obligations of the combined companies. Interest income (expense), net Interest income (expense), net for the year ended December 31, 1999, decreased to $1.5 million from $2.3 million in 1998, due to a reduction in interest income associated with lower cash and investment balances. 14 Provision for income taxes The provision for income taxes for the year ended December 31, 1999 decreased to $83,000 from $166,000 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. Discontinued operations The Company has reported the historical operating results of its Individual.com business segment as discontinued operations. Revenues from discontinued operations were $4.1 million in 1999 and $6.4 million in 1998. Revenues decreased as a result of the decision by new management to convert from a mix of subscription fees and advertising revenue model to a advertising revenue only model. Expenses from discontinued operations were $19.9 million in 1999 and $9.3 million in 1998. The increase in expenses represented the Company's significant accelerated investment to evaluate the viability and market value of the Individual.com business. Due to the lack of growth in revenue, increase in expenses and ongoing funding, the Company's board of directors decided to sell its ownership interest in Individual.com, Inc. in February 2000. See Note 3 in the accompanying Notes to Consolidated Financial Statements. Year Ended December 31, 1998, as Compared to the Year Ended December 31, 1997 Revenues Total revenues for the year ended December 31, 1998 increased 2.1% to $73.2 million compared to $71.7 million in 1997. This increase was due primarily to growth in revenues from the Company's enterprise product lines offset by a decline in other revenues. Other revenues consist of revenues from product lines being terminated or de-emphasized by the Company. Enterprise revenue for the year ended December 31, 1998 increased 14.3% to $67.4 million as compared to $58.9 million in 1997. The increase in enterprise revenue was due primarily to an increase in subscription revenues from new customers and the retention and growth of revenues from existing customers. Other revenues decreased 54.4% to $5.8 million as compared to $12.7 million in 1997. The decrease in other revenues was due primarily to the spin off of the Clarinet business unit effective March 31, 1998 and an overall reduced sales effort directed at business lines that have been terminated or are being de-emphasized by the Company. Cost of revenues Cost of revenues as a percentage of total revenues for the year ended December 31, 1998 increased to 40.8% from 38.8% in 1997. The percentage increase in cost of revenues was due primarily to increased royalties paid to third-party information providers. Customer support expenses Customer support expenses for the year ended December 31, 1998 increased 11.4% to $5.4 million as compared to $4.8 million in 1997. This $600,000 increase resulted primarily from higher payroll costs needed to attract and retain qualified personnel to support the Company's growing customer base. As a percentage of total revenues, customer support expenses for the year ended December 31, 1998 increased to 7.4% from 6.7% in 1997. Development expenses Development expenses for the years ended December 31, 1998 and 1997 were $10.7 million. A decrease of approximately $870,000 in development expenses resulted from reductions in headcount and related expenses associated with the spin off of the Clarinet business unit effective March 31, 1998 and the discontinuation of other development efforts previously maintained by Individual. Offsetting this decline was higher payroll costs related to increases in headcount associated with ongoing development efforts. As a percentage of total revenues, development expenses for the year ended December 31, 1998 decreased to 14.6% from 14.9% in 1997. 15 Sales and marketing expenses Sales and marketing expenses for the year ended December 31, 1998 increased 7.0% to $28.6 million as compared to $26.7 million in 1997. The $1.9 million increase is due primarily to increases in payroll and commission costs associated with increased headcount and sales in the enterprise business. Additionally, twelve months of sales and marketing costs for the Clarinet business unit were included as part of total sales and marketing costs for 1997, but only three months were included in 1998 as a result of the spin off of the Clarinet business unit effective March 31, 1998. As a percentage of total revenues, sales and marketing expenses for the year ended December 31, 1998 increased to 39.1% from 37.3% in 1997. General and administrative expenses General and administrative expenses for the year ended December 31, 1998 decreased 19.8% to $4.0 million as compared to $5.0 million in 1997. The decrease in general and administrative expenses was due primarily to a reduction in professional fees associated with special business development efforts and a reduction in senior management following the Merger. Additionally, twelve months of general and administrative costs for the Clarinet business unit were included as part of total general and administrative costs for 1997, but only three months were included in 1998 as a result of the spin out of the Clarinet business unit effective March 31, 1998. As a percentage of total revenues, general and administrative expenses for the year ended December 31, 1998 decreased to 5.5% from 7.0% in 1997. Merger, disposition and other charges Merger, disposition and other charges consist primarily of the nonrecurring costs related to the Company's business combinations. For the year ended December 31, 1998, these costs, totaling $11.1 million, related primarily to costs associated with the Merger with Individual, the purchase of ISS, the spin off of the Clarinet business unit, the severance and benefits for terminated employees and the cost of terminating and settling certain contractual obligations of the combined companies. For the year ended December 31, 1997, merger, disposition and other charges, totaling $5.1 million related primarily to product development expenses, goodwill amortization and other charges associated with companies previously acquired by Individual. Interest income (expense), net Interest income (expense), net for the year ended December 31, 1998, decreased to $2.3 million from $3.0 million for the same period in 1997, due to a reduction in interest income associated with lower cash and investment balances. Provision for income taxes The provision for income taxes for the year ended December 31, 1998 decreased to $166,000 from $1.3 million in 1997. The higher tax provision for the year ended December 31, 1997, related to the tax provision generated from the profitable operations of Desktop Data when operating as a separate entity. Components of the 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. Discontinued operations Revenues from the discontinued operations of Individual.com, Inc. were $6.4 million in 1998 and $5.8 million in 1997. The increase in revenue resulted primarily from higher advertising revenue offset by a decline in subscription revenue. Expenses from the discontinued operations of Individual.com, Inc. were $9.3 million in 1998 and $14.9 million in 1997. The decrease in expenses represented significantly lower sales and marketing costs. 16 Liquidity and Capital Resources The Company's cash, cash equivalents and investments totaled $20.3 million at December 31, 1999, as compared to $41.6 million at December 31, 1998, a decrease of $21.3 million. The Company's operations used $19.0 million, $8.5 million, and $5.7 million of cash in 1999, 1998, and 1997, respectively. The use of cash in operations during 1999 primarily resulted from the Company's operating losses, of which $15.8 million in operating losses were from the Individual.com, Inc. discontinued business. The continuing Enterprise core business of the Company accounted for only $2.2 million of the Company's consolidated operating loss and generated a positive $1.1 million in operating earnings before depreciation, amortization and interest in 1999. The Company's investing activities used $473,000 and $404,000 in 1999 and 1998, respectively, and provided $17.1 million in 1997. The net use of cash in 1999 resulted primarily from $4.1 million of capital expenditures partially offset by $3.8 million in proceeds resulting from the decrease in short-term investment balances caused by the reinvestment of cash from maturing investments into new investments with an original maturity of less than three months (i.e. cash equivalents). The Company's financing activities provided $2.1 million, $798,000 and $1.6 million in 1999, 1998, and 1997, respectively. Cash from financing activities was derived primarily from employee stock option exercises (including tax benefits) and purchases under the employee stock purchase plan. In 1999, the Company used $700,000 of its proceeds received from employee stock purchases to re-acquire 87,000 shares of its own stock in the open market. In addition to the December 31, 1999 year ending cash balance of $20.3 million, the Company expects to receive in 2000 $8.0 million of the $10.0 million sale proceeds from Individual.com, Inc. divestiture, $2.5 million of which was received in February 2000 and the remainder to be received no later than December 31, 2000. The Company continues to investigate the possibility of investments in or acquisitions of complementary businesses, services or technologies, although the Company has not entered into any commitments or negotiations with respect to any such transactions. The Company believes that its current cash and cash equivalents, investment balances and funds anticipated to be generated from operations will be sufficient to satisfy working capital and capital expenditure requirements for at least the next twelve months primarily as a result of the divestiture of the Individual.com, Inc. business which lost $15.8 million in 1999. 