-----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, GwWtRQ8d0NLrDLFVyCnhEaxWfjwI+yc/fIrlZNXM4ah1DFtNTdHaXsQvElPNFrpR AbqJa7yL623yv/S7Cqk4Jw== 0000927016-96-001583.txt : 19961111 0000927016-96-001583.hdr.sgml : 19961111 ACCESSION NUMBER: 0000927016-96-001583 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DESKTOP DATA INC 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26540 FILM NUMBER: 96656618 BUSINESS ADDRESS: STREET 1: 80 BLANCHARD RD CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 6172293000 MAIL ADDRESS: STREET 1: DESKTOP DATA INC STREET 2: 80 BLANCHARD RD CITY: BURLINGTON STATE: MA ZIP: 01803 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended: September 30, 1996 ------------------ 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 ------- DESKTOP DATA, INC. (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) (617) 229-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 60 days. Yes X . No ___. ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each class Outstanding at October 31, 1996 - ------------------- --------------------------------- Common Stock, par value $.01 8,598,788 1 DESKTOP DATA, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Number
Item 1 - Financial Statements Condensed Consolidated Balance Sheets September 30, 1996 and December 31, 1995................. 3 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 1996 and 1995.. 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995............ 5 Notes to the Condensed Consolidated Financial Statements...... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................. 8 PART II - OTHER INFORMATION Item 6(a) - Exhibits................................................... 13 Signature.............................................................. 14 Exhibit Index.......................................................... 15 Exhibits............................................................... 16
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ITEM 1 DESKTOP DATA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1996 1995 ------- ------- ASSETS Current assets: Cash and cash equivalents $ 8,707 $19,301 Short-term investments 20,269 13,117 Accounts receivable 4,048 3,164 Prepaid expenses and deposits 1,871 1,184 ---------- ---------- Total current assets 34,895 36,766 ---------- ---------- Long-term investments 7,899 - ---------- ---------- Property and equipment, net 4,191 1,991 ---------- ---------- Other assets 271 122 ---------- ---------- Total assets $47,256 $38,879 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,314 $ 974 Accrued expenses 3,739 3,126 Deferred revenue, current 14,128 10,063 Obligation under capital leases, current 34 25 ---------- ---------- Total current liabilities 19,215 14,188 ---------- ---------- Obligation under capital leases, noncurrent 46 53 ---------- ---------- Deferred revenue, nonc urrent 47 33 ---------- ---------- Stockholders' equity: Common stock 86 85 Additional paid-in capital 31,266 30,989 Accumulated deficit (3,404) (6,469) ---------- ---------- Total stockholders' equity 27,948 24,605 ---------- ---------- Total liabilities & stockholders' equity $47,256 $38,879 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3
DESKTOP DATA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ------ ------ ------- ------- Subscription and royalty revenues $8,062 $5,609 $22,457 $15,430 Other revenues 690 334 1,645 1,012 ------ ------ ------- ------- Total revenues 8,752 5,943 24,102 16,442 Cost of revenues 2,409 1,631 6,519 4,534 Customer support expenses 898 683 2,547 1,813 Development expenses 1,024 747 3,184 2,036 Sales and marketing expenses 3,199 2,271 8,649 6,416 General and admini strative expenses 359 281 1,124 835 ------ ------ ------- ------- Total costs and expenses 7,889 5,613 22,023 15,634 ------ ------ ------- ------- Income from operations 863 330 2,079 808 Interest income, net 490 283 1,370 440 ------ ------ ------- ------- Income before provision for income taxes 1,353 613 3,449 1,248 Provision for income taxes 151 49 384 81 ------ ------ ------- ------- Net income $1,202 $ 564 $ 3,065 $ 1,167 ====== ====== ======= ======= Net income per common and common equivalent share for 1996; Pro forma net income per common and common equivalent share for 1995 $0.14 $0.07 $0.35 $0.15 ====== ====== ======= ======= Weighted average number of common and common equivalent shares outstanding for 1996; Pro forma weighted average number of common and common equivalent shares outstanding for 1995 8,795 7,935 8,811 7,219 ====== ====== ====== ======
The accompanying notes are an integral part of these condensed consolidated financial statements. 4
