-----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, TUTD9V7oLw2k0L3mzPwLs/rcRlXzVxxfa98udk6P3oR2G+SYRarrYLyG0R3Fsdz1 tYfFjJOrKFJei7nQrr6c7A== 0000927016-98-001282.txt : 19980401 0000927016-98-001282.hdr.sgml : 19980401 ACCESSION NUMBER: 0000927016-98-001282 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 98581020 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 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, 1997 ----------------- 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 (formerly 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) (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 February 27, 1998, was approximately $154.4 million (based upon the closing bid price of the Registrant's Common Stock on February 27, 1998, of $11.125 per share). The number of shares outstanding of the Registrant's $.01 par value Common Shares as of February 27, 1998 was 16,945,407. 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, 1997. Portions of such proxy statement are incorporated by reference into Part III of this report. 2 PART I Item 1. Business - ----------------- NewsEDGE Corporation (formerly Desktop Data, Inc.) (the "Company") is the leading independent provider of customized, real-time news and information delivered to knowledge workers over their organizations' local area networks. The Company's primary service, NewsEDGE, provides professionals with customized news and information for better decision-making. Implemented in approximately 400 customer organizations, including 26 of the top 50 Fortune 1000 companies, NewsEDGE combines more than 1,600 authoritative news sources with proven scalability and reliability, disseminating business-critical information throughout the corporate intranet. The NewsEDGE service is used by executives, salespeople, marketers, lawyers, accountants, consultants, bankers and financial professionals throughout customer organizations. On February 24, 1998, the Company completed its merger (the "Merger") with Individual, Inc. ("Individual"). Concurrently with the Merger, the Company changed its corporate name to NewsEDGE Corporation. Individual developed and marketed a suite of customized news and information services that provide knowledge workers with daily personalized current awareness reports, while offering information providers and advertisers new ways to reach targeted audiences. Utilizing its knowledge processing systems and editorial knowledge bases, Individual's intelligent software agents search each day through as many as 20,000 stories drawn from approximately 600 broad and specialized information sources, and prepare for each user a highly relevant daily news briefing with full-text retrieval options. In addition, Individual's Hoover Business Intelligence Service ("Hoover") integrates and organizes news and information from internal and external sources and provides real-time and archival electronic services to organizations. Individual delivered its information services to more than approximately 700,000 users across a range of delivery platforms, including facsimile, electronic mail, groupware, intranets and the Internet. The Company believes that there is a strategic fit among the respective services of the Company and Individual and that the Merger will provided the Company with expanded service offerings to address a wider range of customer requirements. The Company also believes that the Merger provides greater opportunities to develop business relationships, license technology, and engage in other strategic combinations and transactions involving the Company's combined products and technologies. Because the Merger was completed subsequent to December 31, 1997, this Annual Report does not contain the financial results of the combined Company. Background The market for business information services is undergoing significant change, driven by rapid growth in the amount of available information, increasingly competitive global industry environments and increased requirements for professionals to improve the quality and timeliness of the information they receive. The U.S. business-to-business information market was estimated by industry analysts to be approximately $49.9 billion in 1997. An industry source has estimated the market segment in which NewsEDGE Corporation competes, current awareness news services, grew 51% in 1997 to $203 million, and is expected to expand by a 35-40% annual rate over the next five years. The decentralization of decision making and accountability in large organizations has created a need for the widespread distribution of business information to knowledge workers across a number of disciplines and at different levels within the organization. At the same time, the accelerating pace of business activity, stimulated by global competitiveness and advanced electronic communication, has created a need for business information to be more current, timely and easy to access and use. Media attention to the World Wide Web and marketplace standardization on the use of web browsers to access information has reinforced the concept that knowledge workers need access to information from their desktop. The profusion of web information sites has made it more difficult for business professionals to quickly find the right information they need for their jobs. Knowledge workers are required to "surf the web" to track the multiple sites that may contain the needed information. The NewsEDGE Solution 3 The Company's NewsEDGE service allows knowledge workers to take advantage of the abundance of news and information available to their organizations. Typically, the Company installs its NewsEDGE software on a dedicated, customer-owned network server which is connected to the customer's LAN at the customer site. The Company arranges for the delivery to the server of real-time news and information from the customer's choice of over 1,600 sources from 120 global content providers. The news is filtered to reflect personal profiles that have been established by each user on the user's desktop or laptop computer, and is delivered in real-time, 24 hours a day, seven days a week. When a news story matching a user's personal profile arrives, the user is notified by a visual and audio alert, even if the user is then working in another application. When the user's computer is not on or is not connected to the LAN, stories matching that user's profile are stored by the server and delivered when the user's computer is re-activated. NewsEDGE stores approximately 90 days of news stories in a database on the NewsEDGE server, whether or not the stories have matched a profile, and enables users to quickly search the entire database at no additional charge. NewsEDGE is distinguished from the information offerings of individual news providers because it integrates the newswires from a number of competitive sources into a single, comprehensive service offering. The NewsEDGE user's profile gathers breaking news from several sources and delivers it to the user's desktop. NewsEDGE leverages the existing LAN investment of business organizations and enables broad access to real-time news from multiple highly respected news sources. NewsEDGE alerts knowledge workers to important developments affecting their business, giving them an opportunity to gain an edge on competitors. The NewsEDGE Service The Company's NewsEDGE service was designed to operate in a client/server LAN or WAN environment. The Company typically installs its NewsEDGE software on a dedicated, customer-owned network server which receives broadcast news on a 24 hour per day basis. The Company arranges for the communication of news selected by the customer to the server through leased telephone lines, satellites or FM sideband transmission. Customers may also, however, access news services by connecting to NewsEDGE servers located at the Company's headquarters in Burlington, MA through dedicated, leased line connections or via the public Internet. No matter where the server is located, the NewsEDGE server software manages the receipt of news from multiple news sources over the communications vehicle arranged by the Company. Incoming stories are tested against the interest profiles of all NewsEDGE users on the LAN and alerts are sent to each user in accordance with the user's own profile. Profiles may also be created for shared access by groups of users with common interests. All stories received by the server are indexed by full text, ticker symbols, subject codes and dates and added to a news history database to support subsequent searching and retrieval. Typically, approximately 90 days of history of stories received, regardless of whether the stories have matched a profile, are maintained for user inquiry on the NewsEDGE server on the customer LAN. NewsEDGE client software manages the user's interface with the news. The NewsEDGE client software provides an easy-to-use graphical user interface that permits users to readily create and modify personalized profile lists of words, phrases and ticker symbols for news monitoring and alerting. When a news story matching a user's personal profile arrives, the user is notified by a visual and audio alert, even if the user is then working in another application. Users can also conduct immediate searches of news stored in the NewsEDGE server using Boolean search techniques, key words or phrases, ticker symbols and subject codes. NewsEDGE user functionality is supported in the Netscape Navigator and Microsoft Internet Explorer browsers, in Windows, Windows NT and UNIX desktop operating systems, and through an applications programming interface (API) and object technology for third-party developers. Increasingly, customers of the NewsEDGE service have requested the ability to customize NewsEDGE features and functionality to fit into internally developed applications or other third-party-provided applications. In response, the Company launched its NewsOBJECTS products and Alliance Partner Program in the spring of 1997. Through NewsOBJECTS, NewsEDGE will support object or component level, programmatic access to the NewsEDGE Server. With component level access, applications integration and customization of news monitoring is greatly facilitated, thereby lowering the barrier to the use of the news service on more desktops throughout the customer organization. During 1997, ten companies; Avesta Technologies, Capitol Hill Software, CompassWare Development, CSK Software, Data Channel, Digitial Knowledge Assets LLC, Midas-Kapiti Int'l, Infotec, Menhir and TIBCo Financial, have joined the NewsOBJECTS Alliance Partner Program to integrate and embed NewsEDGE functionality into their applications. 4 NewsEDGE is designed with client-server architecture to leverage customers' LAN and WAN investments. NewsEDGE operates primarily on Windows NT servers. NewsEDGE supports multiple LAN configurations, including Novell Netware, TCP/IP, broadcast, point-to-point, session and mixed protocols. NewsEDGE also supports server to server connections to groupware, E-mail, quotation and other applications on customer LANs, including Lotus Notes, and TIBCO Marketsheet. In 1997, the Company announced its NewsOBJECTS(R) Toolkit for Active X Components. NewsOBJECTS is the first commercially available technology that enables fully customizable, plug-and-play integration of real-time, on-line news into third-party applications. The Toolkit is designed for companies developing in-house applications that benefit from the integration of news and business information, as well as for third-party applications developers. News and Information Providers The Company has contracted with providers to make available through the NewsEDGE service over 180 newswires, aggregating news and information from over 1,600 sources published by over 120 global content providers. News and information sources currently available on NewsEDGE include newswires from AFP/Extel News Limited, The Associated Press, Inc., Dow Jones & Company, Inc., Knight-Ridder/Tribune Information Services, L.P., Nihon Shimbun America, Inc. (English language Japanese news) and Reuters America, Inc., as well as the text of stories in The Financial Post (Toronto), Financial Times (London), The New York Times and The Wall Street Journal. Also available on NewsEDGE 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 PC Week, 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, and the Economist. Newswires are delivered to customer LANs through one or more of three delivery vehicles: leased telephone lines; direct satellite transmission; and FM sideband transmission. 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 the communications between the news provider and the NewsEDGE customer's server. For newspapers, newsletters, magazines and other sources which do not have their own broadcast communications capabilities, news and information are delivered to the Company's news consolidation facility in Burlington, Massachusetts, where it is reformatted for broadcast to NewsEDGE servers and retransmitted to customers by a common carrier communications provider. Pricing NewsEDGE customers are charged an annual subscription fee for the NewsEDGE service, plus a one-time installation fee. The subscription fee includes the NewsEDGE software, ongoing customer support, and the customer's choice of newswires. Pricing varies depending on the number and type of platforms in the customer's LAN, the number of authorized users and the newswires selected. Current list prices for installation within the United States range from $4,000 to $6,000 per server. There are no separate charges for creating or changing a profile or for conducting searches. As a result of the low incremental cost of providing NewsEDGE to additional users, the Company offers substantial volume discounts. For example, the list price for a customer within the United States with 100 authorized users and including a basic package of newswires is currently $60,000 per year for NewsEDGE/Windows, for a cost per user per day of $1.64. The same package for 1,000 authorized users lists for $135,000, at a cost per user per day of $0.37. The NewsEDGE list price for this package decreases on a per user basis as the number of users increases. Certain newswires, including popular offerings from Dow Jones and Reuters, are billed separately directly by the news provider as an addition to the NewsEDGE subscription fee. Most customers purchase subscriptions for one or more of these newswires. Sales and Marketing NewsEDGE is sold and marketed through the Company's direct sales force and marketing staff which as of December 31, 1997, consisted of 78 full time employees based in nine locations throughout the United States, 5 Canada and United Kingdom. Following the Merger, the direct sales force and marketing staff has increased to 152 employees. Because the decision to purchase NewsEDGE is complex and has implications for many different groups and constituencies throughout a customer organization, the Company believes that the education, NewsEDGE demonstrations and follow-through required to make a new customer sale is best done by its own sales staff, which focuses exclusively on NewsEDGE. The Company believes that the size and experience of its sales force provide the Company with a competitive advantage. The Company's new account selling is concentrated on major corporations, financial institutions, government agencies, and publishers where timely news has high value, where there are numerous LAN users and where NewsEDGE cost economies of scale can provide the greatest benefit. NewsEDGE is generally sold pursuant to annual subscriptions that renew automatically unless notice of termination is provided prior to the end of the term. The Company sales team responsible for making the initial sale is also responsible for renewals and trade-ups. Trade-ups include the purchase by the customer of additional newswires, the authorization of more users and platforms and the acquisition of additional NewsEDGE servers. The Company's experienced direct sales force and significant investments in development and customer support have resulted in annual renewal rates of at least 90% for each of the last five years. To expand its service offerings and assist its sales force in selling NewsEDGE, the Company has entered into development and joint marketing relationships with various corporate partners. For example, the Company has contracted with TIBCO Financial to adapt NewsEDGE for use in conjunction with products sold by TIBCO Financial to the trading floors of financial services firms, and to jointly market the resulting service. The Company has also contracted with CNBC/DowJones Business Video to make CNBC/DowJones Business Video's television and video offerings available through NewsEDGE and to jointly market this service. Similar arrangements have also been made with Disclosure, Inc. in regard to SEC filings and with Disclosure Global Alert for other financial information. Professional Services During fiscal year 1997, the Company's management expressed an intention to expand its professional service offering. On January 6, 1998, the Company acquired the assets, customers and personnel of the ISS unit of ADP Financial Services, Inc. ("ADP") in a cash transaction. The former Investment Software Systems, Inc. (ISS) was acquired by ADP in 1995 and provides news integration systems and consulting for the delivery of real-time news and investment research to the financial services industry. The management and staff of ISS joined the Company to form the nucleus of the Company's professional services initiative. NewsEDGE Customers The Company's customers include corporate, financial and government customers. As of December 31, 1997, NewsEDGE had been installed by approximately 400 customers, representing over 200,000 authorized users. No customer has accounted for over 5% of the Company's revenues in any of the last three years. Customer Support The Company believes that customer service and support is critical to achieving its objectives. The Company employs its own customer support staff, which provides centralized hot-line telephone support, field installation, training, and upgrade and maintenance support services for NewsEDGE customers. The NewsEDGE support staff consists of individuals with technical knowledge and experience relating not only to NewsEDGE, but also to the various client/server architectures and systems installed at customer sites. NewsEDGE is a highly visible application operating on customer networks. The operation of NewsEDGE is dependent on the customer's hardware, news communication to the customer's site, the operation of the customer network, other applications which the customer may be running simultaneously and the technical skills of the customer's NewsEDGE administrator. The NewsEDGE support staff diagnoses problems and suggests solutions over the telephone and, where necessary, travels to customer sites for further diagnosis and maintenance and brings in specialized expertise from the Company's emergency staff of technology experts or the NewsEDGE engineers themselves. The Company has a comprehensive call monitoring and problem tracking system to concentrate and escalate attention to customer problems. 