-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GxJ7VYMdllJ2Bfu0CW6p0VqBzh9DPkyOkhN3bFm8dUkvE3qsn2fhb3BHuz0qQRTb BYhS4K9SAYQiBKShc2shHw== 0000950109-95-003114.txt : 19950814 0000950109-95-003114.hdr.sgml : 19950814 ACCESSION NUMBER: 0000950109-95-003114 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DESKTOP DATA INC CENTRAL INDEX KEY: 0000858912 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 043016142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 033-94054 FILM NUMBER: 95561679 BUSINESS ADDRESS: STREET 1: 1601 TRAPELO RD CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6176722400 MAIL ADDRESS: STREET 1: 1601 TRAPELO ROAD CITY: WALTHAM STATE: MA ZIP: 02154 424B1 1 FINAL PROSPECTUS Rule No. 424(b)(1) Registration No. 33-94054 2,000,000 Shares [LOGO OF DESKTOP DATA, Desktop Data, Inc. INC. APPEARS HERE] Common Stock ------------ Of the 2,000,000 shares of Common Stock offered hereby, 1,677,000 shares are being sold by Desktop Data, Inc. ("Desktop Data" or the "Company") and 323,000 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. See "Underwriting" for the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on The Nasdaq National Market under the symbol "DTOP." Upon the completion of this offering, the Company's directors and executive officers, together with entities and persons affiliated with them, will beneficially own approximately 58.4% of the outstanding Common Stock of the Company (assuming no exercise of the Underwriters' overallotment option). See "Risk Factors--Control by Executive Officers and Directors." ------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 6 HEREOF. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - -------------------------------------------------------------------------------- Per Share.................. $15.00 $1.05 $13.95 $13.95 - -------------------------------------------------------------------------------- Total(3)................... $30,000,000 $2,100,000 $23,394,150 $4,505,850
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) See "Underwriting" for information relating to indemnification of the Underwriters. (2) Before deducting estimated expenses of $600,000, all of which will be payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an aggregate of 300,000 additional shares of the Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $34,500,000, $2,415,000, $27,579,150 and $4,505,850, respectively. See "Underwriting." ------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about August 16, 1995. Alex. Brown & Sons Volpe, Welty & Company INCORPORATED THE DATE OF THIS PROSPECTUS IS AUGUST 11, 1995. [ARTWORK APPEARS HERE] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Desktop Data 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 NewsEDGE service currently delivers up to 488 news and information sources in real time to users' personal computers, automatically monitors and filters the news according to pre-established personal interest profiles, and alerts users to stories matching their profiles. The NewsEDGE service is used by executives, salespeople, marketers, lawyers, accountants, consultants, bankers and financial professionals throughout customer organizations. As of June 30, 1995, NewsEDGE was installed by 297 customers, representing approximately 60,000 authorized users. 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. and the text of stories in The Financial Post (Toronto), Financial Times (London), The New York Times News Service, USA Today and The Wall Street Journal. Also available on NewsEDGE are the business sections of over 100 North American newspapers, periodicals such as Forbes, Fortune, InfoWorld, MacWeek and PC Week and newsletters such as those distributed by American Banker and Phillips Business Information Services, Inc. Desktop Data's objective is to capitalize on the growing demand for enterprise-wide information and the significant investments by businesses and organizations in local area networks ("LANs") by enhancing its position as a leading provider of customized, real-time news and information to knowledge workers who need timely access to information. There can be no assurance that this objective will be achieved. The Company seeks to continually improve and expand NewsEDGE by adding newswires and other information sources, improving the software's database, archiving and search capabilities, and assuring NewsEDGE's compatibility with a wide range of personal computer ("PC") hardware and software and LAN architectures. Desktop Data has established and maintains relationships with major content providers and with major providers of LAN- based software systems, including relationships pursuant to written agreements with Microsoft Corporation, Lotus Development Corporation and Teknekron Software Systems, Inc. See "Business--Sales and Marketing." The Company targets large organizations and offers subscription-based pricing options that include significant volume discounts to encourage widespread adoption of NewsEDGE within customer organizations. Unlike the information offerings of individual news providers, NewsEDGE integrates newswires from a number of competitive sources into a single, comprehensive