DESKTOP DATA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) NINE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 3,065 $ 1,167 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 664 371 Changes in assets and liabilities: Accounts receivable (884) (218) Prepaid expenses and deposits (687) (273) Accounts payable 339 1,040 Accrued expenses 613 903 Deferred revenue 4,078 2,136 --------- --------- Net cash provided by operating activities 7,188 5,126 ========= ========= Cash flows from investing activities: Purchases of short-term investments (7,152) - Purchases of long-term investments (7,899) - Purchases of property and equipment (2,838) (881) Increase in other assets (149) (67) --------- --------- Net cash used in investing activities (18,038) (948) ========= ========= Cash flows from financing activities: Proceeds from IPO, net of issuance costs - 26,711 Payments of dividends on Preferred Stock - (2,638) Proceeds from exercise of stock options 124 54 Proceeds from stock issuance under employee stock purchase plan 154 - Purchase of treasury stock - (2) Payments on obligation under capital leases (22) (17) --------- --------- Net cash provided by financing activities 256 24,108 ========= ========= (Decrease) increase in cash and cash equivalents (10,594) 28,286 Cash and cash equiv alents, beginning of period 19,301 4,074 --------- --------- Cash and cash equivalents, end of period $ 8,707 $32,360 ========= ========= Supplemental disclosure of cash flow information Cash paid for income taxes $ 205 $ 19 --------- --------- Cash paid for interest $ 4 $ 1 --------- --------- Supplemental disclosure of noncash transactions Equipment acquired under capital lease obligations $ 25 $ 17 --------- --------- Accretion of dividends on redeemable preferred stock $ - $ 233 ---------- ---------
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 DESKTOP DATA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) I. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The condensed consolidated financial statements of Desktop Data, Inc. (the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1995 included in the Company's Form 10- K. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries. Interim operating results are not necessarily indicative of the results which would be expected for the full year. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Desktop Data Canada, Inc. and Desktop Data Securities Corporation. All material intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents and Investments Cash equivalents consist of highly liquid investments purchased with an original maturity of three months or less. Those securities with maturities of three months to twelve months as of the balance sheet date are classified as short term investments and securities with maturities of greater than twelve months are classified as long term investments. At September 30, 1996, cash equivalents included approximately $1.7 million in money market investments and $5.4 million in U.S. agency discount notes. At September 30, 1996, short term investments included approximately $4.3 million in U.S. Treasury notes, and $16.0 million in U.S. agency discount notes. Long term investments at September 30, 1996, were comprised of $7.9 million in U.S. Treasury notes. Net Income and Pro Forma Net Income Per Common and Common Equivalent Share For the three and nine month periods ended September 30, 1996, net income per common and common equivalent share is computed by dividing net income by the weighted average number of common and common equivalent shares during that period. Common equivalent shares from stock options have been included in the computation using the treasury-stock method. For the three and nine month periods ended September 30, 1995, pro forma net income per common and common equivalent share is computed by dividing net income, less the charge for the accretion of the Series B preferred stock dividend, by the pro forma weighted average number of common and dilutive common equivalent shares outstanding during that period, assuming conversion of all shares of Series A convertible preferred stock and all shares of Series C and D redeemable preferred stock into common stock. Stock options granted after July 1, 1994 through August 11, 1995 have been reflected as outstanding for the three and nine month periods ended September 30, 1995 using the treasury stock method as required by the Securities and Exchange Commission. 6 2. STOCKHOLDERS' EQUITY Initial Public Offering On August 11, 1995, the Company completed an initial public offering of 1,977,000 shares of its common stock, including 300,000 shares granted to the underwriters upon exercise of their over-allotment option. The proceeds to the Company, net of underwriting discounts, commissions and offering expenses, were approximately $26,711,000. Convertible Preferred Stock Concurrent with the above offering, the following transactions occurred: Upon the closing of the initial public offering, the Series A, Series C and Series D preferred stock was converted into an aggregate of 3,847,123 shares of common stock. In addition, the Company paid cash dividends of approximately $2,009,000 and $629,000 on the Series A and Series B preferred stock, respectively. In accordance with the underlying agreement, the mandatory redemption requirement related to the Series B preferred stock was relieved upon the Company's initial public offering as the offering price exceeded $13.10 per share. In December 1995, the Company redeemed the Series B preferred stock for $10.00 per share or an aggregate of $135,000, representing a $1,232,238 discount. On June 26, 1995, the Company's stockholders approved a new class of undesignated preferred stock, which became effective upon the closing of the Company's initial public offering. 