6 Development The Company recognizes that the continued enhancement of NewsEDGE and the extension of its news and information offerings are critical to obtaining new customers and to obtaining trade-up sales and renewals from existing customers. Since its inception, the Company has made substantial investments in research and development, issuing regular new releases of its NewsEDGE software since the service's first launch in 1990. The NewsEDGE software has been developed by the Company's internal development and quality assurance staff. New versions of NewsEDGE are released periodically and made available to the client/server systems installed at customer sites as part of the annual NewsEDGE subscription fee. The current version of NewsEDGE, release 3.2, was made available to customers beginning in July 1997. Other development efforts have been focused on supporting additional desktop operating platforms and LAN configurations, expanding the scalability of the NewsEDGE server, increasing the 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 $2.9 million, $4.2 million and $5.1 million in 1995, 1996 and 1997, respectively. The NewsEDGE software is entirely proprietary to the Company. The Company believes that control over its own development is critical to its speed and flexibility in meeting market and technology changes. 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. An important aspect of NewsEDGE development is the continuing enhancement of the 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 by development and support personnel. The Company is currently seeking to expand its offerings with additional industry-specific information to increase sales to customers in new vertical markets and with additional international news sources to increase the availability of global, 24 hour a day coverage by NewsEDGE. Vertical market wires for the high-tech, pharmaceutical and consumer goods industries, developed in conjunction with Information Access Co., were released in August 1997. 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. 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 The Dialog Corporation, Dow Jones, Bridge, Lexis/Nexis, Pearson, Reuters and Thomson; (ii) market data services companies such as ADP, Bloomberg and 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/IBM and Microsoft, which could, in the future, ally with competing news and information providers; and (v) to a lesser degree, consumer-oriented, advertising-subsidized Web-based services and Internet access providers. Many of these companies, and other market participants 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 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. 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 and customers as well as current and potential joint marketing partners. 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 7 over each of these competing products. For example, each of the competing services offers substantially fewer real-time news sources than does NewsEDGE. Furthermore, unlike NewsEDGE, certain competitors do not offer real-time delivery of news stories or a historical database to support searching, 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 information provider needs as is NewsEDGE. Finally, many of these smaller competitors are owned by larger organizations, which the Company believes restricts their ability to attract a large variety of news sources and to fully respond to news providers' delivery requirements making it difficult for them to provide the same level and focus of sales, development and customer support as can be provided by the Company. However, increased competition, on the basis of price or otherwise, may require price reductions or increased spending on marketing or software development, which could have a material adverse effect on the Company's business and results of operations. Intellectual Property and Proprietary Rights The Company primarily relies upon a combination of copyright, trademark and trade secret laws and license agreements to establish and protect proprietary rights in its technology. The NewsEDGE software is licensed to customers on a non-exclusive basis pursuant to license agreements containing provisions prohibiting unauthorized use, copying and transfer of the licensed program. The source code for the Company's software is protected both as a trade secret and as an unpublished copyrighted work. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use the Company's software or technology without authorization or to develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The Company does not hold any patents. Furthermore, the proprietary SMART filtering software, which is used as the filtering engine for all Individual products and services, is licensed from Cornell Research Foundations, Inc. ("Cornell") under the terms of such license. The Company has exclusive worldwide rights in the SMART software until February 1999, at which point the license continues but the Company's exclusivity to the technology terminates. There can be no assurance that Cornell will not, at that time, 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, 1997, the Company had 202 full-time employees, consisting of 78 employees in sales and marketing, 61 employees in cost of revenues/customer support, 48 employees in development and 15 employees in general administration. As a result of the Merger, the Company now has 433 full-time employees, consisting of 152 employees in sales and marketing, 137 employees in cost of revenues/customer support, 104 employees in development and 40 employees in general administration. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its relationships with its employees are good. Item 2. Properties - ------------------- The Company's corporate headquarters are located in Burlington, Massachusetts. As of December 31, 1997, the Company leased approximately 40,000 square feet under a lease expiring in May 2003. 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 and London, England. As a result of the Merger, the Company assumed a lease for approximately 42,000 square feet of additional office space for its headquarters expiring in December 8 1999 and additional leased space in California and Tokyo for its sales offices. 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 - -------------------------- An amended consolidated securities class action complaint was filed in February 1997 in the United States District Court for the District of Massachusetts against Individual (now the Company) and certain of Individual's directors and officers, as well as eight of the underwriters of Individual's initial public offering, which closed on March 20, 1996. The complaint asserts that the defendants violated securities laws by failing to disclose at the time of the initial public offering of Individual that there allegedly was a dispute between Joseph A. Amram, the former Chief Executive Officer of Individual, and the Board of Directors, that ultimately led to Mr. Amram's departure from Individual four months after the offering. The plaintiffs seek damages, including costs and expenses, in an unspecified amount, among other relief. On April 15, 1997, the defendants moved to dismiss the litigation in its entirety on the grounds that plaintiffs fail to state any cognizable legal claim. After reviewing defendants' arguments in support of their motion to dismiss, plaintiffs voluntarily dropped three of the five counts of the complaint. A hearing on defendants' motion to dismiss the remaining counts was held before United States District Judge Woodlock of the United Stated District Court for the District of Massachusetts on July 2, 1997. No decision has been rendered in the case to date. The Company believes that the allegations contained in the complaint are without merit and intends to defend vigorously against all such claims. Although the Company believes that claims payable under these actions, if any, would not have a material effect on the Company's results of operations or financial condition, there can be no assurance that this litigation will not have a material adverse effect on the Company. 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 1997. 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 February 27, 1998, there were approximately 103 holders of record of the Company's Common Stock. The Company's Common Stock was listed for quotation on the Nasdaq National Market under the symbol "DTOP" and since the Merger has been listed under the symbol "NEWZ." Based on the Nasdaq National Market daily closing price, the high and low stock prices for each quarter for the past two years are shown below. The quotations represent interdealer quotations, without adjustments for retail markups, markdowns, or commissions, and may not necessarily represent actual transactions. Nasdaq National Market Daily Sales Prices: Quarter Ended High Low ------------- ---- --- March 31, 1996 $ 36.75 $ 17.25 June 30, 1996 40.75 26.50 September 30, 1996 33.25 22.25 December 31, 1996 29.00 17.25 March 31, 1997 20.00 12.25 June 30, 1997 14.25 5.00 September 30, 1997 12.50 9.75 December 31, 1997 13.13 6.44 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. 10 Item 6. Selected Consolidated Financial Data - --------------------------------------------- (In thousands, except per share data)
Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Statement of Operations Data: Subscription and royalty revenues $ 39,343 $ 31,292 $ 21,743 $ 12,925 $ 6,764 Other revenues 2,839 2,487 1,443 1,433 896 -------- -------- -------- -------- -------- Total revenues 42,182 33,779 23,186 14,358 7,660 Cost of revenues 13,062 9,501 6,397 3,879 2,010 Customer support expenses 5,124 3,493 2,493 1,908 719 Development expenses 5,101 4,230 2,870 1,902 1,654 Sales and marketing expenses 14,966 11,657 8,722 6,153 3,898 General and administrative expenses 2,079 1,595 1,281 900 675 -------- -------- -------- -------- -------- Total costs and expenses 40,332 30,476 21,763 14,742 8,956 Income (loss) from operations 1,850 3,303 1,423 (384) (1,296) Interest income, net 2,140 1,896 897 97 34 -------- -------- -------- -------- -------- Income (loss) before provision for income taxes 3,990 5,199 2,320 (287) (1,262) Provision for income taxes 1,297 614 183 -- -- -------- -------- -------- -------- -------- Net income (loss) $ 2,693 $ 4,585 $ 2,137 $ (287) $ (1,262) -------- -------- -------- -------- -------- Basic net income (loss) per common share (1) $ 0.31 $ 0.53 $ 0.66 $ (0.38) $ (0.78) ======== ======== ======== ======== ======== Diluted net income (loss) per common share (1) $ 0.31 $ 0.52 $ 0.43 $ (0.38) $ (0.78) ======== ======== ======== ======== ======== Pro forma net loss per common share (1) $ (0.06) $ (0.22) ======== ======== December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital (deficit) $ 28,040 $ 17,502 $ 22,578 $ (4,664) $ (1,967) Total assets 60,584 48,327 38,879 8,220 4,875 Redeemable preferred stock -- -- -- 4,545 4,195 Total stockholders' equity (deficit) 33,901 29,985 24,605 (6,077) (5,464)
- -------------------------------------------------------------------------------- (1) Calculated on the basis described in Note 1 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." Introduction and Overview The Company, through its family of NewsEDGE products, delivers, via both corporations' intranets, the Internet and local area networks, a large variety of news and information sources in real-time to professionals' personal computers, automatically monitoring and filtering the news, and alerting 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 is 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 the Company 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. On February 24, 1998, the Company completed its merger with Individual, Inc. ("Individual") (the "Merger"). Concurrently with the Merger, the Company changed its corporate name to NewsEDGE Corporation. Individual developed and marketed a suite of customized news and information services that provide knowledge workers with daily personalized current awareness reports, while offering information providers and advertisers new ways to reach targeted audiences. Utilizing its knowledge processing systems and editorial knowledge bases, Individual's intelligent software agents search each day through as many as 20,000 stories drawn from approximately 600 broad and specialized information sources, and prepare for each user a highly relevant daily news briefing with full-text retrieval options. In addition, Individual's Hoover Business Intelligence Service ("Hoover") integrates and organizes news and information from internal and external sources and provides real-time and archival electronic services to organizations. Individual delivered its information services to more than approximately 700,000 users across a range of delivery platforms, including facsimile, electronic mail, groupware, intranets and the Internet. The Company believes that there is a strategic fit among the respective services of the Company and Individual and that the Merger will provide the Company with expanded service offerings to address a wider range of customer requirements. The Company also believes that the Merger provides greater opportunities to develop business relationships, license technology, and engage in other strategic combinations and transactions involving the Company's combined products and technologies. Because the Merger was completed subsequent to December 31, 1997, this Annual Report does not contain the financial results of the combined company. 12 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, ----------- 1997 1996 1995 ---- ---- ---- Subscription and royalty revenues 93.3% 92.6% 93.8% Other revenues 6.7 7.4 6.2 ----- ----- ----- Total revenues 100.0 100.0 100.0 Cost of revenues 31.0 28.1 27.6 Customer support expenses 12.1 10.4 10.8 Development expenses 12.1 12.5 12.4 Sales and marketing expenses 35.5 34.5 37.6 General and administrative expenses 4.9 4.7 5.5 ----- ----- ----- Total costs and expenses 95.6 90.2 93.9 ----- ----- ----- Income from operations 4.4 9.8 6.1 Interest income, net 5.1 5.6 3.9 ----- ----- ----- Income before provision for income taxes 9.5 15.4 10.0 Provision for income taxes 3.1 1.8 0.8 ----- ----- ----- Net income 6.4% 13.6% 9.2% ===== ===== =====
Year Ended December 31, 1997, as Compared to the Year Ended December 31, 1996 Revenues. Revenues consist of (i) subscription and royalty revenues and (ii) other revenues which consist of revenues from NewsEDGE installation services and other sources. Total revenues increased 25% to $42.2 million for 1997, as compared to $33.8 million for 1996. Subscription and royalty revenues increased 26% to $39.3 million from $31.3 million for 1997 and 1996, respectively. The increase in subscription and royalty revenues was attributable 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. Other revenues, consisting of revenues from NewsEDGE installation services, computer hardware system sales and non-recurring custom development projects, increased 14% to $2.8 million for 1997 from $2.5 million for 1996. The approximate $300,000 increase related to non-recurring custom development projects and installations of NewsEDGE. International revenues (revenues from customers outside of North America) accounted for less than 10% of revenues during the years ended December 31, 1997 and 1996. Cost of revenues. Cost of revenues consists primarily of royalties paid to third-party information providers for the cost of news services licensed to customers, costs associated with transmitting news services to customer sites and the cost of computer hardware sold to customers. Cost of revenues does not include customer support expenses. Cost of revenues, as a percentage of total revenues, increased to 31% for the fiscal year ended December 31, 1997 compared to 28% for the same period in 1996. The percentage increase in cost of revenues was due primarily to increases in royalties paid to third-party information providers and increases in transmission costs. 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 increased 47% to $5.1 million for 1997, as compared to $3.5 million for 1996. These increases result primarily from higher staffing levels and the continuing need for the Company to provide additional support to its growing customer base. Customer support expenses, as a percentage of total revenues, increased to 12% for the fiscal year ended December 31, 1997 as compared to 10% for the same period in 1996. 13 Development expenses. Development expenses consist primarily of costs associated with the design, programming, and testing of the Company's new software and services. Development expenses increased 21% to $5.1 million for 1997, as compared to $4.2 million for 1996. The increase in development expenses resulted from a combination of higher staffing levels to provide for product enhancements and higher payroll and recruiting costs deemed necessary to attract and retain new and existing personnel. Development expenses, as a percentage of total revenues, decreased to 12% for the fiscal year ended December 31, 1997, as compared to 13% for the same period in 1996. 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 increased 28% to $15.0 million for 1997, as compared to $11.7 million for 1996. The increase was due primarily to higher staffing levels which resulted from the expansion of the sales and marketing organization. Sales and marketing expenses, as a percentage of total revenues, increased to 36% for the fiscal year ended December 31, 1997, as compared to 35% for the same period in 1996. 