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 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. 17 Fluctuations in Quarterly Results The Company's quarterly operating results may fluctuate significantly in the future depending on factors such as demand for its services, changes in service mix, the size and timing of new and renewal subscriptions from corporate customers, advertising revenue levels, the effects of new service announcements by the Company and its competitors, the ability of the Company to develop, market and introduce new and enhanced versions of its services on a timely basis and the level of product and price competition. A substantial portion of the Company's cost of revenue, which consists principally of fees payable to information providers, communications costs and personnel expenses, is relatively fixed in nature. The operating expense levels of the Company are based, in significant part, on their expectations of future revenue. If quarterly revenues are below management's expectations, results of operations would be adversely affected because a relatively small amount of the Company's costs and expenses will vary with its revenues. Future Operating Results Uncertain The Company's ability to increase its revenues will depend upon its ability to expand its sales force, to increase sales to new customers as well as increase penetration into existing customers. In addition, as of December 31, 1999, the Company had an accumulated deficit of approximately $120.8 million. The time required for the Company to reach profitability is highly uncertain and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. As a result, it is possible that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Although the Company experienced growth in revenues in recent years, there can be no assurance that, in the future, the Company will sustain revenue growth or be profitable on a quarterly or annual basis. 18 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, 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 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. 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: o large, well-established news and information providers such as Dow Jones, Lexis/Nexis, Pearson, and Thomson; o market data services companies such as ADP, Bloomberg and Bridge; o 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; o 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 o 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. 19 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. 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 three vehicles. In these cases, the Company's role is to arrange communications between the news provider and the NewsEdge customer's server. For sources which do not have their own broadcast communications capability, news and information is delivered to the Company news consolidation facility, where it is reformatted for broadcast to NewsEdge servers and retransmitted to customers through 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. 20 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 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 for any losses that it may incur because of any failures in its system or interruptions in delivery 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 operations. 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 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. 21 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. Recent Accounting Pronouncements In June 1998, the Financial 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 heding 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. 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. 22 Item 7a. Quantitative and Qualitative Disclosures About Market Risk The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. As of December 31, 1999, the Company did not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk The Company maintains a short-term investment portfolio consisting of U.S. treasury notes, U.S. Government agencies and corporate bonds. These held-to-maturity securities are subject to interest rate risk and will fall in value if market interest rates increase. The Company has the ability to hold its fixed income investments until maturity, and therefore the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its securities portfolio. Foreign Currency Exchange Risk As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial results. Historically, the Company's primary exposures have been related to nondollar-denominated operating expenses in Canada. The majority of Company sales are denominated in U.S. dollars. The Company has not determined what impact, if any, the introduction of the Euro will have on its foreign exchange exposure. The Company is prepared to hedge against fluctuations in the Euro if this exposure becomes material. As of December 31, 1999, the assets and liabilities of the Company related to nondollar-denominated currencies was not material. 23 Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To NewsEdge Corporation: We have audited the accompanying consolidated balance sheets of NewsEdge Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1997 financial statements of Individual, Inc., a company acquired during 1998 in a transaction accounted for as a pooling of interests, as discussed in Note 6. Such statements are included in the consolidated financial statements of NewsEdge Corporation and reflect total revenues of approximately 46 percent in 1997 of the related consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Individual, Inc., is based solely upon the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of NewsEdge Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts February 18, 2000 (except with respect to the matter discussed in Note 1, as to which the date is March 7, 2000) 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Individual, Inc: We have audited the statements of operations, stockholders' equity (deficit) and cash flows of Individual, Inc. for the year ended December 31, 1997, not presented separately herein. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of Individual, Inc.'s operations and its cash flows for the year ended December 31, 1997 in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP Boston, Massachusetts January 30, 1998 (except as to the information in Note 15, for which the date is February 27, 1998) 25 NEWSEDGE CORPORATION and subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, ------------------------ 1999 1998 ------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents ...................... $ 20,278 $ 37,808 Short-term investments ......................... -- 3,782 Accounts receivable, net of allowance for doubtful accounts of $306 at 1999 and 1998 ............................. 11,280 13,112 Prepaid expenses and deposits .................. 5,132 5,037 --------- --------- Total current assets .................... 36,690 59,739 --------- --------- PROPERTY AND EQUIPMENT, AT COST: Computer equipment ............................. 21,418 17,534 Furniture and fixtures ......................... 1,273 1,116 Leasehold improvements ......................... 1,107 842 Equipment under capital leases ................. 612 852 --------- --------- 24,410 20,344 Accumulated depreciation ...................... (15,012) (11,206) --------- --------- 9,398 9,138 --------- --------- OTHER ASSETS ..................................... 1,766 277 --------- --------- $ 47,854 $ 69,154 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................... $ 2,869 $ 2,864 Accrued expenses ............................... 14,837 17,853 Deferred revenue, current ...................... 23,010 27,837 Current portion of long-term obligations ....... 303 891 --------- --------- Total current liabilities ............... 41,019 49,445 --------- --------- LONG-TERM OBLIGATIONS, LESS CURRENT PORTION ...... -- 303 --------- --------- DEFERRED REVENUE, LESS CURRENT PORTION ........... 124 157 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY: Common stock, $0.01 par value-- Authorized - 35,000 shares; Issued--18.107 shares at 1999 and 17,522 shares at 1998, Outstanding--17,625 shares at 1999 and 17,177 shares at 1998 ..................... 