service offering. While on-line services require users to dial out and pull in searched stories on a variable cost basis, NewsEDGE profiles and pushes the news to all LAN users 24 hours per day at a fixed, predictable cost. Its point-and-click graphical user interface makes NewsEDGE an easy to use monitoring and alerting resource for diverse knowledge workers rather than a research tool designed for information specialists. The NewsEDGE software profiles the full text of all stories, enabling users to automatically monitor news concerning people, products and events as well as companies. In addition, NewsEDGE's open architecture leverages LAN and PC investments by integrating with customer groupware, E-mail and in-house applications rather than requiring proprietary, stand-alone hardware and software. Desktop Data's customers include AT&T Corporation, Citibank, N.A., Compaq Computer Corporation, FMR Corp. (Fidelity Investments), Hewlett-Packard Co., Microsoft Corporation, Pfizer, Inc., Unilever United States, Inc. and the Executive Office of the President of the United States. No customer accounted for over 5% of the Company's revenues in any of the last three years. From December 31, 1991 to December 31, 1994, the average per day, per user cost of NewsEDGE for the Company's customers decreased from $1.82 to $0.95, and the average number of NewsEDGE users per customer increased from 30 to 165. At the same time, the average revenues per customer for these years increased from $19,686 to $57,445. The Company's experienced direct sales force and significant investments in development and customer support have resulted in annual customer renewal rates of at least 90% for each of the last four years. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- THE OFFERING Common Stock offered by the Company.. 1,677,000 shares Common Stock offered by the Selling Stockholders........................ 323,000 shares Common Stock to be outstanding after the offering........................ 8,192,937 shares(1)(2) Use of proceeds by the Company....... For general corporate purposes, including working capital, and to pay accrued dividends on the Company's Series A Convertible Preferred Stock and Series B Redeemable Preferred Stock Nasdaq National Market symbol........ DTOP
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER OPERATING DATA)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------- ---------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Subscription and royalty revenues...... $ 529 $ 1,575 $ 3,441 $ 6,764 $12,925 $ 5,530 $ 9,821 Total revenues......... 537 2,006 4,207 7,660 14,358 6,248 10,499 Income (loss) from operations............ (2,627) (1,850) (1,425) (1,296) (384) (455) 478 Net income (loss)...... (2,545) (1,818) (1,434) (1,262) (287) (425) 603 Pro forma net income (loss) per common and common equivalent share(3).............. $ (.06) $ (.07) $ .08 Pro forma weighted average number of common and common equivalent shares outstanding(3)........ 6,670 6,648 6,922 OTHER OPERATING DATA: Installed customers at end of period......... 59 101 139 195 255 239 297 Authorized users at end of period(4).......... 264 4,480 8,366 22,732 51,548 32,675 60,562 Average users per customer(5)........... 4 30 54 93 165 128 203 Average revenues per customer(6)........... $17,933 $19,686 $28,671 $40,503 $57,445 $25,484 $35,581 Annual renewal rate(7). N/A 90% 94% 99% 94% N/A N/A
JUNE 30, 1995 ------------------------------------- PRO PRO FORMA ACTUAL FORMA (2) AS ADJUSTED (2)(8) ------- --------- ------------------ BALANCE SHEET DATA: Working capital (deficit)................ $(4,545) $(6,295) $15,886 Total assets............................. 12,630 12,630 32,706 Redeemable preferred stock............... 4,720 1,963 1,963 Total stockholders' equity (deficit)..... (5,606) (4,818) 17,363
- -------- (1) Based upon the number of shares outstanding as of June 30, 1995. Excludes 275,102 shares of Common Stock issuable upon the exercise of options outstanding on that date, of which options to purchase 99,111 shares were then exercisable at a weighted average exercise price of $1.22. See "Management--Stock Plans." (2) Gives effect to the conversion of all outstanding shares of the Company's Series A Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Redeemable Convertible Preferred Stock (collectively, the "Convertible Preferred Stock") into an aggregate of 3,847,123 shares of Common Stock upon the closing of this offering. See Notes 3 and 4 of Notes to Consolidated Financial Statements. (3) Calculated on the basis described in Note 1 of Notes to Consolidated Financial Statements. (4) Number of users authorized pursuant to contracts with installed customers. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- (5) Calculated by dividing (i) the average of the number of authorized users at the end of the previous year and at the end of the current period, by (ii) the average of the number of installed customers at the end of the previous year and at the end of the current period. (6) Calculated by dividing (i) subscription and royalty revenues for the current period, by (ii) the average of the number of installed customers at the end of the previous year and at the end of the current period. (7) Total annualized amount due under subscription agreements in effect at the end of the previous year for installed customers who renew their subscriptions during the current year, as a percentage of the total annualized amount due under all subscriptions for installed customers in effect at the end of the previous year. (8) Adjusted to give effect to the sale of 1,677,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom at the closing of this offering after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." ---------------- Except as otherwise noted, all information contained in this Prospectus (i) reflects a 2.25 into 1 reverse stock split of the Company's Common Stock effected as of June 26, 1995; (ii) reflects the conversion of all outstanding shares of Convertible Preferred Stock into an aggregate of 3,847,123 shares of Common Stock upon the closing of this offering; (iii) reflects an amendment to the Company's Certificate of Incorporation, to be filed upon the closing of this offering, to remove the Company's existing series of Convertible Preferred Stock and to create a class of authorized but undesignated preferred stock; and (iv) assumes no exercise of the Underwriters' over-allotment option. See "Use of Proceeds," "Description of Capital Stock," "Underwriting" and Notes 3, 4 and 9 of Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 5 RISK FACTORS In addition to the other information set forth in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Common Stock offered by this Prospectus. Operating Losses. The Company has not been profitable for any year since its inception, although it earned profits in each of the last four quarters. As of June 30, 1995, the Company had an accumulated deficit of $8.0 million. There can be no assurance that the Company will be profitable on either a quarterly or annual basis in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 Knight-Ridder Information Services, Inc. ("Dialog"), Dow Jones & Company, Inc. ("Dow Jones"), Reed Elsevier PLC ("Lexis/Nexis"), Pearson PLC ("Pearson"), Reuters America, Inc. ("Reuters") and Thomson Financial Networks, Inc. ("Thomson"); (ii) market data services companies such as Automatic Data Processing, Inc. ("ADP"), Bloomberg L.P. ("Bloomberg"), Quotron Systems, Inc. ("Quotron") and Dow Jones Telerate Inc. ("Telerate"); (iii) traditional print media companies that are increasingly searching for opportunities for on-line provision of news, including through the establishment of World Wide Web sites on the Internet; (iv) large providers of LAN-based software systems such as Lotus Development Corporation ("Lotus") and Microsoft Corporation ("Microsoft"), which could, in the future, ally with competing news and information providers; and (v) to a lesser degree, consumer-oriented commercial on-line services and Internet access providers. Many of these companies and market participants not named above have substantially greater financial, technical and marketing resources than the Company. The Company believes that NewsEDGE is differentiated from the news and system products offered by the large news and systems providers because of the Company's ability to deliver news from many different, competing providers on an enterprise-wide basis, directly to LAN-connected personal computers, customized to meet the needs of each individual user, at a relatively low cost per user. In addition, several smaller companies offer directly competitive products or services that provide news to enterprises through the customer's computer network. The Company believes that NewsEDGE offers advantages over each of these competing products. For example, 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 scrolling of news stories, while others do not support Lotus Notes or other groupware applications. In addition, many competitors rely on database engines developed by third parties, and as a result the Company believes these services are not as readily adaptable to evolving customer or information provider needs as is NewsEDGE. Finally, each of these smaller competitors is owned by a larger organization, which the Company believes restricts their ability to attract a large variety of news sources and makes it difficult for them to provide the same level and focus of sales, development and customer support as can be provided by Desktop Data. 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. See "Business--Competition." Dependence on NewsEDGE Service. The Company currently derives substantially all of its revenues from NewsEDGE service subscriptions and related royalties. Although the Company intends to increase the number of news and other information sources available through NewsEDGE and to otherwise enhance NewsEDGE, the Company's strategy is to continue to focus on providing the NewsEDGE service 6 as its sole line of business. In addition, there can be no assurance that the Company will be able to increase the number of news sources or otherwise enhance NewsEDGE. As a result, any factor adversely affecting sales of NewsEDGE would have a material adverse effect on the Company. The Company's future financial performance will depend