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 increased 30% to $2.1 million for 1997, as compared to $1.6 million for 1996. The increase in general and administrative expenses was due primarily to additions to staff to support the Company's growth. General and administrative expenses, as a percentage of total revenues, remained constant at 5% for the years ended December 31, 1997 and 1996, respectively. Interest income, net. Interest income, net consists of interest earned on cash, cash equivalents and investments, offset by interest expense on equipment financing. Interest income, net increased to $2.1 million for 1997, from $1.9 million for 1996, due primarily to interest earned on higher cash and investment balances generated from operations and higher interest rates earned on cash, cash equivalents and investment balances. For the fiscal year ended December 31, 1997, the provision for income taxes increased to $1.3 million from $.6 million for the same period in 1996. This increase was due primarily to a reduction in tax loss carryforwards. As a result of the merger with Individual, Inc. on February 24, 1998, the Company does not expect to owe income taxes in 1998 other than an immaterial amount related to income from the Company's foreign operations. Year Ended December 31, 1996, as Compared to the Year Ended December 31, 1995 Revenues. Total revenues increased 46% to $33.8 million for 1996, as compared to $23.2 million for 1995. Subscription and royalty revenues increased 44% to $31.3 million from $21.7 million for 1996 and 1995, respectively. The increase in subscription and royalty revenues was attributable 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. Other revenues increased 72% to $2.5 million for 1996 from $1.4 million for 1995. The increase was due primarily to revenue from one-time custom development projects, such as the NBC Desktop Video and LinkEDGE projects. The Company currently does not solicit hardware sales, and anticipates that revenues from hardware sales will decline as a percentage of total revenues. International revenues (revenues from customers outside of North America) accounted for less than 5% of revenues during the years ended December 31, 1996 and 1995. Cost of revenues. Cost of revenues remained constant at 28% for the years ended December 31, 1996 and 1995. Customer support expenses. Customer support expenses increased 40% to $3.5 million for 1996, as compared to $2.5 million for 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 declined to 10% for 1996 versus 11% for 1995. Development expenses. Development expenses increased 47% to $4.2 million for 1996, as compared to $2.9 million for 1995. Development expenses increased as a result of higher staffing levels to provide for enhancements of existing features and the development of new features. Development expenses, as a percentage of total revenues, increased slightly to 13% for the year ended December 31, 1996, as compared to 12% for the year ended December 31, 1995. 14 Sales and marketing expenses. Sales and marketing expenses increased 34% to $11.7 million for 1996, as compared to $8.7 million for 1995. Sales and marketing expenses represented 35% of revenues for 1996, as compared to 38% for 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, however, sales and marketing expenses decreased primarily as a result of the increase in the Company's revenues, without a corresponding increase in sales and marketing expenses. General and administrative expenses. General and administrative expenses increased 24% to $1.6 million for 1996, from $1.3 million for 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, decreased slightly to 5% for the year ended December 31, 1996, as compared to 6% for the year ended December 31, 1995. Interest income, net. Interest income, net increased to $1.9 million for 1996, from $897,000 for 1995, due primarily to interest earned on higher cash balances generated from operations. For the year ended December 31, 1996, the provision for income taxes was $614,000. This provision is primarily the result of state taxes due in states that do not have net operating loss carryforwards available and the alternative minimum tax due under the Internal Revenue Code. Despite the Company's profitability in 1995 and 1996, the Company has provided a full valuation allowance against its net deferred tax asset due to the uncertainty surrounding the realization of the net deferred tax asset. The uncertainty is due to the mechanism required for utilizing net operating less carryforwards (NOLs) and tax credit carryforwards, as well as the Company's history of cumulative losses since inception of $1.9 million as of December 31, 1996. The Company has significant NOLs from disqualifying dispositions and tax credit carryforwards (TCCs) primarily from research and development activities. The Company is required to first use the NOLs (including NOLs generated from disqualifying dispositions) prior to realizing any benefit from the TCCs, thus extending the time as to when the TCCs can be utilized. Liquidity and Capital Resources On August 11, 1995, the Company completed an initial public offering of its common stock, which provided the Company with net proceeds of approximately $26,711,000. Prior to the initial public offering, the Company funded its operations primarily from cash flow from operations and proceeds from the issuance of preferred stock. The Company's combined cash, cash equivalents and investments balance was $43.2 million at December 31, 1997, as compared to $36.8 million at December 31, 1996, an increase of $6.4 million. Net cash provided by operations was $7.8 million, $7.1 million and $5.8 million for 1997, 1996 and 1995, respectively. Accounts receivable increased $2.6 million, $1.8 million, and $906,000 for 1997, 1996 and 1995, respectively. Deferred revenue increased $3.6 million, $3.7 million, and $2.5 million for 1997, 1996 and 1995, respectively. These increases are due to profitable operations, continued growth in subscription fees and advanced payments received from customers. Net cash provided by investing activities for the year ended December 31, 1997 was $15.4 million. This cash inflow resulted from a large decrease in the short-term investment balance caused by the reinvestment of cash from maturing short-term investments into investments with an original maturity of less than three months (i.e. cash equivalents). The cash inflow resulting from the decrease in short-term investments was partially offset by $2.6 million in capital expenditures. Net cash used in investing activities for the year ended December 31, 1996 was $16.5 million, $13.0 million for the net purchases of investments and $3.5 million for capital expenditures. In 1995, the Company used $14.6 million primarily for capital expenditures required to support the expansion and growth of the business, and the purchase of short-term investments. Net cash provided by financing activities was $1.2 million, $764,000 and $24.0 million for 1997, 1996 and 1995, respectively. Net cash provided during 1997 and 1996 primarily consisted of proceeds from both employee stock option exercises (including tax benefits) and purchases under the employee stock purchase plan. Net cash provided during 1995 consisted primarily of the net proceeds from the Company's initial public offering, offset by payments of dividends on preferred stock. All of the Company's preferred stock was either converted into common stock upon the closing of the public offering or redeemed by the Company during 1995. As such, there is no outstanding preferred stock or dividends payable. 15 The Company believes that its current cash, cash equivalents and short-term investments 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. Subsequent Events On February 24, 1998, the Company merged with Individual to form NewsEDGE Corporation. Under the terms of the agreement, shares of the Company were exchanged for all outstanding shares, options and warrants of Individual, Inc. on the basis of one share of Individual, Inc. common stock for one-half (1/2) of one share of the Company's common stock. As of December 31, 1997, NewsEDGE Corporation had $92.3 million in total assets on a pro forma combined basis, including $58.6 million in cash and short-term investments. The Company expects to incur a charge of approximately $10 million to $12 million in the first quarter of 1998 related to integration of operations, asset write-downs, personnel reduction and other one-time merger related charges. The integration of the business of Individual requires, among other things, integration of the companies' respective service offerings and coordination of the companies' sales, marketing and research and development efforts. Historically, the sales models used by both companies' sales organizations have differed significantly, although each employs direct sales personnel. As compared to the Company, pre-merger, Individual's product line traditionally experienced a shorter sales cycle and its sales model relied more heavily on telesales. There can be no assurance that the Company can take full advantage of the combined sales force's efforts. The companies have also used a number of distribution channels in the various geographic markets in which their respective products are sold and there can be no assurance that channel conflict will not develop as the Company attempts to integrate these channels. The success of the integration process will be significantly influenced by the ability of the Company to attract and retain key management, sales, marketing and research and development personnel. There is no assurance that the foregoing will be accomplished smoothly or successfully. The integration of operations requires the dedication of management resources, which may distract attention from the day-to-day operations of the Company. The inability of management to successfully integrate the operations of the companies may have a material adverse effect upon the business, operating results and financial condition of the Company. See "Certain Factors Affecting Future Operating Results" for additional risks associated with the Merger. Certain Factors Affecting Future Operating Results The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The discussion highlights some of the risks which may affect future operating results. Uncertainties Relating to Integration of Operations The Company entered into the Agreement and Plan of Merger and Organization with Individual, Inc. ("Individual") on November 2, 1997, with the expectation that the Merger will result in long-term strategic benefits. These anticipated benefits will depend in part on whether the companies' operations can be integrated in an efficient and effective manner. There can be no assurance that this will occur. The combination of the companies requires, among other things, integration of the companies' respective service offerings and coordination of the companies' sales, marketing and research and development efforts. Historically, the sales models used by the Company and Individual have differed significantly. While the Company sold principally to the enterprise market utilizing a direct sales force, Individual addressed the three tiers of the market with a distribution strategy that utilized a direct sales force at the enterprise level, telesales to workgroups, and an Internet distribution model that incorporated World Wide Web ("Web") banner advertising, marketing relationships with a number of high traffic Web sites and agreements with Internet Service Providers to capture the individual knowledge worker. There can be no assurance that the Company will be able to take full advantage of the combined sales force's efforts. The Company and Individual also used a number of distribution channels in certain overseas markets in which products are sold and there can be no assurance that channel conflicts will not develop as the Company attempts to integrate these channels. The services of the Company rely on the timely collection, processing and distribution of news and information to enterprises and individuals around the world. While the Company intends to take precautions to maintain service levels, there can be no assurances that the combination of operations centers will not cause service interruptions or performance degradation of the Company's services. Should significant service disruptions occur, customer retention, revenues, and service and support costs of the Company could be materially adversely affected. 16 The success of the integration process will be significantly influenced by the ability of the Company to attract and retain key management, sales, marketing and research and development personnel. There is no assurance that the foregoing will be accomplished smoothly or successfully. The current integration of operations requires the dedication of management resources, which may distract attention from the day-to-day operations of the Company. The inability of management to successfully integrate the operations of the companies could have a material adverse effect upon the business, operating results and financial condition of the Company. History of Operating Losses Individual was incorporated in January 1989 and introduced its initial service, First!, in March 1990. Since its inception, Individual incurred substantial costs to develop and enhance its technology, to create, introduce, and enhance its service offerings, to establish marketing and distribution relationships, to recruit and train a sales and marketing group, to acquire customers for its subscription services, and to build an administrative organization. As a consequence, Individual incurred operating losses in each of its fiscal quarters and in each year since inception, including net losses of approximately $50.9 million and $18.6 million for the years ended December 31, 1996 and 1997, respectively. As of December 31, 1997, Individual had an accumulated deficit on a stand-alone basis of approximately $88.5 million. The time required to reach profitability is highly uncertain and there can be no assurance that the Individual business will be able to achieve profitability on a sustained basis, if at all. The failure of the Individual business to achieve profitability could have a material adverse effect on the Company's business, results of operations and financial condition. Costs and Expenses of Integration The Company estimates that it, and Individual incurred direct transaction costs of approximately $3 million to $4 million associated with the Merger, substantially all of which will be charged to operations of the Company in the first quarter of 1998. The Company expects to incur an additional significant charge to operations of approximately $7 million to $8 million, in the first quarter of 1998, related to integration of operations, asset write-downs, personnel reduction and other one-time merger related charges. There can be no assurance that the Company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the Merger. Effects of Merger on Customers There can be no assurance that the present and potential customers of the Company will continue their current buying patterns without regard to the Merger. Any significant delay or reduction in orders could have an adverse effect on the near-term business and results of operations of the Company. In addition, uncertainties regarding product overlap of the companies' respective services and resolution of that overlap may cause customers to delay purchasing decisions regarding these products. Fluctuations in Quarterly Results The Company's quarterly operating results may in the future fluctuate significantly 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, telecommunications 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, and to integrate the Company's product offerings under a single brand. As a result, the Company believes that period-to-period comparisons of the Company's pre-merger, Individual's or the Company's post-merger results of operations are not and will not necessarily be meaningful and should not be relied upon as an indication of future performance. Due to all of the foregoing factors, 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 17 would likely be materially adversely affected. Although each of the Company and Individual experienced growth in revenues in recent years, there can be no assurance that, in the future, the Company will sustain revenue growth or be profitable on a quarterly or annual basis. Dependence on Continued Growth in Use of the Internet Although Individual, and now the Company, distributes certain products and services across multiple delivery platforms, including facsimile, electronic mail, and private networks based on Lotus Notes and other groupware products, sales of certain of Individual's products and services, such as NewsPage and ClariNews, depend upon the adoption of the Internet as a widely used medium for commerce and communication. Rapid growth in the use of and interest in the Internet is a recent phenomenon. There can be no assurance that communication or commerce over the Internet will become widespread or that extensive content will continue to be provided over the Internet. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development and commercialization of performance improvements, including high speed modems. In addition, to the extent that the Internet continues to experience significant growth in the number of users and level of use, there can be no assurance that the Internet infrastructure will continue to be able to support the demands placed upon it by such potential growth or that the performance or reliability of the Web will not be adversely affected by this continued growth. The Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and adversely affect usage of the Web and the Company's online services. If the necessary infrastructure or complementary services necessary to make the Internet a viable commercial marketplace are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, results of operations, and financial condition could be materially adversely affected. Reliance on Advertising Revenues and Uncertainty of Web as Advertising Medium The Internet is an unproven medium for paid advertising sponsorship of Web-based services such as Individual's, and now the Company's, NewsPage and ClariNews services. Subscriptions to these Web-based services are partially subsidized by revenues from the sale of advertisements on the Web pages of such services. Most of the Company's advertising customers have only limited experience with the Web as an advertising medium, have not devoted a significant portion of their advertising expenditures to Web-based advertising and may not find such advertising to be effective for promoting their products and services relative to traditional print and broadcast media. The Company's ability to generate significant advertising revenues to subsidize subscriptions to its Web-based services will depend upon, among other things, advertisers' acceptance of the Web as an effective and sustainable advertising medium, the development of a large base of users of the Company's services possessing demographic characteristics attractive to advertisers, and the ability of the Company to develop and update effective advertising delivery and measurement systems. No standards have yet been widely accepted for the measurement of the effectiveness of Web-based advertising, and there can be no assurance that such standards will develop sufficiently to support Web-based advertising as a significant advertising medium. In addition, there is intense competition in the sale of advertising on the Internet, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, which makes it difficult to project future levels of Internet advertising revenues that will be realized generally or by any specific company. Competition among current and future Web sites, as well as competition with other traditional media for advertising placements, could result in significant price competition and reductions in advertising revenues. As a result of these factors, there can be no assurance that Individual will sustain or increase current advertising sales levels. Failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Key Personnel Competition for qualified sales, technical and other qualified personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified employees in the future. If the Company is unable to hire and retain such personnel, its business, operating results and financial condition could be materially adversely affected. Success of the integration process following the Merger and future financial success also depends in significant part upon the continued service of its key technical, sales and senior management personnel. The loss of the services of a significant number of these key employees could have a material adverse effect on its business, operating results and financial condition. Additions of new, and departures of existing, personnel, particularly in key positions, can be disruptive and can result in departures of existing personnel, which could have a material adverse effect upon the Company's business, results of operations and financial condition. 