181 175 Additional paid-in capital ....................... 130,136 124,890 Cumulative translation adjustment ................ (58) 63 Accumulated deficit .............................. (120,822) (103,828) Treasury stock, at cost; 432 shares in 1999 and 345 shares in 1998 ............................ (2,726) (2,051) --------- --------- Total stockholders' equity .............. 6,711 19,249 --------- --------- $ 47,854 $ 69,154 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 26 NEWSEDGE CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended December 31, ------------------------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES $ 74,247 $ 73,180 $ 71,669 COSTS AND EXPENSES: Cost of revenues 29,838 29,830 27,785 Customer support expenses 4,903 5,383 4,832 Development expenses 8,541 10,673 10,666 Sales and marketing expenses 30,761 28,611 26,741 General and administrative expenses 2,812 4,024 5,018 Mergers, dispositions and other charges -- 11,094 5,084 -------- -------- -------- Total costs and expenses 76,855 89,615 80,126 -------- -------- -------- Loss from continuing operations (2,608) (16,435) (8,457) INTEREST INCOME AND OTHER, NET 1,541 2,308 2,983 -------- -------- -------- Loss from continuing operations before provision for income taxes (1,067) (14,127) (5,474) PROVISION FOR INCOME TAXES 83 166 1,297 -------- -------- -------- Net loss from continuing operations (1,150) (14,293) (6,771) DISCONTINUED OPERATIONS (NOTE 3): Loss from discontinued operations of Individual.com, Inc., net of taxes (15,843) (2,935) (9,090) -------- -------- -------- Net loss $(16,993) $(17,228) $(15,861) ======== ======== ======== LOSS PER SHARE (NOTE 4): Basic and diluted net loss per common share: Continuing operations $ (0.07) $ (0.83) $ (0.41) Discontinued operations (0.91) (0.17) (0.54) -------- -------- -------- Total basic and diluted loss per share $ (0.98) $ (1.00) $ (0.95) ======== ======== ======== Weighted average common shares outstanding 17,362 17,194 16,729 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 27 NEWSEDGE CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) NewsEdge Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity (in thousands)
Common Stock ----------------------- Additonal Cumulative Number of Par Paid-In Translation Accumulated shares Value Capital Adjustment Deficit -------------------------------------------------------------- Balance at December 31, 1996 16,488 $ 165 $ 121,763 $ 70 $ (70,436) Stock issued related to options, warrants and ESPP, including tax benefits 303 3 1,827 -- -- Warrants issued in acquisition of CompanyLink -- -- 117 -- -- Common stock for consulting services 109 1 1,149 -- -- Dissenter shares -- -- (2) -- (79) Cummulative translation adjustment -- -- -- (47) -- Net loss -- -- -- -- (15,861) Decrease in retained earnings from changing -- -- -- -- -- fiscal year of combining enterprise -- -- -- -- (225) Comprehensive net loss for the year ended December 31, 1997 -------------------------------------------------------------- Balance at December 31, 1997 16,900 169 124,854 23 (86,601) Stock issued related to options, warrants and ESPP, -- -- -- -- -- including tax benefits 622 6 3,955 -- -- Purchase of treasury stock -- -- -- -- -- Contingent purchase price payment -- -- (3,918) -- -- Cummulative translation adjustment -- -- -- 40 -- Net loss -- -- -- -- (17,228) Comprehensive net loss for the year ended December 31, 1998 -- -- -- -- -- -------------------------------------------------------------- Balance at December 31, 1998 17,522 175 124,890 63 (103,828) Stock issued related to options, warrants and ESPP, -- -- -- -- -- including tax benefits 585 6 5,245 -- -- Purchase of treasury stock -- -- -- -- -- Cummulative translation adjustment -- -- -- (121) -- Net loss -- -- -- -- (16,993) Comprehensive net loss for the year ended December 31, 1999 -- -- -- -- -- -------------------------------------------------------------- Balance at December 31, 1999 18,107 $ 181 $ 130,135 $ (58) $(120,821) ==============================================================
NewsEdge Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity (Continued) (in thousands)
Treasury Stock ----------------------------- Total Number of Stockholder's Comprehensive Shares Cost Equity Loss -------------------------------------------------------------- Balance at December 31, 1996 16 $ (31) $ 51,531 Stock issued related to options, warrants and ESPP, including tax benefits (16) 31 1,861 Warrants issued in acquisition of CompanyLink -- -- 117 Common stock for consulting services -- -- 1,150 Dissenter shares -- -- (81) Cummulative translation adjustment -- -- (47) $ (47) Net loss -- -- (15,861) (15,861) ------------- Decrease in retained earnings from changing -- -- -- fiscal year of combining enterprise -- -- (225) Comprehensive net loss for the year ended December 31, 1997 $(15,908) -------------------------------------------------============= Balance at December 31, 1997 -- -- 38,445 Stock issued related to options, warrants and ESPP, -- -- including tax benefits -- -- 3,961 Purchase of treasury stock 345 (2,051) (2,051) Contingent purchase price payment -- -- (3,918) Cummulative translation adjustment -- -- 40 $ 40 Net loss -- -- (17,228) (17,228) ------------- Comprehensive net loss for the year ended December 31, 1998 -- -- -- $(17,188) -------------------------------------------------============= Balance at December 31, 1998 345 (2,051) 19,249 Stock issued related to options, warrants and ESPP, -- -- including tax benefits -- -- 5,251 Purchase of treasury stock 87 (675) (675) Cummulative translation adjustment -- -- (121) $ (121) Net loss -- -- (16,993) (16,993) ------------- Comprehensive net loss for the year ended December 31, 1999 -- -- -- $(17,114) -------------------------------------------------============= Balance at December 31, 1999 432 $(2,726) $ 6,711 ==============================================================
The accompanying notes are an integral part of these consolidated financial statements. 28 NEWSEDGE CORPORATION and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, --------------------------------------------- 1999 1998 1997 --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(16,993) $(17,228) $(15,861) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 4,109 5,707 4,042 (Gain) loss on disposal of property and equipment -- (139) 487 Common stock issued for consulting services -- -- 1,150 Decrease in retained earnings from changing fiscal year of combining enterprise -- -- (225) Changes in assets and liabilities- Accounts receivable 1,831 4,423 (1,005) Prepaid expenses and deposits (95) 639 (2,265) Accounts payable 4 (2,724) (134) Accrued expenses (3,021) 4,862 4,181 Deferred revenue (4,827) (4,021) 3,898 --------------------------------------------- Net cash used in operating activities (18,992) (8,481) (5,732) CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in investments, net 3,782 8,902 21,661 Purchases of property and equipment (4,061) (3,812) (4,681) Contingent purchase price payment -- (3,918) -- Cash paid for acquisition -- (1,544) (280) (Increase) decrease in other assets (194) (32) 439 --------------------------------------------- Net cash (used in) provided by investing activities (473) (404) 17,139 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances related to stock plans, including tax benefits 3,655 3,961 1,896 Purchase of treasury stock (675) (2,051) -- Decrease in long-term obligations (336) (711) (150) Principal payments under capital leases (588) (401) (105) --------------------------------------------- Net cash provided by financing activities 2,056 798 1,641 EFFECT OF EXCHANGE RATE ON CASH (121) 41 (47) --------------------------------------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,530) (8,046) 13,001 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,808 45,854 32,853 --------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,278 $ 37,808 $ 45,854 ============================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 67 $ 148 $ 352 ============================================= Cash paid for income taxes $ 79 $ 191 $ 629 ============================================= NONCASH FINANCING ACTIVITY: Issuance of stock warrants to vendors $ 1,597 $ -- $ -- =============================================