3. STOCK SPLIT On June 26, 1995, the Company's stockholders approved a 1-for-2.25 reverse stock split of the common stock. The reverse stock split has been retroactively reflected in the accompanying consolidated financial statements and notes for all periods presented. 4. COMMITMENTS On August 31, 1995, the Company entered into an operating lease for office facilities, which commenced in February, 1996 and expires in fiscal 2003. The Company will pay out a total of approximately $2.3 million in monthly lease payments over the period of the lease. The Company has paid approximately $229,000 related to the security deposit on the lease. 7 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Desktop Data, through its NewsEDGE service and software, delivers a large variety of news and information sources in real time to personal computers and workstations installed on LANs and WANs, automatically monitors and filters the news, and alerts the users to stories of interest to them. The Company's revenues consist primarily of NewsEDGE subscription fees and related royalties received from news providers in connection with sales of their newswires through NewsEDGE. Historically, royalties have constituted less than 10% of this amount. The Company's other revenues consist principally of NewsEDGE installation services and related computer hardware system sales, and non-recurring custom development projects related to the Company's software. NewsEDGE subscriptions are generally for an initial term of twelve months, payable in advance, and are automatically renewable for successive one year periods unless the customer delivers notice of termination prior to the expiration date of the then current agreement. NewsEDGE subscription revenues are recognized ratably over the subscription term, beginning on installation of the NewsEDGE service. Accordingly, a substantial portion of the Company's revenues are recorded as deferred revenues until they are recognized over the license term. The Company does not capitalize customer acquisition costs. Certain newswires offered by the Company through NewsEDGE 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 ongoing royalties on payments made by the customer to the news provider, and those royalties constitute part of the Company's subscription and royalty revenues. For other newswires that are resold by Desktop Data to the NewsEDGE customer, the Company includes a fee for the newswire in the NewsEDGE subscription fee paid by the customer and pays a royalty to the news provider. Such royalties are included in the Company's cost of revenues. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 Total revenues increased 47%, from $5.9 million for the three months ended September 30, 1995 to $8.8 million for the three months ended September 30, 1996. Year-to-date total revenues increased 47% to $24.1 million as compared to $16.4 million for the same nine month period last year. In the third fiscal quarter, subscription and royalty revenues increased 44% to $8.1 million, up from $5.6 million for the same period in 1995. Year-to-date subscription and royalty revenues increased 46% to $22.5 million from $15.4 million for the nine months ended September 30, 1996 and 1995, respectively. Other revenues increased 107% to $690,000 and 63% to $1.6 million, respectively, for the three and nine month periods ended September 30, 1996, from $334,000 and $1.0 million, respectively, for the same periods in 1995. The increase in subscription and royalty revenues was due to increased subscription revenues from new customers, the retention and growth of revenues from existing customers and increased royalties from the sale of third party information news. The increase in other revenues was due to increased non-recurring custom development projects. The number of installed customers increased from 313 customers at September 30, 1995, to 373 customers at September 30, 1996, an increase of 19%. The number of authorized users within customer organizations increased from 68,915 users at September 30, 1995 to 110,298 users at September 30, 1996, an increase of 60%. The average users per customer increased from 212 users at September 30, 1995 to 270 users at September 30, 1996, an increase of 27%. The Company's average revenues per customer increased from $54,330 for the nine months ended September 30, 1995 to $63,435 for the nine months ended September 30, 1996, an increase of 17%. Cost of revenues, as a percentage of total revenues, remained relatively constant at 28% and 27% for the three and nine months ended September 30, 1996 from 27% and 28% for the three and nine months ended September 30, 1995. 