18 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. The Company will compete or may compete directly or indirectly with the following categories of companies: (i) large, well-established news and information providers such as The Dialog Corporation, Dow Jones, Bridge, Lexis/Nexis, Pearson, Reuters and Thomson; (ii) market data services companies such as ADP, Bloomberg and 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 and Internet-based software systems such as IBM/Lotus, Netscape and Microsoft, which could, in the future, ally with competing news and information providers; and (v) single-user, advertising-subsidized Web-based 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. 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, results of operations and financial condition. Risks Relating to Acquisitions Individual, pre-Merger, recently completed the acquisition of ClariNet Communications Corp., and the Company may acquire other companies, products or technologies in the future. There can be no assurance that these acquisitions can be effectively integrated, that such acquisitions will not result in costs or liabilities that could materially and adversely affect the Company's business, operating results and financial condition, or that the Company will obtain the anticipated or desired benefits of such transactions. 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 products, expand its customer base or obtain other competitive advantages. Such acquisitions involve potential risks, including difficulties in assimilating the acquired company's operations, technology, products and personnel, completing and integrating acquired in-process technology, diverting management's resources, uncertainties associated with operating in new markets and working with new employees and customers, and the potential loss of the acquired company's key employees. Dependence on Cooperative Marketing Arrangements The Company has entered into certain cooperative marketing agreements and informal arrangements with software vendors, Web site sponsors and operators of on-line services, including Microsoft, Netscape and NETCOM. These companies presently market services that compete directly with those of the Company. If the Company's marketing activities with such companies were terminated, reduced, curtailed, or otherwise modified, the Company may not be able to replace or supplement such efforts alone or with others. If these companies were to develop and market their own business information services or those of the Company's competitors, the Company's business and results of operations and financial condition may be materially and adversely affected. Litigation Risks A class action shareholder suit was filed against Individual, certain of its directors and officers and the underwriters of its initial public offering claiming that the defendants made misstatements, or failed to make statements, to the investing public in Individual's Prospectus and Registration Statement relating to its initial public offering, as well as in subsequent public disclosures, relating to the alleged existence of disputes between Joseph A. Amram, Individual's former Chief Executive Officer, and Individual (now the Company). The Company believes that the allegations contained in the complaint are without merit and intends to defend vigorously against the claims, and based upon information currently available, believes that the action will not have a material impact on the Company. However, there can be no assurance that this litigation will ultimately be resolved on terms that are favorable to the Company and that the resolution of this litigation will not have a material adverse effect on the Company. Dependence on News Providers A significant percentage of the Company's customers subscribe to services provided by one or more of Press Association Inc., a subsidiary of The Associated Press, Dow Jones, The Financial Times, Reuters and Thompson. The Company's agreements with news providers are generally for terms of one to three years, with automatic renewal unless notice of termination is provided before the end of the term by either party. These agreements may 19 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 and results of operations. 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 obtain 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 the NewsEDGE products 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, the Company's role is to arrange communications between the news provider and the NewsEDGE customer's server. For sources which do not have their own broadcast communications capability, news and information is delivered to the Company news consolidation facility, where it is reformatted for broadcast to NewsEDGE servers and retransmitted to customers through an arrangement between the Company and WavePhore ("WavePhore"), a common carrier communications vendor. WavePhore presently markets services that compete directly with those of the Company. WavePhore is also the communications provider for many newswires offered by the Company through NewsEDGE. The Company's agreement with WavePhore expires on December 31, 1998. This agreement can be terminated earlier in the event of a material breach by the Company of the agreement. If the agreement with WavePhore were terminated on short notice, or if WavePhore were to encounter technical or financial difficulties adversely affecting its ability to continue to perform under the agreement or otherwise, the Company's business 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, results of operations and financial condition. Risk of System Failure or Inadequacy The Company's operations are dependent on its ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. Although the Company will have 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 feeds and computer downloads from its information providers, whether on account of system failure of the information providers, the public network or otherwise, could disrupt the Company's operations. Risks Relating to Year 2000 Issues Because the Company's Software and Services are not date sensitive or date dependent, the Company believes that its software and services are substantially year 2000 compliant and currently does not anticipate material expenditures to remedy any year 2000 problems. However, many computer systems were not designed to handle any dates beyond the year 1999, and therefore, many companies will be required to modify their computer hardware and software prior to the year 2000 in order to remain functional. Many enterprises, including the Company's present and potential customers, will be devoting a substantial portion of their information systems spending to resolving this upcoming year 2000 problem, which may result in spending being diverted from network applications, such as the Company's products, over the next two years. Additionally, the Company utilizes third-party computer and telecommunications equipment to distribute its products as well as to operate other aspects of its business , and there can be no assurances that such equipment is year 2000 compliant. Although the Company intends to take measures to address the impact, if any, of year 2000 issues, failure of any critical equipment to operate properly in the year 2000 may have a material adverse effect upon the Company's business, results of operations and financial condition or require the Company to incur unanticipated material expenses to remedy any problem. 20 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 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 products and 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. Dependence on Proprietary Technology 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. Individual licensed the proprietary SMART filtering software, which is used as the filtering engine for all of its products and services, from Cornell Research Foundation, Inc. ("Cornell University"). Under the terms of the license agreement with Cornell University, Individual, and now the Company, has 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 is not then in default of the license agreement, at the end of the initial term of the 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 will not license the SMART software to a third-party, including a competitor of the Company, once the Company's exclusive rights have lapsed. 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 were to terminate, the Company could be required to develop or acquire a replacement filtering technology, and there can be no assurance that such technology could be developed or acquired, on a timely basis or at all, and on favorable terms to the Company. Consequently, any termination of the Company's license agreement with Cornell University would have a material adverse effect on the Company's business, results of operations, and financial condition. There has been substantial litigation in the information services industry involving intellectual property rights. Although the Company believes that it is not infringing the intellectual property rights of others, there can be no assurance that such claims, if asserted, would not have a material adverse effect on the Company's business, results of operations, and financial condition. In addition, inasmuch as the Company licenses the informational content that is included in its services from third parties, its exposure to copyright infringement actions may increase because the Company must rely upon such third parties for information as to the origin and ownership of such licensed content. Although the Company generally obtains representations as to the origins and ownership of such licensed informational content and generally obtains indemnification to cover any breach of any such representations, there can be no assurance that such representations will be accurate or that such indemnification will provide adequate compensation for any breach of such representations. In the future, litigation may be necessary to enforce and protect trade secrets, copyrights and other intellectual property rights of the Company. The Company may also be subject to litigation to defend against claimed infringement of the rights of others or to determine the scope and validity of the intellectual property rights of others. Any such litigation would be costly and divert management's attention, either of which would have a material adverse effect on the Company's business, results of operations, and financial condition. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties, and prevent the Company from selling its services, any one of which could have a material adverse effect on the Company's business, results of operations, and financial condition. 21 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- In accordance with the SEC filing requirements on Form 10-K, the following financial statements represent stand-alone financial data and results for the entity formerly known as Desktop Data, Inc. The financial results of Individual, Inc. are not reflected here, but rather are incorporated as part of the financial data and results shown in footnote 8 of the financial statements to follow. 22 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. 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 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 provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NewsEDGE Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts January 30, 1998 (except with respect to the matter discussed in Note 8, as to which the date is February 24, 1998) 23 NEWSEDGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 35,175,200 $ 10,735,071 Short-term investments 7,981,698 18,119,717 Accounts receivable 7,588,166 4,948,351 Prepaid expenses and deposits 3,933,171 1,814,104 ------------ ------------ Total current assets 54,678,235 35,617,243 ------------ ------------ LONG-TERM INVESTMENTS - 7,927,667 ------------ ------------ PROPERTY AND EQUIPMENT, AT COST: Computer equipment 7,219,684 4,846,437 Furniture and fixtures 656,392 518,615 Leasehold improvements 840,262 734,847 Equipment under capital leases 138,792 138,792 ------------ ------------ 8,855,130 6,238,691 Accumulated depreciation and amortization (3,123,021) (1,599,021) ------------ ------------ 5,732,109 4,639,670 ------------ ------------ OTHER ASSETS 173,565 142,570 ------------ ------------ $ 60,583,909 $ 48,327,150 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,951,840 $ 878,147 Accrued expenses 6,281,637 3,572,198 Deferred revenue, current 17,373,218 13,630,356 Obligations under capital leases, current 31,209 34,191 ------------ ------------ Total current liabilities 26,637,904 18,114,892 ------------ ------------ OBLIGATIONS UNDER CAPITAL LEASES, NONCURRENT 6,360 37,569 ------------ ------------ DEFERRED REVENUE, NONCURRENT 38,890 190,165 ------------ ------------ COMMITMENTS (Note 5) STOCKHOLDERS' EQUITY: Common stock, $.01 par value- Authorized--15,000,000 shares Issued and outstanding--8,691,185 shares and 86,912 86,264 8,626,425 shares in 1997 and 1996, respectively Additional paid-in capital 33,004,744 31,782,106 Retained earnings (deficit) 809,099 (1,883,846) ------------ ------------ Total stockholders' equity 33,900,755 29,984,524 ------------ ------------ $ 60,583,909 $ 48,327,150 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 24 NEWSEDGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 1996 1995 REVENUES $ 42,181,558 $ 33,779,259 $ 23,185,833 ------------ ------------ ------------ COSTS AND EXPENSES: Cost of revenues 13,061,586 9,500,735 6,397,094 Customer support expenses 5,123,460 3,492,756 2,492,493 Development expenses 5,101,166 4,230,161 2,870,351 Sales and marketing expenses 14,966,339 11,657,566 8,721,712 General and administrative expenses 2,079,077 1,595,039 1,281,227 ------------ ------------ ------------ Total costs and expenses 40,331,628 30,476,257 21,762,877 ------------ ------------ ------------ Income from operations 1,849,930 3,303,002 1,422,956 INTEREST INCOME, NET 2,139,973 1,896,021 897,108 ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 3,989,903 5,199,023 2,320,064 PROVISION FOR INCOME TAXES 1,296,958 614,225 183,000 ------------ ------------ ------------ Net income 2,692,945 4,584,798 2,137,064 ACCRETION OF DIVIDENDS ON SERIES B PREFERRED STOCK - - (101,250) DISCOUNT ON REDEMPTION OF SERIES B PREFERRED STOCK - - 1,232,238 ------------ ------------ ------------ Net income available for common stockholders $ 2,692,945 $ 4,584,798 $ 3,268,052 ============ ============ ============ BASIC NET INCOME PER COMMON SHARE $ .31 $ .53 $ .66 ============ ============ ============ DILUTED NET INCOME PER COMMON SHARE $ .31 $ .52 $ .43 ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,654,166 8,572,200 4,959,013 ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ASSUMING DILUTION 8,742,180 8,778,479 7,518,529 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 25 NEWSEDGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Series A Convertible Preferred Stock Common Stock Additional Retained Number of $.01 Par Number of $.01 Par Paid-in Earnings Shares Value Shares Value Capital (Deficit) BALANCE, DECEMBER 31, 1994 5,335,410 $ 53,354 2,642,213 $ 26,422 $ 2,479,277 $ (8,605,708) Purchase of treasury stock - - - - - - Retirement of treasury stock - - (29,766) (298) (32,387) - Exercise of stock options - - 74,110 742 63,895 - Payments and accretion of dividends on redeemable preferred stock - - - - (2,217,000) - Proceeds from initial public offering, less offering costs - - 1,977,000 19,770 26,691,551 - Conversion of Series A, C and D preferred stock (5,335,410) (53,354) 3,847,123 38,471 2,770,868 - Discount on redemption of Series B preferred stock - - - - 1,232,238 - Net income - - - - - 2,137,064 ---------- ---------- --------- --------- ------------ ------------ BALANCE, DECEMBER 31, 1995 - - 8,510,680 85,107 30,988,442 (6,468,644) Exercise of stock options, including tax benefits - - 99,566 996 498,631 - Stock issued under employee stock purchase plan - - 16,179 161 295,033 - Net income - - - - - 4,584,798 ---------- ---------- --------- --------- ------------ ------------ BALANCE, DECEMBER 31, 1996 - - 8,626,425 86,264 31,782,106 (1,883,846) Exercise of stock options, including tax benefits - - 49,675 497 1,095,615 - Stock issued under employee stock purchase plan - - 15,085 151 127,023 - Net income - - - - - 2,692,945 ---------- ---------- --------- --------- ------------ ------------ BALANCE, DECEMBER 31, 1997 - $ - 8,691,185 $ 86,912 $ 33,004,744 $ 809,099 =========== ========== ========= ========= ============ ============ Total Treasury Stock Stockholders' Number of Equity Shares Cost (Deficit) BALANCE, DECEMBER 31, 1994 29,485 $ (30,755) $ (6,077,410) Purchase of treasury stock 281 (1,930) (1,930) Retirement of treasury stock (29,766) 32,685 - Exercise of stock options - - 64,637 Payments and accretion of dividends on redeemable preferred stock - - (2,217,000) Proceeds from initial public offering, less offering costs - - 26,711,321 Conversion of Series A, C and D preferred stock - - 2,755,985 Discount on redemption of Series B preferred stock - - 1,232,238 Net income - - 2,137,064 ------- ---------- ------------ BALANCE, DECEMBER 31, 1995 - - 24,604,905 Exercise of stock options, including tax benefits - - 499,627 Stock issued under employee stock purchase plan - - 295,194 Net income - - 4,584,798 ------- ---------- ------------ BALANCE, DECEMBER 31, 1996 - - 29,984,524 Exercise of stock options, including tax - - 1,096,112 benefits Stock issued under employee stock purchase - - 127,174 plan Net income - - 2,692,945 ------- ---------- ------------ BALANCE, DECEMBER 31, 1997 - $ - $ 33,900,755 ======= ========== ============