The accompanying notes are an integral part of these consolidated financial statements. 29 NEWSEDGE CORPORATION and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (1) NATURE OF BUSINESS NewsEdge Corporation (the Company) is the leading independent provider of global news and current awareness solutions for business. The Company's mission is to make news valuable for business. NewsEdge services provide access to value-added news over the Internet or customer intranets. The Company aggregates and adds value to news and information from over 2,000 sources published by over one hundred global content providers. This information is customized and filtered so that users can readily find the most important, relevant stories from the overwhelming volume of daily news that is available. NewsEdge Corporation is headquartered in Burlington, Massachusetts, with sales offices and distributors throughout North America, South America, Europe, Asia and the Middle East. The Company was formed as Desktop Data, Inc. in 1988, acquired Investment Software Systems, Inc. ("ISS") from ADP Financial Services, Inc. in January 1998 and, upon the closing of the February 1998 merger (the "Merger") with Individual, Inc. ("Individual"), changed its name to NewsEdge Corporation. 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 7, 2000, the agreement was mutually terminated by both parties. The Company estimates costs of approximately $1.9 million, comprised of legal, retention and acquisition related expenses will be charged to operations during the first quarter of 2000. (2) SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents Cash and cash equivalents, which have original maturities of less than three months, consist of the following:
December 31, --------------------- 1999 1998 --------------------- (in thousands) Cash $ 2,221 $ 4,308 Money market accounts 1,403 1,320 U.S. Government agencies obligations 16,654 32,180 --------------------- $20,278 $37,808 =====================
30 (c) Investments As of December 31, 1998, the Company's investments consisted entirely of U.S. Treasury notes and we classified and accounted for as held-to- maturity and reported at amortized cost. There were no investments as of December 31, 1999. Any security that experienced a decline in value that management believed was other than temporary was reduced to its net realizable value by a charge to operations. Realized gains and losses from the sale of investment securities were recorded on the trade date by specific identification of the security sold. Realized gains and losses were not material during any year presented. (d) Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (e) Depreciation and Amortization The Company provides for depreciation using the straight-line method by charges to operations in amounts that allocate the cost of assets over their estimated useful lives of three to seven years, except for leasehold improvements, which are depreciated over the shorter of the lease term or life of the asset. Depreciation expense was approximately $3,053,000 in 1999, $3,174,000 in 1998 and $3,068,000 in 1997, respectively. (f) Research and Development and Software Development Costs Research and development costs are expensed as incurred. Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed, requires the capitalization of certain computer software development costs incurred after technological feasibility is established. The Company has not capitalized software development costs to date, as the costs incurred after technological feasibility of a software product has been established have not been significant. (g) Revenue Recognition The majority of the Company's services are sold on a subscription basis. Subscription revenues are recognized ratably over the term of the agreement, generally 12 months, beginning upon installation. The unearned portion of revenue is shown as deferred revenue in the accompanying consolidated balance sheets. Royalty revenues are recognized as they are earned under agreements with certain information providers. Advertising revenue is recognized ratably based on contractual terms, which are typically over the advertising period or as advertisements are delivered. Revenues generated from hardware sales or professional consulting services are recognized at the time of shipment or when services are rendered. (h) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This statement requires the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss carryforwards available for tax reporting purposes, using the applicable tax rates for the years in which the differences are expected to reverse. A valuation allowance is recorded on deferred tax assets unless realization is more likely than not. 31 (i) Foreign Currency Translation Revenues and expenses are translated using an average of exchange rates in effect during the year. The majority of asset and liability accounts of foreign consolidating entities are translated using the year-end exchange rates. Cumulative translation adjustments related to the Company's operations in the United Kingdom, Japan and Switzerland are reflected separately as a component of stockholders' equity in the accompanying consolidated balance sheets. Gains or losses from foreign currency transactions are expensed as incurred. There were no significant gains or losses from foreign currency transactions during any year presented. (j) Postretirement Benefits The Company has no obligations for postretirement benefits. (k) Concentration of Credit Risk SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet. Risks or credit risk concentrations such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash, cash equivalent and investment balances with one financial institution and its accounts receivable balances are primarily domestic. (l) Comprehensive Income (Loss) SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For all years presented, the only difference between net loss and comprehensive net loss relates to the cumulative translation adjustment. (m) Reclassifications Certain prior-year amounts have been reclassified to conform with current year's presentation. (n) Long-Lived Assets The Company has adopted SFAS No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets be evaluated for impairment by comparing the fair value of the assets with their carrying amount. Any write-downs are to be treated as permanent reductions in the carrying amount of the assets. The Company's evaluation considers nonfinancial data such as changes in the operating environment and business strategy, competitive information market trends and operating performance. As a result of its evaluation, the Company does not believe that any impairment currently exists related to its long-lived assets. (o) Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, requires the measurement of the fair value of employee and director stock options or warrants to be included in the consolidated statement of operations or disclosed in the notes to consolidated financial statements. The Company has determined that it will continue to account for stock- based compensation for employees and directors under the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. The Company accounts for options and warrants granted to nonemployees using the fair-value method prescribed by SFAS No. 123 and Emerging Issues Task Force, (EITF) No. 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services. (p) New Accounting Pronouncement 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. 32 (3) DISCONTINUED OPERATIONS On February 18, 2000, the Company entered into an agreement to sell its ownership interest in its wholly owned subsidiary, Individual.com, Inc. Upon the initial closing of the purchase and sale agreement, the Company sold 80% of its interest in its Individual.com, Inc. for a purchase price of $8,000,000 payable by $2,500,000 in cash and $5,500,000 in installment receivables payable through December 2000 on February 18, 2000. Upon the second closing in February 2001, the Company will receive an additional $2,000,000 in consideration for the remaining 20% ownership interest. Individual.com, Inc. operated the Company's single-worker news service business unit, which derives its revenues from targeted advertising and electronic commerce. The Company estimates a gain on the sale of Individual.com, Inc. totaling approximately $7,600,000 before applicable income taxes. The Company will record $5,600,000 of the gain in February 2000 and the remainder in February 2001, as each of the two closings occur. The Company also made payments to retain the Individual.com, Inc. workforce, which will be included as a reduction in the estimated gain on the sale. Revenues from the Individual.com business were approximately $4,120,000 in 1999, $6,352,000 in 1998, and $5,802,000 in 1997. The Company has presented the operating results of Individual.com as discontinued operations for all periods presented. The Company has not restated the consolidated balance sheet for the net assets of Individual.com. The components of the net assets of discontinued operations of Individual.com as of December 31, 1999 are as follows.
Amount (in thousands) Accounts receivable, net $ 1,265 Equipment, net 938 Accounts payable (83) Accrued expenses (784) Deferred revenue (101) ------- $ 1,235 =======
(4) BASIC AND DILUTED NET LOSS PER COMMON SHARE In accordance with SFAS No. 128, Earnings per Share, basic and diluted net loss per common share is calculated by dividing the net loss to common stockholders by the weighted average number of common shares outstanding for all periods presented. The following potential common stock financial instruments are excluded from the calculation of dilutive earnings per share because their inclusion would be antidilutive to net loss per share.