principally on the market's acceptance of NewsEDGE and the Company's ability to sell NewsEDGE to additional customers and to increase revenue derived from existing customers by increasing the number of users within each customer, adding additional newswires or adding additional NewsEDGE servers. There can be no assurance that the Company will be able to continue to successfully market NewsEDGE or to increase its revenues per customer. See "Business--The NewsEDGE Service." Dependence on News Providers. The Company currently makes 488 news and information sources available through NewsEDGE, pursuant to agreements between the Company and over 50 different news providers. A significant percentage of the Company's customers subscribe to services provided by one or more of Press Association Inc., a subsidiary of The Associated Press ("The Associated Press"), Dow Jones, The Financial Times, Reuters and Thomson. The Company's agreements with news providers are generally for a term of one year, with automatic renewal unless notice of termination is provided before the end of the term by either party. These agreements may also be terminated by the provider if Desktop Data fails to fulfill its obligations under the agreement and, under some of the agreements, upon the occurence of a change in control of the Company. Many of these news and information providers compete with one another and, to some extent, with the Company. Termination of one or more significant news provider agreements would decrease the news and information which the Company can offer its customers and would have a material adverse effect on the Company's business and results of operations. See "Business--The NewsEDGE Service." Dependence on News Transmission Sources. NewsEDGE news and information is transmitted using one or more of three methods: leased telephone lines, satellites or FM radio transmission. None of these methods of news transmission is within the control of the Company, and the loss or significant disruption of any of them could have a material adverse effect on the Company's business. Many newswire providers have established their own broadcast communications networks using one or more of these three vehicles. In these cases, Desktop Data's role is to arrange communications between the news provider and the NewsEDGE customer's server. For sources which do not have their own broadcast communications capability, news and information is delivered to the Company's news consolidation facility, where it is reformatted for broadcast to NewsEDGE servers and retransmitted to customers through an arrangement between the Company and Mainstream Data, Inc. ("Mainstream"), a common carrier communications vendor. Mainstream is also the communications provider for many newswires offered by the Company through NewsEDGE. The Company's agreement with Mainstream expires on December 31, 1996 and can be terminated earlier in the event of a material breach by the Company of the agreement. If the agreement with Mainstream were terminated on short notice, or if Mainstream 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. Mainstream is a privately-held company and, therefore, Desktop Data does not have access to information concerning Maintstream's financial condition. However, the Company has no reason to believe that Mainstream has any financial difficulty that would cause it to be unable to fulfill its obligations under its agreement with Desktop Data. Moreover, the Company believes that if Mainstream were unable to fulfill those obligations, other sources of retransmission would be available to the Company, although the transition from Mainstream to those sources could result in delays or interuptions of service that could have a material adverse affect on the Company's business. See "Business--The NewsEDGE Service." Rapid Technological Change. The business information services, software and communications industries are subject to rapid technological change, which may render existing products and services obsolete or require significant unanticipated investments in research and development. The Company's future success will depend, in part, upon its ability to enhance NewsEDGE and keep pace with 7 technological developments. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful enhancement and continued development of its services or that new or enhanced services, once developed, will meet with market acceptance. See "Business--The NewsEDGE Service" and "--Development." Dependence on Proprietary Technology. The Company's success is heavily dependent upon proprietary technology. The Company's NewsEDGE software is licensed to customers under license agreements containing provisions prohibiting the unauthorized use, copying and transfer of the licensed program. 