The accompanying notes are an integral part of these consolidated financial statements. 26 NEWSEDGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,692,945 $ 4,584,798 $ 2,137,064 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 1,524,000 898,300 498,900 Changes in assets and liabilities- Accounts receivable (2,639,815) (1,784,607) (905,914) Prepaid expenses and deposits (2,119,067) (629,795) (439,893) Accounts payable 2,073,693 (96,021) 552,292 Accrued expenses 2,709,439 446,442 1,496,537 Deferred revenue 3,591,587 3,723,945 2,476,294 ------------- ------------ ------------- Net cash provided by operating activities 7,832,782 7,143,062 5,815,280 ------------- ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (increase) in investments, net 18,065,686 (12,930,167) (13,117,217) Purchases of property and equipment (2,616,439) (3,521,809) (1,383,269) Increase in other assets (30,995) (20,377) (65,876) ------------- ------------ ------------- Net cash provided by (used in) investing activities 15,418,252 (16,472,353) (14,566,362) ------------- ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options, including tax benefits 1,096,112 499,627 64,637 Stock issued under employee stock purchase plan 127,174 295,194 - Proceeds from initial public offering, less offering costs - - 26,711,321 Payments of dividends on redeemable preferred stock - - (2,638,041) Purchase of fractional shares on conversion of preferred stock - - (1,041) Redemption of Series B preferred stock - - (135,000) Purchase of treasury stock - - (1,930) Payments on obligations under capital leases (34,191) (30,974) (21,799) ------------- ------------ ------------- Net cash provided by financing activities 1,189,095 763,847 23,978,147 ------------- ------------ ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,440,129 (8,565,444) 15,227,065 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,735,071 19,300,515 4,073,450 ------------- ------------ ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 35,175,200 $ 10,735,071 $ 19,300,515 ============= ============ ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 6,506 $ 5,325 $ 3,121 ============= ============ ============= Cash paid for income taxes $ 352,008 $ 294,119 $ 10,600 ============= ============ ============= SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Equipment acquired under capital lease obligations $ - $ 25,624 $ 18,090 ============= ============ ============= Accretion of dividends on redeemable preferred stock $ - $ - $ 17,238 ============= ============ ============= Discount on redemption of Series B preferred stock $ - $ - $ 1,232,238 ============= ============ ============= Conversion of Series A, C and D preferred stock $ - $ - $ 2,757,025 ============= ============ =============
The accompanying notes are an integral part of these consolidated financial statements. 27 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NewsEDGE Corporation (the Company), formerly Desktop Data, Inc., was incorporated on July 11, 1988, and through its NewsEDGE service and software, delivers to businesses a large variety of news and information sources in real-time to personal computers installed on LANs and WANs, automatically monitors and filters the news, and alerts users to stories of interest to them. The accompanying consolidated financial statements reflect the application of certain significant accounting policies, as described in this note and elsewhere in the accompanying notes to consolidated financial statements. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NewsEDGE Canada, Inc. and NewsEDGE Securities Corp. 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, 1997 1996 Cash $ 3,977,995 $ 989,221 Money market accounts 2,499,181 900,479 Securities purchased under agreements to resell 2,644,185 - U.S. Government agencies obligations 26,053,839 8,845,371 ------------ ------------ $ 35,175,200 $ 10,735,071 ============ ============
28 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) (c) Investments As of December 31, 1997, all of the Company's investments are classified and accounted for as held-to-maturity and reported at amortized cost. As of December 31, 1997 and 1996, the amortized cost of the Company's investments, which approximates fair market value, is as follows: December 31, 1997 1996 Short-term- U.S. Government agencies $ - $ 13,833,870 U.S. Treasury notes 7,981,698 4,285,847 ----------- ------------ $ 7,981,698 $ 18,119,717 =========== ============ Long-term- U.S. Treasury notes $ - $ 7,927,667 =========== ============ Any security that experiences a decline in value that management believes is other than temporary is reduced to its net realizable value by a charge to income. Realized gains and losses from the sale of investment securities are recorded on the trade date by specific identification of the security sold. Realized gains and losses were not material during any year presented. (d) Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (e) Depreciation and Amortization The Company provides for depreciation using the straight-line method by charges to operations in amounts that allocate the cost of assets over their estimated useful lives of five years, except for leasehold improvements, which are depreciated over the shorter of the lease term or life of the asset. 29 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) (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 Company licenses its software for a specified term under standard subscription agreements. 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 news providers. Other revenues are recognized at the time of shipment or when services are rendered. Cost of revenues includes royalties payable to news service and transmission providers and is expensed over the term of the subscription agreement. (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 bases 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. (i) Foreign Currency Translation Revenues and expenses are translated using exchange rates in effect during the year. Assets and liabilities are translated using the year-end exchange rates. 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. 30 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) (j) Postretirement Benefits The Company has no obligations for postretirement benefits. (k) Concentration of Credit Risk SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of cash balances with two financial institutions, and its accounts receivable balances are primarily domestic. (l) Basic and Diluted Net Income per Common Share In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share. This statement established standards for computing and presenting earning per share and applies to all entities with publicly traded common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997. This statement has been adopted as of December 31, 1997. Accordingly, the prior year's earnings per share have been retroactively restated. The dollar impact available to common stockholders of the redemption of the Series B preferred stock is as follows:
Years Ended December 31, 1997 1996 1995 Net income $ 2,692,945 $ 4,584,798 $ 2,137,064 Accretion of dividends on Series B preferred stock - - (101,250) Discount on redemption of Series B preferred stock - - 1,232,238 ----------- ----------- ----------- Net income available for common stockholders $ 2,692,945 $ 4,584,798 $ 3,268,052 =========== =========== =========== Weighted average common shares outstanding 8,654,166 8,572,200 4,959,013 Effect of dilutive securities- Conversion of Series A, C and D preferred stock - - 2,350,452 Stock options 88,014 206,279 209,064 ----------- ----------- ----------- Weighted average common shares outstanding assuming dilution 8,742,180 8,778,479 7,518,529 =========== =========== ===========
31 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) (m) New Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 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. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Unless impracticable, companies would be required to restate prior period information upon adoption. (n) Reclassifications Certain prior year amounts have been reclassified to conform with current year's presentation. (o) Long-Lived Assets The Company adopted SFAS No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, in 1995. SFAS No. 121 requires that long-lived assets be reviewed for impairment by comparing the fair value of the assets with their carrying amount. Any write-downs are to be treated as permanent reductions in the carrying amount of the assets. Accordingly, the Company evaluates the possible impairment of long-lived assets at each reporting period based on the undiscounted projected cash flows of the related asset. Should there be an impairment, the cash flow estimates that will be used will contain management's best estimates, using appropriate and customary assumption and projections at the time. The effect of adoption was not material to the financial statements. 32 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) (2) INCOME TAXES The income tax provision for the years ended December 31, 1997, 1996 and 1995 consists of the following: 1997 1996 1995 Current- Federal $ 1,098,392 $ 1,853,371 $ 788,800 State 122,044 327,538 146,200 International 44,900 67,200 - ------------ ------------ ------------ 1,265,336 2,248,109 935,000 Deferred- Federal 28,460 (1,385,094) (669,000) State 3,162 (248,790) (83,000) ------------ ------------ ------------ 31,622 (1,633,884) (752,000) ------------ ------------ ------------ Total $ 1,296,958 $ 614,225 $ 183,000 ============ ============ ============ A reconciliation of the federal statutory rate to the Company's effective tax rate at December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 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 3.0 6.3 6.3 Research and development credits (2.2) - - Change in valuation allowance .8 (31.4) (32.4) Other (3.1) 2.9 - ---- ---- ----- Effective tax rate 32.5% 11.8% 7.9% ==== ==== =====
33 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) The components of deferred income taxes are as follows:
December 31, 1997 1996 Deferred revenue $ 370,724 $ 312,040 Financial reserves not yet deductible 484,478 309,726 Depreciation (461,890) (180,076) Research and development and alternative 675,956 595,956 minimum tax credit carryforwards Valuation allowance (1,069,268) (1,037,646) ----------- ----------- $ - $ - =========== ===========
In determining the need for a valuation allowance, the Company considered several items. Negative evidence that is significant for the period since the Company's IPO is the generation of large net operating loss carryforwards (NOLs) from the exercise of nonqualified stock options (the amount unused as of December 31, 1997 was in excess of $2.5 million, which constituted the Company's entire NOL carryforward). In addition, the Company had tax credit carryforwards of $676,000 as of December 31, 1997. The income tax laws provide for an ordering rule with respect to the utilization of the Company's tax attributes (i.e., NOL and credit carryforwards). The tax laws require the Company to utilize the NOLs prior to taking the benefit for credit carryforwards. In addition, the Company anticipates further disqualifying dispositions which will generate additional tax losses, thus extending the time as to when the credits can be utilized. As a result, there is significant uncertainty as to whether the Company will ever realize a benefit from any of the tax credit carryforwards. Additional doubt as to the realizability of the tax credit is presented because (i) the credits have calculated limits on usage based on income in any period, (ii) the credits have expiration dates and (iii) utilization could be further limited by other events such as an acquisition or a change in ownership, which is common among technology companies. Additionally, the merger discussed in Note 8 raises additional doubt as to the realizability of the deferred tax assets, as the acquired Company has considerable NOLs. This negative evidence was weighed against the relatively short history of profitability. As a result, management believes that it is more likely than not that the net deferred tax asset will not be realized. The exercise of nonqualified stock options gives rise to compensation which is includible in the taxable income of the applicable employees and deductible by the Company for federal and state income tax purposes. Compensation resulting from increases in the fair market value of the Company's common stock subsequent to the date of grant of the applicable exercised stock options is not recognized by the Company, in accordance with Accounting Principles Board Opinion No. 25, as an expense for financial accounting purposes, and the related tax benefits are credited directly to additional paid-in capital when the benefit is realized. Tax deductions related to stock option exercises were approximately $2.4 million and $2.8 million for 1997 and 1996, respectively. During the years ended December 31, 1997 34 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) and 1996, a tax benefit in the amount of $970,475 and $933,000, respectively, was realized and credited to additional paid-in capital. The research and development credit carryforwards ($594,324) expire in 2007 through 2012. (3) STOCKHOLDERS' EQUITY (a) Redeemable Preferred Stock In December 1990, the Company sold 13,500 shares of Series B redeemable preferred stock (the Series B preferred stock) and 1,500 shares of Series C convertible preferred stock (the Series C preferred stock) for gross proceeds of $1,350,000 and $150,000, respectively. On October 20, 1992, the Company sold 20,000 shares of Series D convertible redeemable preferred stock (the Series D preferred stock) for gross proceeds of $2,000,000. (b) Stock Split On June 26, 1995, the Company's stockholders approved a 1-for-2.25 reverse stock split of the Company's common stock. The reverse stock split has been retroactively reflected in the accompanying consolidated financial statements and notes for all periods presented. (c) 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. (d) Conversion of Preferred Stock Upon the closing of the initial public offering, the Series A, Series C and Series D preferred stock was converted (at a rate of approximately .444, 534.90 and 33.68 shares, respectively) 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. (e) Series B Redeemable Preferred Stock 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 35 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) Series B preferred stock for $10.00 per share or an aggregate of $135,000. As a result of the redemption, the Company recognized a $1,232,238 discount. (f) Preferred Stock 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. (4) STOCK OPTION AND EMPLOYEE STOCK PURCHASE 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 1,625,000 shares may be issued under this plan. Options granted under the 1995 Plan expire 10 years from the date of grant. (c) 1995 Non-Employee Director Stock Option Plan On June 26, 1995, the Company's stockholders also approved the 1995 Non-Employee Director Stock Option Plan (the 1995 Director Plan), for which 100,000 shares of the Company's common stock have 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. 36 NEWSEDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (Continued) (d) Stock Option Plan Activity The following schedule summarizes all stock option activity under the 1989 Plan, the 1995 Director Plan and 1995 Plan for the three years ended December 31, 1997:
1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding, beginning of year 649,983 $ 19.60 263,241 $ 3.44 275,881 $ 1.39 Granted 1,308,099 10.90 575,850 24.18 75,497 8.58 Exercised (49,675) 2.53 (99,566) 1.64 (74,110) .87 Terminated (1,030,495) 18.22 (89,542) 21.28 (14,027) 3.85 ----------- ----------- ------------ ----------- ------------ ----------- Outstanding, end of year 877,912 $ 9.11 649,983 $ 19.60 263,241 $ 3.44 =========== =========== ============ =========== ============ =========== Exercisable, end of year 253,185 $ 8.38 83,401 $ 3.52 115,572 $ 1.34 =========== ============ ============ =========== ============ =========== Weighted average fair value of options granted $ 5.74 $ 13.19 $ 4.67 =========== ============ ============
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Weighted Options Exercisable Number Average Weighted Number Exercise Price/ Outstanding as Remaining Average Exercisable Weighted Range of Exercise of December 31, Contractual Exercise at December 31, Average Prices 1997 Life Price 1997 Exercise Price $ .90-$ 4.50 58,512 1.30 $ 2.42 49,324 $ 2.30 7.43- 9.13 508,000 8.15 8.58 187,616 8.53 10.06- 14.13 301,400 9.54 10.55 6,245 14.13 26.25- 34.00 10,000 8.45 32.06 10,000 32.06 --------- -------- --------- ------- $ .90-$ 34.00 877,912 8.17 $ 9.11 253,185 $ 8.38 ========= ======= ========= =======
37 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) On February 13, 1997, the Company's Board of Directors authorized the repricing of all stock options previously granted under the 1995 Plan, excluding 105,000 options which were granted to the executive officers of the Company. The repricing provided for the exercise price of 375,525 options outstanding to be reduced to $14.13 per share, the closing price of the Company's stock on February 13, 1997. Prior to the repricing, such options had exercise prices ranging from $22.75 to $35.75. On June 18, 1997, the Company's Board of Directors authorized the repricing of 518,075 and 4,203 stock options previously granted under the 1989 Plan and the 1995 Plan, respectively. The repricing provided for the exercise price of 522,278 options to be reduced to $8.625 per share, the closing price of the Company's stock on June 18, 1997. Prior to the repricing, such options had exercise prices ranging from $9.13 to $24.00. (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 250 shares 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, 1997, 143,736 shares of common stock were reserved for purchases under the 1995 Purchase Plan. (f) Fair Value of Stock Based Compensation In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options 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 1995, 1996 and 1997 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions used are as follows: 1997 1996 1995 Risk-free interest rate 5.59-6.8% 5.26-6.70% 5.76-7.74% Expected dividend yield None None None Expected lives 3-6 years 3-6 years 3-6 years Expected volatility 65% 63% 63% 38 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) Had compensation cost for the Company's stock option plans been determined consistent with SFAS No. 123, the Company's net income available to common stockholders and basic and diluted net income per common share would have been the following pro forma amounts:
1997 1996 1995 Net income available to common stockholders- As reported $ 2,692,945 $ 4,584,798 $ 3,268,052 Pro forma 7,495 3,074,395 3,213,195 Basic net income per common share- As reported $ .31 $ .53 $ .66 Pro forma $ - $ .36 $ .65 Diluted net income per common share- As reported $ .31 $ .52 $ .43 Pro forma $ - $ .35 $ .43