8 Customer support expenses increased 32% to $898,000 for the three months ended September 30, 1996, as compared to $683,000 for the same period in 1995. Year- to-date customer support expenses increased 41% to $2.5 million for the nine months ended September 30, 1996, as compared to $1.8 million for the same period in 1995. These increases result primarily from higher staffing levels and the continuing need for the Company to provide additional support to its growing customer base. As a percentage of total revenues, customer support expenses remained relatively constant at 10% and 11%, respectively, for the three and nine month periods ended September 30, 1996, as compared to 11% for both the three and nine month periods ended September 30, 1995. At September 30, 1996, Desktop Data had 49 employees engaged in field and central customer support operations. Development expenses increased 37% to $1.0 million for the three months ended September 30, 1996, as compared to $747,000 for the three months ended September 30, 1995. Year-to-date development expenses increased 56% to $3.2 million for the nine months ended September 30, 1996, as compared to $2.0 million for the comparable period in 1995. Development expenses increased as a result of higher staffing levels to provide for enhancements of existing features and the development and quality assurance testing of new features. As a percentage of total revenues, development expenses remained relatively constant at 12% and 13%, respectively, for the three and nine month periods ended September 30, 1996, as compared to 13% and 12%, respectively, for the comparable periods in 1995. The increase in development expenses was due primarily to planned increases in development staff required to expand and enhance the Company's product line. At September 30, 1996, Desktop Data had 45 employees engaged in development and quality assurance operations. Sales and marketing expenses increased 41% to $3.2 million for the three month period ended September 30, 1996, as compared to $2.3 million for the same period in 1995. Year-to-date sales and marketing expenses increased 35% to $8.6 million for the nine month period ended September 30, 1996, from $6.4 for the same period in 1995. Sales and marketing expenses increased during these periods, primarily due to the expansion of the sales and marketing organizations. As a percentage of total revenues, sales and marketing expenses decreased to 37% and 36% for the three and nine month periods ended September 30, 1996, from 38% and 39% for the same periods in 1995. The decrease was primarily due to an increase in the Company's revenues, without a corresponding increase in sales and marketing expenses. As of September 30, 1996, Desktop Data's direct sales force and marketing staff consisted of 63 employees. General and administrative expenses increased 28% to $359,000 for the three months ended September 30, 1996 from $281,000 for the three months ended September 30, 1995. Year-to-date general and administrative expenses increased 35% to $1.1 million for the nine months ended September 30, 1996 from $835,000 for the nine month period ended September 30, 1995. The increases in general and administrative expenses were due primarily to additions to staff to support the Company's growth. General and administrative expenses, as a percentage of total revenues, remained relatively constant at 4% and 5% for the three and nine month periods ended September 30, 1996, as compared to 5% for both the three and nine months ended September 30, 1995. At September 30, 1996, Desktop Data had 12 employees engaged in general and administrative operations. Interest income, net increased to $490,000 and $1.4 million, respectively, for the three and nine month periods ended September 30, 1996, from $283,000 and $440,000 for the comparable periods in 1995, due to the interest earned on higher cash balances generated from operations and the proceeds from the Company's initial public offering and higher interest rates paid on cash balances. The provision for income taxes increased to $151,000 and $384,000, respectively, for the three and nine month periods ended September 30, 1996 from $49,000 and $81,000 for the comparable periods in 1995. The increase in the tax provision is due to both the utilization of the available tax loss carryforwards and higher expected taxable income in the Company's foreign operations with higher tax rates. 9 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company had cash and investments aggregating $36.9 million (including $7.9 million in long term investments), as compared to $32.4 million of cash and investments at December 31, 1995, an overall increase of $4.5 million. Net cash generated from operations was $7.2 million for the nine months ending September 30, 1996 compared with $5.1 million for the comparable period in 1995, due primarily to higher net income in the period ended September 30, 1996 combined with the effects of changes in accounts receivable and deferred revenue related to the timing of cash receipts. Net cash used for investing activities for the nine months ended September 30, 1996 was $18.0 million, due primarily to the purchase of long term and short term investments, and purchases of property and equipment. Net cash provided by financing activities in the nine months ended September 30, 1996 was $256,000, due primarily to proceeds from both employee stock option exercises and employee stock plan purchases. The Company continues to investigate the possibility of investments in or acquisitions of complementary businesses, products or technologies, although the Company has not entered into any commitments with respect to any such transactions. The Company believes that its current cash balances and funds anticipated to be generated from operations, will be sufficient to satisfy working capital and capital expenditure requirements for the next twelve months. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of the risks which may affect future operating results. Competition. The business information services industry is intensely competitive and is characterized by rapid technological change and the entry into the field of extremely large and well-capitalized companies as well as smaller competitors. 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. The Company competes or may compete directly or indirectly with the following categories of companies: (i) large, well- established news and information providers such as Knight-Ridder Information Services, Inc. ("Dialog"), Dow Jones & Company, Inc. ("Dow Jones"), Reed Elsevier PLC ("Lexis/Nexis"), Pearson PLC ("Pearson"), Reuters America, Inc. ("Reuters") and Thomson Financial Networks, Inc. ("Thomson"); (ii) market data services companies such as Automatic Data Processing, Inc. ("ADP"), Bloomberg L.P. ("Bloomberg"), Quotron Systems, Inc. ("Quotron") and Dow Jones Telerate Inc. ("Telerate"); (iii) traditional print media companies that are increasingly searching for opportunities for on-line provision of news, including through the establishment of World Wide Web sites on the Internet; (iv) large providers of LAN-based software systems such as Lotus Development Corporation ("Lotus") and Microsoft Corporation ("Microsoft"), which could, in the future, ally with competing news and information providers; and (v) to a lesser degree, consumer- oriented commercial on-line services and Internet access providers. Many of these companies and market participants not named above have substantially greater financial, technical and marketing resources than the Company. The Company believes that NewsEDGE is differentiated from the news and system products offered by the large news and systems providers because of the Company's ability to deliver news from many different, competing providers on an enterprise-wide basis, directly to LAN-connected personal computers, customized to meet the needs of each individual user, at a relatively low cost per user. 10 In addition, several smaller companies offer directly competitive products or services that provide news to enterprises through the customer's computer network. The Company believes that NewsEDGE offers advantages over each of these competing products. For example, certain of the competing services offers substantially fewer real-time news sources than does NewsEDGE. Furthermore, unlike NewsEDGE, certain competitors do not offer real-time scrolling of news stories, while others do not support Lotus Notes or other groupware applications. In addition, many competitors rely on database engines developed by third parties, and as a result the Company believes these services are not as readily adaptable to evolving customer or information provider needs as is NewsEDGE. Finally, certain of these smaller competitors are owned by a larger organization, which the Company believes restricts their ability to attract a large variety of news sources and makes it difficult for them to provide the same level and focus of sales, development and customer support as can be provided by Desktop Data. Dependence on NewsEDGE Service. The Company currently derives substantially all of its revenues from NewsEDGE service subscriptions and related royalties. Although the Company intends to increase the number of news and other information sources available through NewsEDGE and to otherwise enhance NewsEDGE, the Company's strategy is to continue to focus on providing the NewsEDGE service as its sole line of business. In addition, there can be no assurance that the Company will be able to increase the number of news sources or otherwise enhance NewsEDGE. As a result, any factor adversely affecting sales of NewsEDGE would have a material adverse effect on the Company. The Company's future financial performance will depend principally on the market's acceptance of NewsEDGE and the Company's ability to sell NewsEDGE to additional customers and to increase revenue derived from existing customers by increasing the number of users within each customer, adding additional newswires or adding additional NewsEDGE servers. Dependence on News Providers. The Company currently makes over 600 news and information sources available through NewsEDGE, pursuant to agreements between the Company and over 50 different 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 ("The Associated Press"), Dow Jones, The Financial Times, Reuters and Thomson. The Company's agreements with news providers are generally for a term of one year, 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 Desktop Data fails to fulfill its obligations under the agreement and, under some of the agreements, upon the occurrence of a change in control of the Company. 