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 technology. See "Business--Intellectual Property and Proprietary Rights." Dependence on Key Personnel. The Company's success depends to a significant extent upon the continued service of its executive officers and other key management, sales and technical personnel, and on its ability to continue to attract, retain and motivate qualified personnel. The competition for such employees is intense. The Company has no long-term employment contracts with any of its employees, and, with the exception of the Company's executive officers, none of its employees is bound by a non-competition agreement. The loss of the services of one or more of the Company's executive officers, sales people, design engineers or other key personnel or the Company's inability to recruit replacements for such personnel or to otherwise attract, retain and motivate qualified personnel could have a material adverse effect on the Company's business and results of operations. The Company maintains $3 million of key-man life insurance on Donald L. McLagan, the Company's Chairman, President and Chief Executive Officer. See "Business--Employees" and "Management--Executive Officers and Directors." Potential Fluctuations in Quarterly Results. The Company has generally increased operating expenses in each successive quarter to generate and support higher revenue levels and development efforts and, in part, based on its expectations regarding future revenue levels. Particularly when viewed on a quarterly basis, the addition of new development engineers and new sales people represent investments which may negatively affect the Company's operating income until those new people become productive. If revenue levels in any quarter are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenues because a proportionately smaller amount of the Company's expenses varies with its revenues. As a result, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Selected Quarterly Operating Results." Control by Executive Officers and Directors. Upon the closing of this offering, the Company's directors and executive officers, together with entities and persons affiliated with them, will beneficially own approximately 58.4% of the outstanding Common Stock (56.3% if the Underwriters' over- allotment option is exercised in full). Accordingly, such persons, if acting together, would have sufficient voting power to control the outcome of matters (including the election of a majority of the Board of Directors, and any merger, consolidation or sale of all or substantially all of the Company's assets) submitted to the stockholders for approval and also to have control over the management and affairs of the Company. As a result of such control, certain transactions may not be possible without the approval of such stockholders. These transactions include proxy contests, mergers involving the Company, tender offers, open-market purchase programs or other purchases of Common Stock that could give stockholders of the Company 8 the opportunity to realize a premium over the then-prevailing market price for their shares of Common Stock. See "Principal and Selling Stockholders" and "Description of Capital Stock--Delaware Law and Certain Charter and By-law Provisions; Anti-Takeover Effects." Absence of Public Market and Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Common Stock of the Company. The Common Stock has been approved for quotation on The Nasdaq National Market. However, there can be no assurance that, following this offering, an active trading market for the Common Stock will develop or be sustained or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price has been determined by negotiations among the Company, representatives of the Selling Stockholders, and the Representatives of the Underwriters and will not necessarily reflect the market price of the Common Stock after this offering. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The stock market in recent years has experienced extreme price and volume fluctuations that have particularly affected the market prices of many technology companies and that have often been unrelated or disproportionate to the operating performance of such companies. The market price of the Common Stock could also be subject to significant fluctuations in response to, and may be adversely affected by, variations in quarterly operating results, changes in earnings estimates by analysts and adverse earnings or other financial announcements of the Company's customers as well as other factors. Unspecified Use of Proceeds. The principal purposes of this offering are to increase the Company's equity capital and to create a public market for the Company's Common Stock, which will facilitate future access by the Company to public equity markets and enhance the ability of the Company to use its Common Stock as consideration for acquisitions and as a means for attracting and retaining key employees. The Company intends to use the proceeds of this offering primarily for general corporate purposes, including working capital. The Company has not as yet identified specific uses of a majority of the net proceeds to be received by it from this offering, and, pending such uses, the Company expects that it will invest such net proceeds in short-term, interest- bearing investment grade securities. Accordingly, the Company's management will have broad discretion as to the use of such proceeds without any action or approval of the Company's stockholders. See "Use of Proceeds." Payments to Affiliates. In connection with the Company's payment upon the closing