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. (5) COMMITMENTS (a) Operating Leases The Company conducts its operations in facilities under operating leases expiring through 2003. The Company's future minimum lease payments under these leases as of December 31, 1997 are approximately as follows: Year Amount 1998 $ 810,000 1999 653,000 2000 480,000 2001 435,000 2002 435,000 Thereafter 145,000 ----------- $ 2,958,000 =========== Rent expense charged to operations was approximately $1,122,000, $900,000 and $564,000 for the years ended 1997, 1996 and 1995, respectively. 39 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) (b) Capital Leases The Company leases certain equipment under capital leases. Future minimum lease payments under these capital leases as of December 31, 1997 are as follows: Year Amount 1998 $ 39,001 1999 5,861 ---------- Total minimum lease payments 44,862 Less--Amount representing interest 7,293 ---------- Obligations under capital leases 37,569 Less--Current portion of capital lease obligations 31,209 ---------- $ 6,360 ========== (6) PREPAID EXPENSES AND DEPOSITS Prepaid expenses and deposits in the accompanying consolidated balance sheets consist of the following: December 31, 1997 1996 Prepaid commissions $ 1,759,695 $ 995,378 Prepaid royalties 1,007,718 562,446 Other 1,165,758 256,280 ------------ ---------- $ 3,933,171 $1,814,104 ============ ========== (7) ACCRUED EXPENSES Accrued expenses in the accompanying consolidated balance sheets consist of the following: December 31, 1997 1996 Payroll and payroll-related $ 1,677,971 $ 867,789 Royalties 2,250,018 917,086 Other 2,353,648 1,787,323 ------------ ---------- $ 6,281,637 $3,572,198 ============ ========== 40 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) (8) SUBSEQUENT EVENT On November 2, 1997, the Company entered into an Agreement and Plan of Merger and Reorganization (the Agreement) to combine with Individual, Inc. (Individual) in a strategic business combination (the Merger). The Agreement related to the proposed Merger and the issuance of shares of the common stock, par value $0.01 per share, of the Company to the stockholders of Individual. The Merger is to be accounted for as a pooling of interests for financial reporting purposes in accordance with APB Opinion No. 16. Upon the effective date of the merger, February 24, 1998, the Company changed its corporate name from Desktop Data, Inc. to NewsEDGE Corporation, increased the authorized shares of common stock reserved for issuance from 15,000,000 to 35,000,000 shares, amended the 1995 Plan to increase the number of shares of common stock reserved for issuance thereunder from 1,625,000 to 4,125,000 shares, amended the 1995 Purchase Plan to increase the number of shares of common stock reserved for issuance thereunder from 175,000 to 500,000 shares and assumed outstanding options and warrants to purchase approximately 3,000,000 shares of common stock from grants made under Individual's corporate stock plans. Upon completion of the merger on February 24, 1998, the Company estimated the transaction costs of the merger to be approximately $3 million to $4 million. These costs include fees for banking, legal, accounting and printing services. Additionally, the Company estimated it would incur a charge of approximately $7 million to $8 million in the first fiscal quarter of 1998 related to integration of operations, asset write-downs, personnel reductions and other one-time merger related charges. The supplemental pro forma combined financial statements of the Company and Individual are included on the following pages. These statements assume the companies have been combined since inception. The pro forma adjustments include conforming the equity accounts and conforming the commission policies to recognize sales commission expense on a pro rata basis as the associated revenue is recognized. The conforming adjustment to align the commission policies increased both net income and prepaids by $24,000, $459,000 and $172,000 in 1997, 1996 and 1995, respectively. 41 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) Unaudited pro forma operating results for the Company are as follows: NEWSEDGE CORPORATION AND SUBSIDIARIES PRO FORMA COMBINED BALANCE SHEETS (Unaudited) (In thousands)
ASSETS Years Ended December 31, 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 45,854 $ 32,853 Short-term investments 12,773 26,568 Accounts receivable 17,903 16,899 Prepaid expenses and deposits 5,718 3,453 -------------- -------------- Total current assets 82,248 79,773 LONG-TERM INVESTMENTS - 7,928 PROPERTY AND EQUIPMENT, NET 9,497 8,974 OTHER ASSETS 589 1,094 -------------- -------------- Total assets $ 92,334 $ 97,769 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,639 $ 5,772 Accrued expenses 13,319 9,139 Deferred revenue, current 32,374 28,326 Current portion of long-term obligations 1,298 1,108 -------------- -------------- Total current liabilities 52,630 44,345 LONG-TERM OBLIGATIONS, LESS CURRENT PORTION 1,132 1,578 DEFERRED REVENUE, NONCURRENT 39 190 STOCKHOLDERS' EQUITY: Common stock 169 165 Additional paid-in capital 124,853 121,732 Cumulative translation adjustment 24 70 Unrealized gain on marketable securities 88 125 Accumulated deficit (86,601) (70,436) -------------- -------------- Total stockholders' equity 38,533 51,656 -------------- -------------- Total liabilities and stockholders' equity $ 92,334 $ 97,769 ============== ==============
42 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) NEWSEDGE CORPORATION AND SUBSIDIARIES PRO FORMA COMBINED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
Years Ended December 31, 1997 1996 1995 TOTAL REVENUES $ 77,471 $ 61,838 $ 42,122 COSTS AND EXPENSES: Cost of revenues 30,245 23,186 15,187 Customer support expenses 5,275 2,983 2,315 Development expenses 12,477 9,268 5,610 Sales and marketing expenses 36,402 26,769 19,207 General and administrative expenses 5,535 7,124 4,338 Mergers, dispositions and other charges 5,084 39,422 - ------------ ------------ ----------- Total costs and expenses 95,018 108,752 46,557 ------------ ------------ ----------- Loss from operations (17,547) (46,914) (4,535) INTEREST INCOME AND OTHER, NET 2,983 1,672 (653) ------------ ------------ ----------- Loss before provision for income taxes (14,564) (45,242) (3,882) PROVISION FOR INCOME TAXES 1,297 614 183 ------------ ------------ ----------- Net loss $ (15,861) $ (45,856) $ (4,065) ============ ============ =========== BASIC AND DILUTED NET LOSS PER SHARE $ (0.95) $ (2.95) $ (0.32) =========== ============ =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 16,729 15,543 12,670 ============ ============ ===========
43 NEWSEDGE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, 1997 (Continued) In accordance with APB No. 16, the following financial data are presented for each of the combining companies: SELECTED FINANCIAL DATA OF COMBINING COMPANIES Years Ended December 31, 1997 1996 1995 NEWSEDGE CORPORATION: Revenues $ 42,182 $ 33,779 $ 23,186 Net income 2,693 4,585 3,268 Basic net income per share 0.31 0.53 .66 Diluted net income per share 0.31 0.52 .43 INDIVIDUAL, INC.: Revenues $ 35,289 $ 28,059 $ 18,936 Net loss (18,578) (50,900) (6,374) Basic and diluted net loss per share (1.15) (3.65) (.60) 44 Item 9. Changes in and Disagreements with Accountants on Accounting and ----------------------------------------------------------------------- Financial Disclosure - -------------------- Not applicable. 45 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, 1997. 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, 1997. 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, 1997. 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, 1997. 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, 1997. 46 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 ----------------------------- (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) *3.1 Amended and Restated Certificate of Incorporation of the Company 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 10.1 1995 Stock Plan, as amended (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-4, No. 333-44887 and incorporated herein by reference) 10.2 1995 Non-Employee Director Stock Option Plan, as amended (filed as Annex A to the Company's Proxy Statement filed on April 29, 1996 and incorporated herein by reference) 10.3 1989 Stock Plan (filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 33-94054 and incorporated herein by reference) 10.4 1995 Employee Stock Purchase Plan, as amended (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-4, No. 333-44887 and incorporated herein by reference) 10.5 Amended and Restated 1989 Stock Option Plan (filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8, No. 333-46863) 10.6 1995 Incentive Stock Option Plan (filed as Exhibit 99.2 to the Company's Registration Statement on Form S-8, No. 333-46863) 10.7 1996 Non-Employee Director Stock Option Plan (filed as Exhibit 99.3 to the Company's Registration Statement on Form S-8, No. 333-46863) 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 47 Exhibit ------- Number Description of Document ------ ----------------------- 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. 10.17 Form of Common Stock Purchase Warrant (filed as Exhibit 10.4 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.18 Second Amended and Restated Investors' Rights Agreement dated as of October 3, 1995 (filed as Exhibit 10.13 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.19 Licensing Agreement with Cornell Research Foundation, Inc. dated as of March 22, 1989 (filed as Exhibit 10.14 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.20 Letter Agreement dated as of July 2, 1992 between Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.15 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 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 48 Exhibit ------- Number Description of Document ------ ----------------------- Individual, Inc. and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.18 to Individual, Inc.'s Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.24 Lease dated as of August 25, 1994 between Individual, Inc. and Trustees of New England Executive Park Trust, 40 Spaulding Investment Company, Inc. (filed as Exhibit 10.19 to the Individual Inc. Registration Statement on Form S-1, No. 333-00792, and incorporated herein by reference). 10.25 Third Loan Modification Agreement dated as of December 31, 1996 between Individual, Inc. and Fleet National Bank (filed as Exhibit 10.24 to Individual, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). *21.1 Subsidiaries of the Company. *23.1 Consent of Arthur Andersen LLP *24.0 Power of Attorney (included on page 50) *27.1 Financial Data Schedule for fiscal year ended 1997 *27.2 Restated Financial Data Schedule for fiscal year ended 1996 - ------------------------ * Filed herewith. + Indicates a management contract or a compensatory plan, contract or arrangement (b) Reports on Form 8-K. On November 14, 1997, 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 Reorganization by and between the Company and Individual, Inc. dated as of November 2, 1997 (the "Merger Agreement", pursuant to which Individual, Inc. was to be merged with and into the Company (the "Merger"). The Merger was consummated on February 24, 1998. 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). 49 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 27, 1998 /s/ Donald L. McLagan --------------------------- Donald L. McLagan Chairman, President and Chief Executive Officer We, the undersigned officers and directors of NewsEDGE Corporation, hereby severally constitute and appoint Donald L. McLagan and Edward R. Siegfried, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities to do all things in our names and on our behalf in such capacities to enable NewsEDGE Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities Exchange Commission. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title(s) Date --------- -------- ---- /s/ Donald L. McLagan Chairman, President, Chief March 27, 1998 - ------------------------------- Executive Officer and Donald L. McLagan Director (Principal Executive Officer) /s/ Michael E. Kolowich Vice-Chairman and Director March 27, 1998 - ------------------------------- Michael E. Kolowich /s/ Edward R. Siegfried Vice President--Finance March 27, 1998 - ------------------------------- and Operations Treasurer Edward R. Siegfried and Assistant Secretary (Principal Financial and Accounting Officer) /s/ June Rokoff Director March 27, 1998 - ------------------------------- June Rokoff /s/ Ellen Carnahan Director March 27, 1998 - ------------------------------- Ellen Carnahan /s/ Rory J. Cowan Director March 27, 1998 - ------------------------------- Rory J. Cowan /s/ William Devereaux Director March 27, 1998 - ------------------------------- William Devereaux /s/ James Daniell Director March 27, 1998 - ------------------------------- James Daniell 50 EX-3.1 2 AMENDMENT AND RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 ----------- SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NEWSEDGE CORPORATION * * * * * * FIRST. The name of the Corporation is NewsEDGE Corporation. SECOND. The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 36,000,000 shares, consisting of 35,000,000 shares of Common Stock with a par value of $.01 per share (the "Common Stock") and 1,000,000 shares of Preferred Stock with a par value of $.01 per share (the "Preferred Stock"). A description of the respective classes of stock and a statement of the designations, powers, preferences and rights, and the qualifications, limitations and restrictions of the Preferred Stock and Common Stock are as follows: A. COMMON STOCK ------------ 1. GENERAL. All shares of Common Stock will be identical and will entitle ------- the holders thereof to the same rights, powers and privileges. The rights, powers and privileges of the holders of the Common Stock are subject to and qualified by the rights of holders of the Preferred Stock. 2. DIVIDENDS. Dividends may be declared and paid on the Common Stock from --------- funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any -------------------------------------- dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, each issued and outstanding share of Common Stock shall entitle the holder thereof to receive an -2- equal portion of the net assets of the Corporation available for distribution to the holders of Common Stock, subject to any preferential rights of any then outstanding Preferred Stock. 4. VOTING RIGHTS. Except as otherwise required by law or this Amended and ------------- Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held of record by such holder on the books of the Corporation for the election of directors and on all matters submitted to a vote of stockholders of the Corporation. Except as otherwise required by law or provided herein, holders of Common Stock shall vote together with holders of the Preferred Stock as a single class, subject to any special or preferential voting rights of any then outstanding Preferred Stock. There shall be no cumulative voting. B. PREFERRED STOCK --------------- The Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as the Board of Directors of the Corporation may determine. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. Except as otherwise provided in this Amended and Restated Certificate of Incorporation, different series of Preferred Stock shall not be construed to constitute different classes of shares for the purpose of voting by classes. The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the undesignated Preferred Stock in one or more series, each with such designations, preferences, voting powers (or special, preferential or no voting powers), relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions adopted by the Board of Directors to create such series, and a certificate of said resolution or resolutions (a "Certificate of Designation") shall be filed in accordance with the General Corporation Law of the State of Delaware. The authority of the Board of Directors with respect to each such series shall include, without limitation of the foregoing, the right to provide that the shares of each such series may be: (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments, if any; (v) entitled to the benefit of such limitations, if any, on the issuance of additional shares of such series or shares of any other series of Preferred Stock; or (vi) entitled to such other preferences, powers, qualifications, rights and privileges, all as the Board of Directors may deem advisable and as are not inconsistent with law and the provisions of this Amended and Restated Certificate of Incorporation. FIFTH. The Corporation is to have perpetual existence. -3- SIXTH. The following provisions are included for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Board of Directors and stockholders: 1. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors of the Corporation. 2. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the By-laws of the Corporation, subject to any limitation thereof contained in the By-laws. Except as otherwise provided by this Amended and Restated Certificate of Incorporation, by the By-laws of the Corporation or by law, the stockholders shall also have the power to adopt, amend or repeal the By-laws of the Corporation by the affirmative vote of the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at any regular or special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such meeting. 3. Stockholders of the Corporation may not take any action by written consent in lieu of a meeting. 4. Special meetings of stockholders may be called at any time only by the President, the Chairman of the Board of Directors (if any) or a majority of the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 5. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-laws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation. SEVENTH. 1. NUMBER OF DIRECTORS. The number of directors which shall constitute the ------------------- whole Board of Directors shall be determined by resolution of a majority of the Board of Directors, but in no event shall the number of directors be less than three. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the Corporation. 2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided -------------------- into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. -4- 3. ELECTION OF DIRECTORS. Elections of directors need not be by written --------------------- ballot except as and to the extent provided in the By-laws of the Corporation. 4. TERMS OF OFFICE. Each director shall serve for a term ending on the --------------- date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending December 31, 1995; each initial director in Class II shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending December 31, 1996; and each initial director in Class III shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's fiscal year ending December 31, 1997. 5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR ------------------------------------------------------------------ DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease - ------------------------------------ in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as director of the class of which he or she is a member until the expiration of such director's current term or his or her prior death, retirement or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, though less than a quorum. No decrease in the number of director constituting the whole Board of Directors shall shorten the term of an incumbent Director. 