Years Ended December 31, --------------------------- 1999 1998 1997 --------------------------- (in thousands) Options to purchase common stock 4,432 3,506 2,859 Warrants to purchase common stock 335 1,164 970 --------------------------- 4,767 4,670 3,829 ===========================
33 (5) INCOME TAXES The provision for income taxes for each of the years in the period ended December 31, 1999 consists of the following:
1999 1998 1997 --------------------------- (in thousands) Current- Federal $ -- $ -- $1,098 State 83 76 122 International -- 90 45 --------------------------- 83 166 1,265 Deferred- Federal -- -- 29 State -- -- 3 --------------------------- -- -- 32 --------------------------- Total $ 83 $ 166 $1,297 ===========================
A reconciliation of the federal statutory rate to the Company's effective tax rate for each of the three years in the period ended December 31, 1999 is as follows:
1999 1998 1997 -------------------------------------------- Income tax provision at federal statutory rate (34.0)% (34.0)% (34.0)% Increase (decrease) in tax resulting from- State tax provision, net of federal benefit 0.5 0.4 0.8 Research and development credits -- -- (0.6) Change in valuation allowance 34.0 38.9 43.5 Other (--) (4.3) (0.8) -------------------------------------------- Effective tax rate 0.5% 1.0% 8.9% ============================================
The components of deferred income taxes are as follows:
December 31, 1999 1998 --------------------------------- (in thousands) Net operating loss carryforwards $ 28,609 * $ 21,774 Financial reserves not yet deductible 4,183 3,871 Research and development and alternative minimum tax credit carryforwards 1,382 903 Deferred revenue 663 481 Depreciation (870) (730) Valuation allowance (33,967) (26,299) --------------------------------- $ -- * $ -- =================================
As of December 31, 1999, the Company had net operating loss carryforwards (NOLs) of approximately $72 million and other credit carryforwards related to research and development and alternative minimum tax, totaling approximately $1,382,000 available to offset future taxable income, if any. These carryforwards expire through 2019 and are subject to review and possible adjustment by the Internal Revenue Service. Additionally, the Company's historical mergers raise additional doubt as to the realizability of the deferred tax assets, as the acquired companies have considerable NOLs. As a result, management believes that it is more likely than not that the net deferred tax asset will not be realized. 34 In 1997, a tax benefit related to disqualifying dispositions from stock option exercises of approximately $970,000 was realized and credited to additional paid-in capital. No tax benefit was realized in 1998 and 1999 due to the uncertainty related to the future realizability of the NOLs generated from disqualifying dispositions from stock option exercises. (6) MERGERS AND DISPOSITIONS Merger, disposition and other charges totaled $11,094,000 and $5,084,000 in 1998 and in 1997. In 1998, these costs related primarily to costs associated with the merger with Individual, the purchase of ISS, the termination of the Clarinet business unit, the severance and benefits for terminated employees and the cost of terminating and settling certain contractual obligations of the combined companies. In 1997, these costs related primarily to product development expenses, goodwill amortization and other charges associated with companies previously acquired by Individual. Accrued but unpaid amounts associated with the above-mentioned merger costs totaled $450,000 at December 31, 1999 and $2,300,000 at December 31, 1998. A description of the Company's acquisitions and dispositions are as follows: (a) Freeloader, Inc. In 1996, the Company acquired FreeLoader, Inc. ("FreeLoader") in a combination accounted for as a purchase. As of May 31, 1997, the Company ceased operations of FreeLoader. Certain expenses related to FreeLoader, primarily terminated product development projects of approximately $2,000,000, have been included in mergers, dispositions and other charges in 1997. In addition, the Company made payments of $1,300,000 to the FreeLoader founders as settlement of a $2,000,000 balloon payment required in the merger agreement. The Company also guaranteed the value of certain shares issued to the two founders in the transaction. In February 1998, the two founders of Freeloader exercised their value guarantee, resulting in a payment by the Company of $3,918,000. The Company has no future contingency payments due related to this acquisition. (b) Hoover In 1996, the Company acquired certain assets and liabilities of the Hoover Business Intelligence Services unit from the Information Access Company (IAC), a unit of The Thomson Corporation (Toronto, Canada). Hoover is an intelligent software agent that provides real-time and archival electronic news and information services. The acquisition, financed through cash and installment payments, was accounted for as a purchase. The purchase price was $1,650,000, including $500,000 in acquisition related costs, of which $1,085,000 was paid in cash and $565,000 in notes payable over 36 months. Approximately $672,000 of the purchase price was allocated to the net identifiable assets acquired and approximately $978,000 of the purchase price was allocated to goodwill. At December 31, 1997 there was no remaining goodwill due to amortization of $187,000 and adjustments resulting from the realization of net asset value in excess of net identifiable assets acquired. (c) CompanyLink In June 1997, the Company acquired certain assets and liabilities of the CompanyLink service from Knowledge Factory Partners, L.L.C., a subsidiary of Delphi Internet Services Corporation. The purchase price for the acquisition included $280,000 in cash, a warrant to purchase 25,000 shares of the Company's common stock at an exercise price of $10.50 per share and certain monthly contingent payments payable for a period of 12 months after the closing of the acquisition. The acquisition was accounted for as a purchase transaction. The total estimated purchase price of $447,000 was originally recorded as an intangible asset. Amortization expense of $273,000 in 1998 and $174,000 in 1997 is included in mergers, dispositions and other charges. 35 (d) Clarinet Communications Corp. In June 1997, the Company purchased the stock of ClariNet Communications Corp. ("ClariNet") whereby a wholly owned subsidiary of the Company was merged with and into ClariNet, with ClariNet continuing as the surviving corporation and a wholly owned subsidiary of the Company. ClariNet published a global electronic newspaper on the Internet called ClariNews, which was distributed through internet service providers and to corporations, educational institutions and individual subscribers. Under the terms of the ClariNet merger agreement, each share of ClariNet common stock was exchanged for 0.10977437 shares of the Company's common stock. Approximately 737,500 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of ClariNet (including approximately 69,256 shares reserved for issuance upon exercise of outstanding ClariNet stock options assumed by the Company in the merger). The transaction was accounted for as a pooling of interests and all prior- period financial statements presented herein have been restated as if the merger took place at the beginning of such periods. Effective March 31, 1998, the Company sold the Clarinet business unit to its management and received 750,000 shares of Series A Preferred Stock in the newly formed corporation, NaviLinks, Inc. The investment was accounted for using the equity method of accounting. The carrying value of the investment as of December 31, 1999 and 1998 was zero. (e) ISS On January 6, 1998, the Company acquired the assets, customers, and personnel of ISS, a former business unit of ADP Financial Services, Inc., for approximately $1,500,000 in cash. The acquisition has been recorded using the purchase method of accounting. The management and staff of ISS joined the Company to form the nucleus of the Company's professional services group. (f) Individual, Inc. On February 24, 1998, the Company completed its merger with Individual, Inc. Under the terms of the merger agreement, each share of Individual, Inc. common stock was exchanged for 0.5 shares of the Company's common stock. Approximately 8,230,000 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Individual. Approximately 2,873,000 shares were reserved for issuance upon exercise of outstanding Individual stock options and warrants assumed by the Company in the merger. The transaction was accounted for as a pooling of interests. All prior-period financial statements presented herein have been restated as if the merger took place at the beginning of such periods. In accordance with APB No. 16, the following pro forma financial data are presented for the Company and Individual:
Year ended Three Months ended December 31, 1997 March 31, 1998 ----------------- -------------- (in thousands) (unaudited) NewsEdge Corporation: Revenues $ 42,182 $ 11,787 Net income (loss) 2,693 (8,487) Individual, Inc. Revenues $ 35,289 $ 7,962 Net loss (18,544) (5,362)
(7) STOCKHOLDERS' EQUITY (a) Preferred Stock On June 26, 1995, the Company's stockholders authorized 1,000,000 shares of undesignated preferred stock. At December 31, 1999, no shares of preferred stock were issued or outstanding. (b) Stock Repurchase Program In September 1998, the Board of Directors authorized a program to repurchase up to 1,500,000 shares of the Company's common stock in the open market. As of December 31, 1999 and 1998, 432,000 shares and 345,000 shares, respectively had been repurchased at a cost of approximately $2,726,000 and $2,051,000, respectively. The Company is currently no longer purchasing stock in the open market. 36 (8) WARRANTS In connection with the acquisition of Individual, the Company assumed warrants to purchase 963,516 shares of common stock at a weighted average exercise price of $16.28 per share. These warrants had 10-year terms and were issued principally to employees of Individual in 1989 and 1991. As of December 31, 1999, options to purchase a total of 85,188 shares of common stock, with a weighted average exercise price of $19.12 per share remained outstanding. On November 6, 1998, the Board of Directors approved the issuance of warrants to purchase 200,000 shares of common stock at an exercise price of $8.50 per share to a vendor as part of an agreement for services. Vesting occurs monthly over a three-year period beginning on January 1, 1999. These warrants expire on November 6, 2003, but may be subject to earlier expiration. Upon a change in control of the Company, the unvested warrants would be fully vested, provided the vendor does not terminate its service agreement with the Company. If the vendor terminates its service agreement upon a change in control of the Company, all vested and unvested warrants held by the vendor would expire. The estimated fair value of these warrants totaled $592,000 at the time of the grant, using the Black-Scholes option pricing model and the assumptions described in Note 9(g). In accordance with EITF 96-18, the fair value of these warrants must be marked to-market over the vesting period. As of December 31, 1999, the fair value of these warrants totaled $1,294,000, of which $308,000 has been recorded as a cost of revenue in 1999 and $986,000 of unamortized warrant value has been included in other assets. The Company will be required to record a charge for the unamortized warrant in the period during which a change in control occurs provided the vendor continues services, as described above. In November 1999, the board of directors of the Company approved the issuance of warrants to purchase 50,000 shares of common stock at an exercise price of $7.125 per share to an investment advisor. The warrant is fully vested and is excercisable over a two-year period. The estimated fair value of the warrants totaled $303,000 and has been recorded as a charge to general and administrative expenses in 1999. (9) STOCK PLANS (a) 1989 Stock Option Plan The Company has a stock option plan (the 1989 Plan) pursuant to which 622,222 shares of common stock are reserved for issuance. The 1989 Plan is administered by the Board of Directors and provides for the granting of incentive stock options, nonqualified stock options, stock awards and direct stock purchases. During 1995, the Board of Directors terminated the 1989 Plan, such that no further options may be granted under the 1989 Plan. (b) 1995 Stock Plan On June 26, 1995, the Company's stockholders approved the 1995 Stock Plan (the 1995 Plan). The 1995 Plan is administered by the Board of Directors and provides for stock awards, direct purchases and the grant of options to purchase shares of the Company's common stock. A maximum of 4,125,000 shares may be issued under this plan. Options granted under the 1995 Plan expire 10 years from the date of grant. (c) 1995 Nonemployee Director Stock Option Plan On June 26, 1995, the Company's stockholders also approved the 1995 Non Employee Director Stock Option Plan (the 1995 Director Plan), for which 100,000 shares of the Company's common stock have been reserved. The purpose of the 1995 Director Plan is to attract and retain qualified persons who are not also officers or employees of the Company (the Eligible Directors) to serve as directors of the Company. Under the 1995 Director Plan, any eligible Director shall automatically be granted an option to purchase 20,000 shares of common stock on the effective date of election at an option price equal to the fair market value on the date of grant and an option to purchase 2,500 shares of the common stock on the date of each successive annual meeting of the stockholders, if such director has attended at least 75% of the meetings of the Board of Directors during the past fiscal year. Options granted under this plan expire 10 years from the date of grant. 37 (d) Stock Option Plan Activity The following schedule summarizes all stock option activity for the three years ended December 31, 1999 (shares in thousands):
1999 1998 1997 ---------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------------------------- Outstanding, beginning of year 3,506 $ 8.56 2,859 $ 7.63 2,366 $ 12.29 Granted 1,605 9.62 1,955 9.37 2,113 9.71 Exercised (479) 6.93 (574) 6.48 (260) 1.49 Terminated (768) 9.04 (734) 8.42 (1,360) 16.01 ---------------------------------------------------------------------------------------- Outstanding, end of year 3,863 $ 9.12 3,506 $ 8.56 2,859 $ 7.63 ======================================================================================== Exercisable, end of year 1,757 1,323 835 ============== ============== ============= Weighted average fair value of options granted during the year $ 5.30 $ 5.20 $ 5.36 ============== ============== =============
The following table summarizes information about stock options outstanding at December 31, 1999 (shares in thousands):
Options Outstanding Options Exercisable --------------------------------------------------------------------------------- Weighted Number Average Number Exercise Price/ Outstanding as Remaining Weighted Exercisable Weighted Range of Exercise of December 31, Contractual Average at December 31, Average Prices 1999 Life (Years) Exercise Price 1999 Exercise Price ------------------------------------------------------------------------------------------------------ $ 0.01-$ 6.50 609 6.52 $ 6.25 603 $ 6.25 6.63- 8.13 914 8.98 7.42 220 6.87 8.56- 10.44 1,135 7.95 9.37 555 9.39 10.50- 12.00 1,174 8.99 11.39 348 11.02 12.50- 34.00 31 6.03 19.85 31 19.86 --------------------------------------------------------------------------------- 3,863 8.27 $ 9.12 1,757 $ 8.50 =================================================================================
In February and June of 1997, the Company's Board of Directors authorized the repricing of certain of its stock options to $14.13 and $8.63, respectively. Each price was equal to or greater than the closing price of the Company's common stock on the date of the repricing. During 1997, Individual repriced certain of its stock options to $12.50 and $6.50. The new price was equal to or greater than the market value of the Company's common stock on the date of the repricing. 38 (e) 1995 Employee Stock Purchase Plan On June 26, 1995, the Company's stockholders approved the 1995 Employee Stock Purchase Plan (the 1995 Purchase Plan). This plan permits eligible employees to purchase up to 500 shares of the Company's common stock at 85% of the fair market value of the stock on the first or last date of each semiannual plan period, whichever is lower. The 1995 Purchase Plan covers substantially all employees, subject to certain limitations. An eligible employee may elect to have up to 10% of his or her total compensation, as defined, withheld and applied toward the purchase of shares in such a plan period (not to exceed the $25,000 annual IRS limit). At December 31, 1999, 388,529 shares of common stock were reserved for purchases under the 1995 Purchase Plan. During 1999, 1998 and 1997, 56,719, 23,408 and 15,085 shares of common stock were purchased under the 1995 Purchase Plan. (f) Fair Value of Stock Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock options granted to employees to be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company has computed the pro forma disclosures required under SFAS No. 123 for options granted in 1999, 1998 and 1997 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions used are as follows:
1999 1998 1997 -------------------------------------------------- Risk-free interest rate 4.60%-6.38% 4.19%-5.95% 5.59%-6.80% Expected dividend yield None None None Expected lives 5 years 2-5 years 3-6 years Expected volatility 70% 63% 65% Expected volatility (options assumed in Individual merger) -- 80% 80%
Had compensation cost for the Company's stock plans been determined consistent with SFAS No. 123, the Company's net loss to common stockholders and basic and diluted net loss per common share would have resulted in the following pro forma amounts:
1999 1998 1997 --------------------------------------------------- (in thousands, except per share data) Net loss to common stockholders- As reported $ (16,993) $ (17,228) $ (15,861) Pro forma (22,229) (22,326) (22,624) Basic and diluted net loss per common share- As reported $ (0.98) $ (1.00) $ (0.95) =================================================== Pro forma $ (1.28) $ (1.30) $ (1.35) ===================================================
39 (10) 401K PLAN The Company maintains a 401(k) retirement savings plan (the "Plan"). All employees of the Company are eligible to participate in the Plan after completing at least three consecutive months of service with the Company as defined in the plan agreement. The Plan provides that each participant may make voluntary contributions up to 15% of their eligible compensation, limited to the maximum amount allowable by the IRS. The Company may elect to make discretionary matching contributions and/or profit sharing contributions. For the plan years ended December 31, 1999, 1998 and 1997, the employer matching contribution was 20% of the first 6% of the participant contributions. Accordingly, $232,461, $185,054 and $95,155 of expense, are included in the accompanying consolidated statements of operations for the years ended December 31, 1999, 1998 and 1997, respectively. No profit sharing contributions have been made to the Plan since inception. Participants are fully vested in the current value of their employee contributions and all earnings on such contributions. Participants become vested in employer contributions and earnings thereon after completion of one year of service. (11) COMMITMENTS AND CONTINGENCIES Operating Leases The Company conducts its operations in facilities under operating leases expiring through 2005. The Company's future minimum lease payments, net of a sub-lease agreement of $301,000 to be received during 2000 related to the sale and disposition of Individual.com, under these leases as of December 31, 1999 are approximately as follows:
Amount (in thousands) For the years ending December 31, 2000 $ 2,349 2001 1,959 2002 1,454 2003 999 2004 728 Thereafter 87 -------------------- $ 7,576 ====================
Rent expense charged to operations was approximately $2,718,000 in 1999, $2,633,000 in 1998 and $2,411,000 in 1997. (12) LONG-TERM OBLIGATIONS At December 31, 1999, the Company had two lines of credit for equipment purchases of up to $3,000,000. The lines of credit bear interest at prime plus 1.0% to 1.5%. As of December 31, 1999, the prime rate was 8.50%. Both lines-of-credit expire on December 1, 2000. As of December 31, 1999, the outstanding balance of borrowings under the lines totaled $303,000, at an effective interest rate of 9.50%. The Company may not make any additional borrowings under these lines of credit. Borrowings under these lines are secured by substantially all the assets of the Company. The line-of-credit arrangements contain financial covenants relating to minimum tangible net worth, debt to cash flow, minimum earned revenue and certain financial ratios. At December 31, 1999, the Company was in compliance with these arrangements. 40 (13) ACCRUED EXPENSES Accrued expenses in the accompanying consolidated balance sheets consist of the following:
December 31, ---------------------------------- 1999 1998 ---------------------------------- (in thousands) Payroll and payroll-related $ 2,988 $ 3,658 Royalties 3,703 5,040 Other 8,146 9,155 ---------------------------------- $ 14,837 $ 17,853 ==================================
(14) SEGMENT REPORTING On December 31, 1998, the Company 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 a direct selling effort and targets large organizations. The Enterprise services deliver news and information to large numbers of users within organizations through their corporate intranet or local area networks. As of December 31, 1999, the Company had over 1,400 enterprise customers, up 8% from the previous year-end, with approximately 700,000 users. In addition to the Enterprise business, the Company also reports a segment of Other, which consists of services which are being phased out by the Company and which the Company expects to be immaterial beyond 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 continuing operations before income taxes, interest and merger, dispositions 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. 41
Year Ended December 31, ---------------------------------------------------------- 1999 1998 1997 -------------------- ------------------ ------------------ (in thousands) Revenues: Enterprise $ 72,931 $ 67,374 $ 58,938 Other 1,316 5,807 12,731 -------------------- ------------------ ------------------ Total revenues $ 74,247 $ 73,181 $ 71,669 ==================== ================== ================== Loss from continuing operations before mergers, dispositions and other charges, interest and income taxes: Enterprise $ (2,203) $ (5,195) $ (1,805) Other (406) (146) (1,569) -------------------- ------------------ ------------------ $ (2,609) $ (5,341) $ (3,374) ==================== ================== ================== Noncash expenses by segment: Enterprise $ 3,283 $ 2,731 $ 2,552 Other 78 514 516
(15) VALUATION AND QUALIFYING ACCOUNTS A summary of the valuation and qualifying accounts of the Company related to reserve for doubtful accounts and accrued merger, dispositions and other charges for each of the three years in the period ended December 31, 1999 is as follows:
Reserve for Doubtful Accounts Other -------- ----- Reserve Balance at December 31, 1996 $ 571 $ -- Additions to reserves -- 6,565 Reductions in reserves (64) 6,565 --------- --------- Reserve Balance at December 31, 1997 507 -- Additions to reserves -- 11,094 Reductions in reserves (202) (8,809) --------- --------- Reserve Balance at December 31, 1998 306 (2,285) Additions to reserves -- -- Reductions in reserves -- (1,832) --------- --------- Reserve Balance at December 31, 1999 $ 306 $ 453 ========== =========
42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 43 PART III Item 10. Directors and Executive Officers of the Registrant. Directors The information concerning directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999. Executive Officers The information concerning officers of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999. Item 11. Executive Compensation and Other Information The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1999. Item 13. Certain Relationships and Related Transactions. The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission within 120 days after the close of the Company's fiscal year ended December 31, 1999. 44 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) List of documents filed as part of this report (1) Financial Statements Financial Statements (Listed Under Part II, Item 8 and included herein by reference). (2) Financial Statement Schedules Schedules to the Financial Statements have been omitted because the information required to be set forth therein is not applicable or is shown in the accompanying Financial Statements or notes thereto. (3) Exhibits