of this offering of all accrued and unpaid dividends on the Series A Convertible Preferred Stock, Messrs. Cass, Homans, McLagan and Semmel, together with their respective affiliates, will receive an estimated $255,000, $12,000, $435,000 and $168,000, respectively, in their capacities as holders of Series A Convertible Preferred Stock of the Company. In connection with the Company's payment upon the closing of this offering of all accrued and unpaid dividends on the Series B Redeemable Preferred Stock, Messrs. Cass, McLagan and Semmel, together with their respective affiliates, will receive an estimated $12,000, $30,000 and $11,000, respectively, in their capacities as holders of Series B Redeemable Preferred Stock, and William Blair Venture Partners III ("Blair") will receive an estimated $530,000. The Company may use a portion of the proceeds of this offering to redeem the Series B Redeemable Preferred Stock. See "Use of Proceeds" and "Certain Transactions." Shares Eligible For Future Sale. Sales of substantial amounts of Common Stock in the public market after this offering could adversely affect the prevailing market price of the Common Stock. In addition to the 2,000,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), as of the date of this Prospectus (the "Effective Date"), based upon shares outstanding as of June 30, 1995, there will be 6,192,937 shares of Common Stock outstanding, all of which are "restricted" shares (the "Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). Approximately 111,162 Restricted Shares will be eligible for sale immediately following the Effective Date in reliance on Rule 144(k) promulgated under the Securities Act. Beginning 90 days and 180 days after the Effective Date, an additional 41,191 and 5,875,305 Restricted Shares, respectively, will 9 first become eligible for sale in the public market pursuant to Rules 144 and 701 promulgated under the Securities Act, upon the expiration of certain lock- up agreements with the Underwriters, or as a result of a combination of the foregoing. Of the Restricted Shares that will first become eligible for sale in the public market 180 days after the Effective Date, approximately 4,452,751 shares will be subject to certain volume and other resale restrictions pursuant to Rule 144. The Securities and Exchange Commission has proposed an amendment to Rule 144 which would reduce the holding period required for shares subject to Rule 144 to become eligible for sale in the public market. If this proposal is adopted, an additional 31,950 shares will become eligible for sale to the public 180 days after the Effective Date. In addition, upon the expiration of lock-up agreements with the Underwriters and pursuant to a registration statement on Form S-8, which the Company intends to file with the Securities and Exchange Commission 90 days following the Effective Date, an aggregate of approximately 1,796 and 146,770 shares issuable upon exercise of stock options will first become eligible for sale in the public market 90 and 180 days following the Effective Date, respectively. See "Principal and Selling Stockholders" and "Shares Eligible for Future Sale." Effect of Anti-Takeover Provisions. Upon the closing of this offering, the Company's Board of Directors will have the authority to issue up to 1,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that may be issued in the future. While the Company has no present intention to issue shares of Preferred Stock, such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have other rights, including economic rights senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. The Amended and Restated Certificate of Incorporation, which will be filed upon the closing of this offering (the "Amended and Restated Certificate"), will provide for a classified Board of Directors, and members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least a majority, or without cause, upon the affirmative vote of at least 75% of the shares of capital stock of the Company entitled to vote. Furthermore, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of Section 203 could also have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Amended and Restated Certificate may have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock--Delaware Law and Certain Charter and By-law Provisions; Anti-Takeover Effects." Dividend Policy. In connection with the conversion of the Company's outstanding Series A Convertible Preferred Stock on the closing of this offering, the Company will pay the holders of such stock dividends accruing at the rate of $.0656 per share per annum ($350,000 per annum in the aggregate). As of June 30, 1995, the amount accrued for such dividends was $2.0 million. Upon closing of this offering, the Company will pay to the holders of the Company's outstanding Series B Redeemable Preferred Stock dividends accruing at the rate of $10.00 per share per annum ($135,000 per annum in the aggregate). As of June 30, 1995, the amount accrued for such dividends was $613,000. Donald L. McLagan, the Company's Chairman, Chief Executive Officer and President, as well as A. Baron Cass III, Peter P. Homans and David R. Semmel, each of whom is a