6. TENURE. Notwithstanding any provisions to the contrary contained ------ herein, each director shall hold office until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 7. VACANCIES. Unless and until filled by the stockholders, any vacancy in --------- the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board of Directors, may be filled only by vote of a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office, if applicable, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 8. QUORUM. A majority of the total number of the whole Board of Directors ------ shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any -5- such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 9. ACTION AT MEETING. At any meeting of the Board of Directors at which a ----------------- quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law or the Corporation's By-laws. 10. REMOVAL. Any one or more or all of the directors may be removed ------- without cause only by the holders of at least seventy-five percent (75%) of the shares then entitled to vote at an election of directors. Any one or more or all of the directors may be removed with cause only by the holders of at least a majority of the shares then entitled to vote at an election of directors. 11. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance ---------------------------------------------------------- notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided in the By-laws of the Corporation. 12. RIGHTS OF PREFERRED STOCK. The provisions of this Article are subject ------------------------- to the rights of the holders of any series of Preferred Stock from time to time outstanding. EIGHTH. No director (including any advisory director) of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that, to the extent provided by applicable law, this provision shall not eliminate the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. NINTH. The Board of Directors of the Corporation, when evaluating any offer of another party (a) to make a tender or exchange offer for any equity security of the Corporation or (b) to effect a business combination, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation as whole, be authorized to give due consideration to any such factors as the Board of Directors determines to be relevant, including, without limitation: (i) the interests of the Corporation's stockholders, including the possibility that these interests might be best served by the continued independence of the Corporation; (ii) whether the proposed transaction might violate federal or state laws; -6- (iii) not only the consideration being offered in the proposed transaction, in relation to the then current market price for the outstanding capital stock of the Corporation, but also to the market price for the capital stock of the Corporation over a period of years, the estimated price that might be achieved in a negotiated sale of the Corporation as a whole or in part or through orderly liquidation, the premiums over market price for the securities of other corporations in similar transactions, current political, economic and other factors bearing on securities prices and the Corporation's financial condition and future prospects; and (iv) the social, legal and economic effects upon employees, suppliers, customers, creditors and others having similar relationships with the Corporation, upon the communities in which the Corporation conducts its business and upon the economy of the state, region and nation. In connection with any such evaluation, the Board of Directors is authorized to conduct such investigations and engage in such legal proceedings as the Board of Directors may determine. TENTH. 1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE ------------------------------------------------------------------- CORPORATION. The Corporation shall indemnify each person who was or is a party - ----------- or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a ---- ---------- presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Notwithstanding anything to the contrary in this Article, except as set forth in Section 6 below, the Corporation shall not indemnify an Indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. 2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The ------------------------------------------------------ Corporation shall indemnify any Indemnitee who was or is a party or is threatened to be made a party to any -7- threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses (including attorneys' fees) which the Court of Chancery of Delaware or such other court shall deem proper. 3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the ------------------------------------------------ other provisions of this Article, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, or on appeal from any such action, suit or proceeding, he shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the ---- ---------- Indemnitee did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that the Indemnitee had reasonable cause to believe his conduct was unlawful, the Indemnitee shall be considered for the purpose hereof to have been wholly successful with respect thereto. -8- 4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his --------------------------------- right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving him for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as provided below in this Section 4. The Indemnitee shall have the right to employ his own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below, in ------------------- the event that the Corporation does not assume the defense pursuant to Section 4 of this Article of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article, any expenses (including attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, provided, -------- however, that the payment of such expenses incurred by an Indemnitee in advance - ------- of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article. Such undertaking may be accepted without reference to the financial ability of such person to make such repayment. 6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or ----------------------------- advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification or advancement of expenses shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the Corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet the -9- applicable standard of conduct set forth in Section 1 or 2, as the case may be. Such determination shall be made in each instance by (a) a majority vote of the directors of the Corporation who are not at that time parties to the action, suit or proceeding in question ("disinterested directors"), even though less than a quorum, (b) if there are no such disinterested directors, or if such disinterested directors so direct, by independent legal counsel (who may be regular legal counsel to the corporation) in a written opinion, (c) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the action, suit or proceeding in question, or (d) a court of competent jurisdiction. 7. REMEDIES. The right to indemnification or advances as granted by this -------- Article shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the 60-day period referred to above in Section 6. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article shall be on the Corporation. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this -------------------- Article or of the relevant provisions of the General Corporation Law of the State of Delaware or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. 9. OTHER RIGHTS. The indemnification and advancement of expenses provided ------------ by this Article shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth in this Article. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. -10- 10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any ----------------------- provision of this Article to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. 11. INSURANCE. The Corporation may purchase and maintain insurance, at --------- its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) against any expense, liability or loss incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. 12. MERGER OR CONSOLIDATION. If the Corporation is merged into or ----------------------- consolidated with another corporation and the Corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the Corporation under this Article with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the date of such merger or consolidation. 13. SAVINGS CLAUSE. If this Article or any portion hereof shall be -------------- invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by an applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. 14. DEFINITIONS. Terms used herein and defined in Section 145(h) and ----------- Section 145(i) of the General Corporation Law of the State of Delaware shall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i). 15. SUBSEQUENT LEGISLATION. If the General Corporation Law of the State ---------------------- of Delaware is amended after adoption of this Article to expand further the indemnification permitted to Indemnitees, then the Corporation shall indemnify such persons to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. ELEVENTH. The Corporation reserves the right to amend or repeal any provision contained in this Amended and Restated Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation, provided, -------- however, that in addition to the vote of the holders of any class or series of - ------- stock of the Corporation required by law or by this Amended and Restated Certificate of -11- Incorporation, but in addition to any vote of the holders of any class or series of stock of the Corporation required by law, this Amended and Restated Certificate of Incorporation or a Certificate of Designation with respect to a series of Preferred Stock, the affirmative vote of the holders of shares of voting stock of the Corporation representing at least seventy-five percent (75%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to (i) reduce or eliminate the number of authorized shares of Common Stock or the number of authorized shares of Preferred Stock set forth in Article Fourth or (ii) amend or repeal, or adopt any provision inconsistent with, Parts A and B of Article FOURTH And Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH and this Article ELEVENTH of this Amended and Restated Certificate of Incorporation. EX-4.1 3 SPECIMAN CERTIFICATE EXHIBIT 4.1 NUMBER SHARES NEWZ [NewsEGDE Logo] COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MA OR NEW YORK, NY NEWSEDGE CORPORATION CUSIP 65249Q 10 6 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT is the owner of FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF ONE CENT ($.01) EACH OF THE COMMON STOCK OF NEWSEDGE CORPORATION, transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to the laws of the State of Delaware and the Certificate of Incorporation and the By-Laws of the Corporation, as the same may be from time to time amended, to all of which the holder by acceptance hereof assents. This certificate is not valid unless countersigned by the Transfer Agent and Registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED: /s/ Donald L. McLagan BankBoston, N.A. ------------------------------ TRANSFER AGENT AND REGISTRAR CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR [NewsEDGE Seal] BY /s/ M. Dengir /s/ Edward R. Siegfried ------------------------- --------------------------------- AUTHORIZED SIGNATURE VICE PRESIDENT-FINANCE AND OPERATIONS, TREASURER AND ASSISTANT SECRETARY NEWSEDGE CORPORATION THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OR SERIES OF STOCK. THE CORPORATION WILL FURNISH TO THE HOLDER UPON WRITTEN REQUEST WITHOUT CHARGE A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with the right of survivorship and not as tenants in common UNIF GIFT/TRAN MIN ACT - _____________ Custodian _____________ (Cust) (Minor) Under Uniform Gifts/Transfers to Minors Act __________________________________ (State) Additional abbreviations may also be used though not in the above list. For value received __________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ____________________________________________ ____________________________________________ ________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within-named Company with full power of substitution in the premises. Dated, __________________________ _________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: __________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C RULE 17Ad-15. EX-10.16 4 EMPLOYMENT AGREEMENT Exhibit 10.16 ------------- EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made on February 23, 1998 by and between MICHAEL E. KOLOWICH of 116 Monument Street, Concord, Massachusetts 01742 (the "Executive"), and DESKTOP DATA, INC., a Delaware corporation with a principal place of business at 80 Blanchard Road, Burlington, Massachusetts 01803 (the "Company"). WHEREAS, the Company shall be the surviving entity of a merger (the "Merger") with Individual, Inc., pursuant to an Agreement and Plan of Merger and Reorganization dated November 2, 1997 (the "Merger Agreement"); and WHEREAS, the Executive is Chief Executive Officer of Individual, Inc. as of the time of the Merger; and WHEREAS, the Company desires to (i) employ the Executive to render services to the Company as an employee consultant and (ii) appoint the Executive to serve on its Board of Directors, and the Executive desires to accept such employment and appointment, all on the terms and conditions hereinafter provided; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and obligations herein contained, the parties hereto agree as follows: 1. Positions and Responsibilities ------------------------------ (a) Employment Position. The Executive shall serve the Company as ------------------- Senior Executive Consultant under the terms and conditions of this Agreement. As Senior Executive Consultant the Executive shall report to the Chief Executive Officer of -2- the Company, and his service shall be subject to the direction and control of the Chief Executive Officer and the Board of Directors (the "Board", which term shall include any committee to which the Board may delegate its authority with respect to matters subject to this Agreement). (b) Board Position. On or about the effective date of the Merger the -------------- Board shall nominate and appoint the Executive as a director of the Company. Thereafter, during the term of this Agreement, the Board shall designate and nominate the Executive as a director of the Company and, if elected by the stockholders of the Company, the Executive shall accept such position and diligently perform the duties arising from such position. For his first term as a director the Board shall nominate and appoint the Executive to the position of Vice Chairman. (c) Responsibilities through April 30, 1998. For the period beginning --------------------------------------- with the commencement of the term of this Agreement (as set forth in Paragraph 2) and ending April 30, 1998 (the "Transition Period"), the Executive shall be engaged in the performance of his duties hereunder, which shall include (i) assisting the Chief Executive Officer in matters relating to transition and restructuring arising from the Merger and marketing and repositioning the Company ("Transition Duties"), as well as (ii) general matters of strategy development, cultivation and implementation of major alliances, acquisitions and mergers, investor and public relations, and any other matters and duties as may reasonably be requested by the Chief Executive Officer and the Board. During the Transition Period the Executive shall devote substantially all of his business time, attention and services to the diligent, faithful and competent discharge of such duties for the successful operation of the Company's business. Any business activity that the -3- Executive wishes to engage in on his own time shall not conflict or compete with any interest of the Company or interfere with the Executive's performance of his duties hereunder. During the Transition Period the Executive shall not have any managerial or operational responsibility, other than service on a board of directors, in any enterprise, firm, corporation, trust or other business entity other than the Company; provided, however, that nothing herein shall prevent the ownership by the Executive of an equity interest in any business entity, provided that such ownership does not involve any managerial or operational responsibility other than serving on the board of directors. Any directorships of corporations other than the Company must be approved in writing by the Board in advance, with the exception of directorships or similar positions with charitable and professional organizations or family-owned trusts or businesses (provided that such activities do not interfere with Executive's performance of his duties hereunder). (d) Responsibilities After April 30, 1998. For the remainder of the ------------------------------------- term of this Agreement after April 30, 1998 (the "Remaining Term"), the Executive shall serve the Company as shall be mutually agreed by the parties. During the Remaining Term the Executive's duties, which he shall discharge diligently, faithfully and competently, shall be unchanged except that, unless otherwise mutually agreed between the parties, the Executive shall have no Transition Duties. The Executive may engage in any activity on his own time without Board approval, provided the same does not conflict or compete with any interest of the Company or interfere with the Executive's performance of his duties hereunder. -4- 2. Term ---- The term of this Agreement shall commence on the effective date of the Merger, and shall expire on the third anniversary thereof, unless terminated sooner in accordance with the provisions of Paragraph 6. 3. Compensation ------------ (a) Salary. During the Transition Period, the Company shall pay ------ to the Executive salary at the annual rate of Two Hundred Fifty Thousand Dollars ($250,000.00), payable in such installments as may be established, and from time to time modified, by the Company for executive compensation. During the Remaining Term, the Company shall pay to the Executive salary at the annual rate of Fifty-five Thousand Dollars ($55,000.00), payable as hereinabove specified. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. The Executive's salary may be adjusted at any time by mutual agreement of the parties, but shall not be lowered from the amounts hereinabove specified for the Transition Period and the Remaining Term, respectively. (b) Benefits. During the term of this Agreement, subject to the -------- provisions of Paragraph 4, the Executive shall be reimbursed for all of his business-related travel and other business-related expenses in accordance with the Company's policies from time to time in effect, and shall also be furnished by the Company, for use in the Company's business, with such executive support services, including without limitation office space, clerical support, lap top computer, network access, cellular telephone and service, and Wildfire telephone answering and forwarding, as are customarily provided by the Company, all at the Company's expense. The Executive will -5- also be entitled to participate on the same basis with all other management employees of the Company in the Company's standard benefits package generally available for all other officers and employees of the Company, with respect to group health, disability and life insurance programs and retirement and profit sharing plans, to the extent such benefit plans exist. (c) Stock Options. Beginning on the Annual Meeting of Stockholders ------------- following the Company's fiscal year ending in 1998, the Executive shall receive non-qualified stock options in the same amount, and at the same times, as are granted to non-employee directors of the Company under the Company's 1995 Non- Employee Director Option Plan (the "Director Option Plan"); provided, however, that Executive shall not be entitled to the Initial Grant of options provided under the Director Option Plan for non-employee directors upon their initial election to the Board; and provided, further, however, that with respect to any -------- fiscal year such options shall not be granted to the Executive if the Executive shall not have attended at least 75% of the meetings of the Board for such fiscal year. 4. Acceptance of Full Time Employment ---------------------------------- If at any time during the Remaining Term the Executive shall accept a full time position with an employer not the Company, the Executive shall immediately resign his employment. If following such resignation the Executive continues to serve as a non-employee director of the Company, the Company shall pay to the Executive such compensation and benefits, including without limitation stock options under the Director Stock Option Plan, as are customarily paid to a non-employee director. -6- 5. Assumption of Individual, Inc. Stock Options -------------------------------------------- The parties acknowledge and agree that the Executive has been granted options to purchase 1,000,000 shares of the stock of Individual, Inc. (the "Options"), pursuant to the Individual, Inc. Amended and Restated 1989 Stock Option Plan, two Individual, Inc. Non-Qualified Stock Option Agreements both dated September 3, 1996, the Individual, Inc. Incentive Stock Option Agreement dated September 3, 1996 and the July 31, 1997 Option Repricing Memorandum (the "Option Agreements"). The Company shall assume all obligations with respect to the Options, on the same terms and conditions found in the Option Agreements (which are incorporated herein by reference), except that: (i) The Options will be exercisable for that number of shares of the Company's Common Stock equal to the product of the number of shares of Individual, Inc. Common Stock that were purchasable under such Options immediately prior to the effective date of the Merger multiplied by the Exchange Ratio (as defined in the Merger Agreement); and (ii) The per share exercise price for the shares of the Company's Common Stock issuable upon exercise of the Options will be equal to the quotient determined by dividing the exercise price per share of Individual, Inc. Common Stock at which the Options were exercisable immediately prior to the effective date of the Merger by the Exchange Ratio. -7- Any exercise of Options shall be subject to restrictions under pooling-of- interest accounting rules to the extent applicable. 6. Termination ----------- The Executive's employment under this Agreement shall terminate prior to the expiration of the term set forth in Paragraph 3 upon the occurrence of any of the following events: (i) The death or disability of the Executive. For the purposes of this Paragraph, "disability" shall mean the inability of the Executive, by reason of accident or illness, to perform substantially the duties of his employment, which inability persists for a continuous period of three (3) months. (ii) The giving of thirty (30) days' written notice by either party to other of the notifying party's election to terminate this Agreement for any reason other than for cause (as hereinafter defined). (iii) The giving of fourteen (14) days' written notice by the Executive to the Company of the Executive's election to terminate this Agreement for cause. As used in this subparagraph, "for cause" means any change in the Executive's title, position, responsibilities, compensation, benefits or location which is not consented to by the Executive. (iv) Immediately after determination by resolution of the Board, duly adopted by a majority of its members excluding the Executive, to terminate this Agreement for cause. As used in this subparagraph, -8- "for cause" means: (A) the substantial and continuing willful breach by the Executive of his obligations under this Agreement, such breach not having been cured within thirty (30) days after the Executive's receipt of notice thereof from the Board, which notice shall set forth in reasonable detail the nature of such breach; provided, however, that this subparagraph shall not apply to acts or omissions by the Executive in the exercise of his honest business judgment; (B) the commission by the Executive of an act of fraud or substantial and material breach of fiduciary duty; or (C) the conviction of the Executive of any felony or of any misdemeanor involving moral turpitude or misappropriation of Company property. 7. Non-Competition; Non-Disclosure ------------------------------- In connection with his employment by the Company pursuant to the terms of this Agreement, the Executive shall execute simultaneously herewith the Noncompetition, Nondisclosure and Developments Agreement attached hereto as Annex A, the terms and conditions of which are incorporated herein by reference. 8. No Conflict ----------- The Executive warrants and represents that the performance of his obligations under this Agreement does not and will not violate or conflict with any agreement relating to confidentiality, non-competition or exclusive employment to which the Executive is or was subject. The Executive shall, during the term of this Agreement, -9- not enter into any agreement conflicting with or causing any breach of the provisions of this Agreement. 9. Waiver ------ The failure of any party hereto at any time or times to require performance of any provision of this Agreement shall in no manner affect that party's right at a later time to enforce the same provision. Any waiver by any party of the breach of any provision contained in this Agreement in any one or more instances shall not be deemed to be a waiver of any other breach of the same provision or any other provisions contained herein. 10. Notices ------- Any notices or other communications required or permitted under this Agreement shall be sufficiently given if delivered in hand or if sent by registered or certified mail, postage prepaid, and if to the Executive, addressed to him as follows: Mr. Michael E. Kolowich 116 Monument Street Concord, MA 01742 With a copy to: Medverd & Simmons, P.C. 175 Federal Street, 8th Floor Boston, MA 02110 Attention: Richard L. Medverd, Esquire And if to the Company, addressed to it as follows: Desktop Data, Inc. 80 Blanchard Road Burlington, MA 01803 Attention: Donald McLagan, President -10- With a copy to: Testa, Hurwitz & Thibeault, LLP 125 High Street Boston, MA 02110 Attention: Lawrence S. Wittenberg, Esquire Either party may at any time change his or its address for notice hereunder by giving notice thereof to the other party in accordance with the provisions of this Paragraph 10. 11. Entire Agreement Amendment -------------------------- Except as otherwise provided herein, this Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof, and supersedes all proposals, negotiations and understandings of any nature whatsoever. This Agreement may be amended only by a written instrument signed by both parties. 12. Severability ------------ If any of the provisions of this Agreement, or any part thereof, are hereafter construed to be invalid or unenforceable, the same shall not affect the remaining provisions, which shall be enforced to the fullest extent permitted by law, without regard to the invalid portion or portions. 13. Assignment ---------- The Executive acknowledges that the services to be rendered by him hereunder are unique and personal in nature. Accordingly, the Executive may not assign any of his rights or delegate any of his duties or obligations under this Agreement, except with the written consent of the Company. The rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. The rights of the Executive hereunder shall -11- inure to the benefit of the Executive and, where the context so requires, to his personal representatives. 14. Further Assurances ------------------ If at any time either party hereto shall consider or be advised that any further agreement, assurances or other documents are reasonably necessary or desirable to carry out the provisions hereof and the transactions contemplated hereby, the parties hereto shall execute and deliver any and all such agreements or other documents, and do all things reasonably necessary or appropriate to carry out fully the provisions hereof. 15. Consent ------- Whenever the consent or approval of a party is required or permitted hereunder, such consent shall be in writing, and shall not be unreasonably withheld. 16. Governing Law ------------- This Agreement, the employment relationship contemplated herein and any claim arising from such relationship, whether or not arising under this Agreement, shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, and this Agreement shall be deemed to be performable in Massachusetts. 17. Captions -------- The captions of the several paragraphs and subparagraphs of this Agreement have been inserted for convenience only and do not constitute a part of this Agreement. -12- 18. Counterparts ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [THIS SPACE INTENTIONALLY LEFT BLANK] -13- IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as a sealed instrument, as of the date first above written. ----------------------------------- MICHAEL E. KOLOWICH DESKTOP DATA, INC. By: -------------------------------- Name: --------------------------- Title: --------------------------- -14- ANNEX A ------- EMPLOYEE NONCOMPETITION, ------------------------ NONDISCLOSURE AND DEVELOPMENTS AGREEMENT ---------------------------------------- In consideration and as a condition of my employment by Desktop Data, Inc. (the "Company"), I hereby agree with the Company as follows: 1. During the period of my employment by the Company and for one year thereafter, I agree that I will not, directly or indirectly, alone or as a partner, officer, director, employee or stockholder, or consultant to, of any entity, (a) engage in any business activity which is in competition in the United States with the products or services being developed, manufactured or sold by the Company or (b) solicit, interfere with or endeavor to entice away any employee of the Company; provided however, that this Agreement does not prohibit me from holding up to five percent (5%) of the publicly traded shares of a public company. 2. I will not at any time, whether during or after the termination of my employment, reveal to any person or entity any of the trade secrets or confidential information concerning the organization, business or finances of the Company or of any third party which the Company is under an obligation to keep confidential (including but not limited to trade secrets or confidential information respecting inventions, products, designs, methods, know-how, techniques, systems, processes, software programs, works of authorship, customer lists, projects, plans and proposals), except as may be required in the ordinary course of performing my duties as an employee of the Company; and I shall keep secret all matters entrusted to me and shall not use or attempt to use any such information in any manner which may injure or cause loss or may be calculated to injure or cause loss whether directly or indirectly to the Company (it being understood that any use of such information in the exercise of honest business judgment in connection with my performance of services for the Company shall not constitute a violation of this clause). Further, I agree that during my employment I shall not make, use or permit to be used any notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials of any nature relating to any matter within the scope of the business of the Company or concerning any of its dealings or affairs otherwise than for the benefit of the Company. I further agree that I shall not, after the termination of my employment, use or permit to be used any such notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials, it being agreed that all of the foregoing shall be and remain the sole and exclusive property of the Company and that immediately upon the termination of my employment I shall deliver all of the foregoing, and all copies thereof, to the Company, at its main office. 3. If at any time or times during my employment, I shall (either alone or with others) make, conceive, discover or reduce to practice any invention, modification, discovery, -15- design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, secret or intellectual property right whatsoever or any interest therein (whether or not patentable or registrable under copyright or similar statutes or subject to analogous protection) (herein called "Developments") that (a) relates to the business of the Company or any of the products or services being developed, manufactured or sold by the Company or which may be used in relation therewith or (b) results from tasks assigned me by the Company, such Developments and the benefits thereof shall immediately become the sole and absolute property of the Company and its assigns, and I shall promptly disclose to the Company (or any persons designated by it) each such Development and hereby assign any rights I may have or acquire in the Developments and benefits and/or rights resulting therefrom to the Company and its assigns without further compensation and shall communicate, without cost or delay, and without publishing the same, all available information relating thereto (with all necessary plans and models) to the Company. Upon disclosure of each Development to the Company, I will, during my employment and at any time thereafter, at the request and cost of the Company, sign, execute, make and do all such deeds, documents, acts and things as the Company and its duly authorized agents may reasonable require: (a) to apply for, obtain and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same; and (b) to defend any opposition proceedings in respect of such applications and any opposition proceedings or petitions or applications for revocation of such letters patent, copyright or other analogous protection. In the event the Company is unable, after reasonable effort, to secure my signature on any letters patent, copyright or other analogous protection relating to a development, whether because my physical or mental incapacity or for any other reason whatsoever, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in- fact, to act for and in my behalf and stead to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyright or other analogous protection thereon with the same legal force and effect as if executed by me. 4. I agree that any breach of this Agreement by me will cause irreparable damage to the Company and that in the event of such breach the Company shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of my obligations hereunder. -16- 5. I understand that this Agreement does not create an obligation on the Company or any other person or entity to continue my employment. 6. I represent that my performance of all of the terms of this Agreement, the Employment Agreement between myself and the Company and my service as an employee and a director of the Company does not and will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment with the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 7. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision hereof. 8. I hereby agree that each provision herein shall be treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses herein. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law as it shall then appear. 9. My obligations under this Agreement shall survive the termination of my employment regardless of the manner of such termination and shall be binding upon my heirs, executors, administrators and legal representatives. 10. The term "Company" shall include Desktop Data, Inc. and any of its predecessors, successors, subsidiaries, subdivisions or affiliates (including, without limitation, NewsEdge Corporation). The Company shall have the right to assign this Agreement to its successors and assigns, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by said successors or assigns. 11. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the undersigned has executed this Agreement as a sealed instrument as of the 3rd day of November, 1997. ---------------------------------------- Michael E. Kolowich EX-21.1 5 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 - ------------ SUBSIDIARIES OF THE COMPANY --------------------------- 1. NewsEDGE Corporation Canada, Inc., Toronto, Ontario, Canada 2. NewsEDGE Corporation Securities Corporation, Delaware, United States of America 3. Individual, K.K., Tokyo, Japan 4. ClariNet Communications Corporation, California, United States of America 5. Individual Inc. Securities Corporation, Delaware, United States of America EX-23.1 6 CONSENT OF INDEPENDENT ACCTS. 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 Statement on Form S-1 File No. 33-94054 and 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 27, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE 1
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 35,175,200 7,981,698 7,588,166 0 0 54,678,235 8,855,130 3,123,021 60,583,909 26,637,904 0 0 0 86,912 33,813,843 60,583,909 42,181,558 42,181,558 13,061,586 40,331,628 0 0 0 3,989,903 1,296,958 2,692,945 0 0 0 2,692,945 0.31 0.31
EX-27.2 8 FINANCIAL DATA SCHEDULE 2
5 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 10,735,071 19,300,515 18,119,717 13,117,217 4,948,351 3,163,744 0 0 0 0 35,617,243 36,765,785 6,238,691 3,311,184 1,599,021 1,320,647 48,327,150 38,878,515 18,114,892 14,187,654 0 0 0 0 0 0 86,264 85,107 29,898,260 24,519,798 48,327,150 38,878,515 33,779,259 23,185,833 33,779,259 23,185,833 9,500,735 6,397,094 30,476,253 21,762,877 0 0 0 0 0 0 5,199,023 2,320,064 614,225 183,000 4,584,798 2,137,064 0 0 0 0 0 0 4,584,798 2,137,064 .53 .66 .52 .43
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