Exhibit Number Description of Document ------ ----------------------- 2.1 Agreement and Plan of Merger and Reorganization by and among the Company, and Individual, Inc. dated as of November 2, 1997 (attached as Annex A to the Prospectus/Joint Proxy Statement contained in the Company's Registration Statement on Form S-4, No. 333-44887) 2.2 Stock Purchase Agreement dated February 18, 2000 by and among the Company, Office.com Inc. and Individual.com, Inc. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 6, 2000 and incorporated therein by reference) 3.1 Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1997 and incorporated herein by reference) 3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.4 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1997 and incorporated herein by reference) 10.1 1995 Stock Plan, as amended (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-4, No. 333-44887 and incorporated herein by reference) 10.2 1995 Non-Employee Director Stock Option Plan, as amended (filed as Annex A to the Company's Proxy Statement filed on April 29, 1996 and incorporated herein by reference) 10.3 1989 Stock Plan (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 10.4 1995 Employee Stock Purchase Plan, as amended (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-4, No. 333-44887 and incorporated herein by reference) 10.5 Amended and Restated 1989 Stock Option Plan (filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8, No. 333-46863) 10.6 1995 Incentive Stock Option Plan (filed as Exhibit 99.2 to the Company's
45
Exhibit Number Description of Document ------ ----------------------- Registration Statement on Form S-8, No. 333-46863) 10.7 1996 Non-Employee Director Stock Option Plan (filed as Exhibit 99.3 to the Company's Registration Statement on Form S-8, No. 333-46863) 10.8 1996 Stock Option Plan (filed as Exhibit 99.4 to the Company's Registration Statement on Form S-8, No. 333-46863) 10.9 1996 Amended and Restated Stock Plan (filed as Exhibit 99.5 to the Company's Registration Statement on Form S-8, No. 333-46863) 10.10 Amended and Restated Registration Agreement dated as of October 20, 1992 by and among the Company and certain stockholders named herein (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 10.11 Lease for 80 Blanchard Road (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference) 10.12 Data Transmission Agreement between the Company and Mainstream Data, Inc. dated as of November 24, 1993, as amended (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 10.13 Software Development and Marketing Agreement between the Company and Reuters America Inc. dated as of November 1, 1993, as amended (filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 10.14 Letter Agreement between the Company and Teknekron Software Systems, Inc. dated as of June 13, 1994 (filed as Exhibit 10.11 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 10.15 Database License, Development and Delivery Agreement between the Company and NBC Desktop, Inc. dated as of October 17, 1994 (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) **10.16 Employment Agreement dated as of February 24, 1998 between Michael E. Kolowich and the Company (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year-ended December 31, 1997 and incorporated herein by reference) 10.17 Form of Common Stock Purchase Warrant (filed as Exhibit 10.4 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.18 Second Amended and Restated Investors' Rights Agreement dated as of October 3, 1995 (filed as Exhibit 10.13 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.19 Licensing Agreement with Cornell Research Foundation, Inc. dated as of March 22, 1989 (filed as Exhibit 10.14 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.20 Letter Agreement dated as of July 2, 1992 between Individual, Inc. and Fleet
46
Exhibit Number Description of Document ------ ----------------------- Bank of Massachusetts, N.A. (filed as Exhibit 10.15 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.21 Letter Agreement dated as of September 22, 1994 between Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.16 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.22 Consent and Loan Modification Agreement dated as of November 29, 1995 between Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.17 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.23 Second Loan Modification Agreement dated as of December 29, 1995 between Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.18 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.24 Lease dated as of August 25, 1994 between Individual, Inc. and Trustees of New England Executive Park Trust, 40 Spaulding Investment Company, Inc. (filed as Exhibit 10.19 to the Individual Inc. Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.25 Third Loan Modification Agreement dated as of December 31, 1996 between Individual, Inc. and Fleet National Bank (filed as Exhibit 10.24 to Individual, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). *23.1 Consent of Arthur Andersen LLP *23.2 Consent of PricewaterhouseCoopers LLP *24.0 Power of Attorney (included on page 53) *27.1 Financial Data Schedule for fiscal year ended 1999
- ------------------------ * Filed herewith. ** Indicates a management contract or a compensatory plan, contract or arrangement 47 (b) Reports on Form 8-K. On December 17, 1999 the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission, disclosing under Item 5 that the Company had entered into an Agreement and Plan of Merger and Reorganization, by and between the Company, RoweCom Inc. and RoweCom Merger Corporation dated as of December 7, 1999 (the "Merger Agreement") pursuant to which RoweCom Merger Corporation was to be merged with and into the Company. The Merger Agreement was termination by mutual consent of the parties on March 6, 2000. No financial statements were required to be filed as part of this report. (c) The exhibits required by this Item are listed under Item 14(a). (d) The financial statement schedules required by this Item are listed under Item 14(a). 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWSEDGE CORPORATION (Registrant) Date: March 30, 2000 /s/ Clifford Pollan ------------------------------- Clifford Pollan Chairman, President and Chief Executive Officer We, the undersigned officers and directors of NewsEdge Corporation, hereby severally constitute and appoint Clifford Pollan and Ronald Benanto, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities to do all things in our names and on our behalf in such capacities to enable NewsEdge Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities Exchange Commission. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date /s/ Clifford Pollan President, Chief March 30, 2000 - ----------------------- Executive Officer and Clifford Pollan Director (Principal Executive Officer) /s/ Ronald Benanto Vice President--Finance March 30, 2000 - ----------------------- and Operations, Ronald Benanto Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) /s/ Michael E. Kolowich Director March 30, 2000 - ----------------------- Michael E. Kolowich /s/ Basil Regan Director March 30, 2000 - ----------------------- Basil Regan /s/ Peter Woodward Director March 30, 2000 - ----------------------- Peter Woodward /s/ Rory J. Cowan Chairman and Director March 30, 2000 - ----------------------- Rory J. Cowan /s/ William A. Devereaux Director March 30, 2000 - ----------------------- William A. Devereaux /s/ James D. Daniell Director March 30, 2000 - ----------------------- James D. Daniell 49 EX-21.1 2 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 SUBSIDIARIES OF THE COMPANY - --------------------------- 1. NewsEdge Canada Corporation, Toronto, Ontario, Canada 2. NewsEdge Securities Corporation, Massachusetts, United States of America 3. NewsEdge, K.K., Tokyo, Japan EX-23.1 3 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 File Nos. 33-98786, 333-46863 and 333-46899. ARTHUR ANDERSEN LLP Boston, Massachusetts March 28, 2000 EX-23.2 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of NewsEdge Corporation on Forms S-8 (File Nos. 33-98786, 333-46863, and 333-46899) of our report dated January 30, 1998, except as to the information in Note 15, for which the date is February 27, 1998, on our audit of the consolidated financial statements of Individual, Inc. for the year ended December 31, 1997 which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP March 28, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 20,278 37,808 0 3,782 11,586 13,418 306 306 0 0 36,690 59,739 24,410 20,344 15,012 11,206 47,854 69,154 41,019 49,445 0 0 0 0 0 0 181 175 6,530 19,074 47,854 47,854 74,247 73,180 74,247 73,180 29,838 29,830 76,855 89,615 0 0 0 0 0 0 (1,067) (14,127) 83 166 (1,150) (14,293) (15,843) (2,935) 0 0 0 0 (16,993) (17,228) (0.98) (1.00) (0.98) (1.00)
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