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 would have a material adverse effect on the Company's business and results of operations. Dependence on News Transmission Sources. NewsEDGE news and information is transmitted using one or more of three methods: leased telephone lines, satellites or FM radio transmission. None of these methods of news transmission is within the control of the Company, and the loss or significant disruption of any of them could have a material adverse effect on the Company's business. Many newswire providers have established their own broadcast communications networks using one or more of these three vehicles. In these cases, Desktop Data'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's news consolidation facility, where it is reformatted for broadcast to NewsEDGE servers and retransmitted to customers through an arrangement between the Company and WavePhore Networks, Inc. ("WavePhore"), a common carrier communications vendor. WavePhore is also the communications provider for many newswires offered by the Company through NewsEDGE. The Company's agreement with WavePhore expires on December 31, 1998 and can be terminated earlier in the event of a material breach by the Company of the agreement. If the agreement with WavePhore were terminated on short notice, or if WavePhore were to encounter technical or financial difficulties adversely affecting its ability to continue to perform under the agreement or otherwise, the Company's business would be materially and adversely affected. The Company believes that if WavePhore were unable to fulfill its obligations, other sources of retransmission would be available to the Company, although the transition from WavePhore to those sources could result in delays or interruptions of service that could have a material adverse affect on the Company's business. 11 Rapid Technological Change. The business information services, software and communications industries are subject to rapid technological change, which may render existing products and services obsolete or require significant unanticipated investments in research and development. The Company's future success will depend, in part, upon its ability to enhance NewsEDGE and keep pace with technological developments. Dependence on Key Personnel. The Company's success depends to a significant extent upon the continued service of its executive officers and other key management, sales and technical personnel, and on its ability to continue to attract, retain and motivate qualified personnel. The competition for such employees is intense. The Company has no long-term employment contracts with any of its employees and none of its employees is bound by a non-competition agreement. The loss of the services of one or more of the Company's executive officers, sales people, design engineers or other key personnel or the Company's inability to recruit replacements for such personnel or to otherwise attract, retain and motivate qualified personnel could have a material adverse effect on the Company's business and results of operations. The Company maintains $3 million of key-man life insurance on Donald L. McLagan, the Company's Chairman, President and Chief Executive Officer. 12 DESKTOP DATA, INC. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K. - ------------------------------------------------ 6a. Exhibits. 11.1 Computation of earnings per share 6b. REPORTS ON FORM 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. 13 DESKTOP DATA, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DESKTOP DATA, INC. (Registrant) Date: November 8, 1996 /s/ Edward R. Siegfried -------------------------------------------- Edward R. Siegfried Vice President--Finance and Operations Treasurer and Assistant Secretary 14 DESKTOP DATA, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibit No. Description Page - ----------- ----------- ---- 11.1 - Computation of earnings per share 16 EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE DESKTOP DATA, INC. AND SUBSIDIARIES EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 --------- -------- -------- -------- Net income $1,202 $ 564 $3,065 $1,167 Accretion of dividends on Series B redeemable preferred stock - (34) - (101) ------ ------ ------ ------- Net income available for common stockholders $1,202 $ 530 $3,065 $1,066 ====== ====== ====== ======= Weighted average common shares outstanding, 8,592 5,904 8,561 3,742 assuming conversion of Series A, Series C, and Series D preferred stock as of the beginning of the period - 1,714 - 3,128 Weighted average shares to be issued sufficient to generate proceeds for the payment of dividends on the Series A preferred stock payable upon the Initial Public Offering - 84 - 154 Common stock equivalents outstanding, pursuant to the treasury stock method (1) 203 233 250 195 ------ ------ ------ ------- Weighted average number of common and common equivalent shares outstanding in 1996; Pro forma weighted average number of common and common equivalent shares outstanding in 1995 8,795 7,935 8,811 7,219 ------ ------ ------ ------- Net income per common and common equivalent share in 1996; Pro forma net income per common and common equivalent share in 1995 $0.14 $0.07 $0.35 $0.15 ====== ====== ====== =======
(1) For 1995, includes common stock options issued after July 1, 1994, pursuant to the treasury stock method, in accordance with Securities and Exchange Commission Rules. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 8,707 20,269 4,048 0 0 34,895 6,176 1,985 47,256 19,215 0 0 0 86 27,862 47,256 24,102 24,102 6,519 22,023 0 0 0 3,449 384 3,065 0 0 0 3,065 .35 .35
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