director of the Company, are holders of Series A Convertible Preferred Stock. Messrs. McLagan, Cass and Semmel are also holders of Series B Redeemable Preferred Stock, and Ellen Carnahan, a director of the Company, is a general partner of Blair, which is a holder of Series B Redeemable Preferred Stock. Except for the payment of these dividends, the Company has never 10 declared or paid cash dividends on its capital stock and the Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The terms of the Series B Redeemable Preferred Stock, which will remain outstanding following this offering, prohibit payment of dividends on the Company's Common Stock while the Series B Redeemable Preferred Stock remains outstanding. See "Use of Proceeds," "Dividend Policy," "Description of Capital Stock--Series B Redeemable Preferred Stock" and "Certain Transactions." Immediate and Substantial Dilution. Purchasers of Common Stock offered hereby will suffer an immediate and substantial dilution in the net tangible book value of the Common Stock from the initial public offering price. See "Dilution." THE COMPANY The Company was incorporated in the State of Delaware in July 1988. The Company's principal executive offices are located at 1601 Trapelo Road, Waltham, Massachusetts 02154, and its telephone number is (617) 672-2400. References herein to "Desktop Data" and the "Company" include Desktop Data, Inc. and its wholly-owned subsidiary, Desktop Data Canada, Inc. NewsEDGE (R) is a registered trademark and Desktop Data and the NewsEDGE logo are trademarks of the Company. All other trademarks and tradenames referred to in this Prospectus are the property of their respective owners. USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,677,000 shares of Common Stock offered by the Company hereby are estimated to be $22.8 million ($27.0 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses. The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders. See "Principal and Selling Stockholders." The principal purposes of this offering are to increase the Company's equity capital and to create a public market for the Company's Common Stock, which will facilitate future access by the Company to public equity markets and enhance the ability of the Company to use its Common Stock as consideration for acquisitions and as a means for attracting and retaining key employees. The Company intends to use the proceeds of this offering primarily for general corporate purposes, including working capital. The Company also expects to use approximately $2.0 million of the net proceeds to pay accrued dividends on the Company's Series A Convertible Preferred Stock, which are due upon the conversion of such Series A Preferred Stock on the closing of this offering. Dividends accrue on the Series A Convertible Preferred Stock at a rate of $350,000 per annum ($2.0 million as of June 30, 1995). In connection with the Company's payment upon the closing of this offering of all accrued and unpaid dividends on the Series A Convertible Preferred Stock, Messrs. Cass, Homans, McLagan and Semmel, together with their respective affiliates, will receive an estimated $255,000, $12,000, $435,000 and $168,000, respectively, in their capacities as holders of Series A Convertible Preferred Stock. The Company will use approximately $640,000 of the net proceeds to pay accrued dividends on the Series B Redeemable Preferred Stock. There are currently outstanding 13,500 shares of Series B Redeemable Preferred Stock, with an aggregate redemption price of $1,350,000 plus accrued dividends. Dividends accrue on the Series B Redeemable Preferred Stock at a rate of $135,000 per annum ($613,000 as of June 30, 1995). The Company may use a portion of the proceeds of this offering to redeem the Series 11 B Redeemable Preferred Stock. See "Description of Capital Stock--Series B Redeemable Preferred Stock." Messrs. Cass, McLagan and Semmel are the holders of 261, 641.25 and 225 shares of Series B Redeemable Preferred Stock, respectively, and Blair is the holder of 11,250 shares of Series B Redeemable Preferred Stock. In connection with the Company's payment upon the closing of this offering of all accrued and unpaid dividends on the Series B Redeemable Preferred Stock, Messrs. Cass, McLagan and Semmel, together with their respective affiliates, will receive an estimated $12,000, $30,000 and $11,000, respectively, in their capacities as holders of Series B Redeemable Preferred Stock, and Blair will receive an estimated $530,000. A portion of the net proceeds of this offering may also be used for investments in or acquisitions of complementary businesses, products or technologies, although the Company has not entered into any commitments or negotiations with respect to any such transactions. Pending such uses, the Company expects to invest the net proceeds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY In connection with the conversion of the Company's outstanding Series A Convertible Preferred Stock at the closing of this offering, the Company will pay the holders of such stock dividends accruing at the rate of $.0656 per share per annum ($350,000 per annum in the aggregate). As of June 30, 1995, the amount accrued for such dividends was $2.0 million. In addition, dividends at the rate of $10.00 per share per annum ($135,000 per annum in the aggregate) accrue on the Company's Series B Redeemable Preferred Stock. Such dividends will be paid at the closing of this offering. As of June 30, 1995, the amount accrued for such dividends was $613,000. Dividends will continue to accrue on the Series B Redeemable Preferred Stock until it is redeemed, and will be payable upon redemption and certain other circumstances. See "Description of Capital Stock--Series B Redeemable Preferred Stock." Except for such payments, the Company has never declared or paid any cash dividends on its capital stock, and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion The terms of the Series B Redeemable Preferred Stock prohibit payment of dividends on the Company's Common Stock while the Series B Redeemable Preferred Stock remains outstanding. See "Description of Capital Stock--Series B Redeemable Preferred Stock." 12 CAPITALIZATION The following table sets forth as of June 30, 1995 (i) the actual capitalization of the Company, (ii) the capitalization of the Company on a pro forma basis to reflect the conversion of all outstanding shares of Convertible Preferred Stock into an aggregate of 3,847,123 shares of Common Stock upon the closing of this offering, and (iii) the pro forma capitalization of the Company as adjusted to reflect the sale of the 1,677,000 shares of Common Stock offered by the Company hereby, after deducting the underwriting discounts and commissions and estimated offering expenses, and the application of the estimated net proceeds therefrom as set forth in "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1995 ---------------------------------- PRO PRO FORMA ACTUAL FORMA(1) AS ADJUSTED(1) ------- --------- -------------- (IN THOUSANDS) Series B Redeemable Preferred Stock......... $ 1,963 $ 1,963 $ 1,963 Series C Convertible Preferred Stock........ 218 -- -- Series D Convertible Redeemable Preferred Stock...................................... 2,539 -- -- Stockholders' equity (deficit)(2): Series A Convertible Preferred Stock, $.01 par value; 5,335,410 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted).... 53 -- -- Preferred Stock, $.01 par value; no shares authorized, issued or outstanding (actual); 1,000,000 shares authorized, no shares issued or outstanding (pro forma and pro forma as adjusted)............... -- -- -- Common Stock, $.01 par value; 15,000,000 shares authorized, 2,668,814 shares issued and outstanding (actual); 15,000,000 shares authorized, 6,515,937 shares issued and outstanding (pro forma); 15,000,000 shares authorized, 8,192,937 shares issued and outstanding (pro forma as adjusted)(2)... 27 65 82 Additional paid-in capital................ 2,317 3,120 25,284 Accumulated deficit....................... (8,003) (8,003) (8,003) ------- --------- ------- Total stockholders' equity (deficit).... (5,606) (4,818) 17,363 ------- --------- ------- Total capitalization.................. $ (886) $ (2,855) $19,326 ======= ========= =======
- -------- (1) Gives effect to (i) the conversion of all outstanding shares of Convertible Preferred Stock into Common Stock upon the closing of this offering, and (ii) the Amended and Restated Certificate of Incorporation to be filed upon the closing of this offering removing the Company's existing series of Convertible Preferred Stock and creating a class of authorized but undesignated preferred stock. See Notes 3, 4 and 9 of Notes to Consolidated Financial Statements. (2) Excludes an aggregate of 275,102 shares of Common Stock issuable upon the exercise of stock options outstanding as of June 30, 1995 (of which options to purchase 99,111 shares were then exercisable at a weighted average exercise price of $1.22). See "Management--Stock Plans" and Note 5 of Notes to Consolidated Financial Statements. 13 DILUTION The pro forma net tangible book value of the Company as of June 30, 1995 was a deficit of $4,954,000 or $0.74 per share. Pro forma net tangible book value per share represents the amount of total tangible assets of the Company less its total liabilities, divided by the number of shares of Common Stock outstanding, assuming (i) the conversion of all outstanding shares of Convertible Preferred Stock into 3,847,123 shares of Common Stock and (ii) the issuance of 190,876 shares of Common Stock in the offering to generate proceeds for the payment of $2.7 million of dividends on the Series A Convertible Preferred Stock and Series B Redeemable Preferred Stock to be paid upon consummation of this offering. After giving effect to the sale by the Company of the 1,677,000 shares of Common Stock offered by the Company hereby and after deducting the underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of June 30, 1995 would have been $17,363,000 or $2.12 per share. This represents an immediate increase in pro forma net tangible book value of $2.86 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $12.88 per share to purchasers of Common Stock in this offering. The following table illustrates the dilution in pro forma net tangible book value per share to new investors: Initial public offering price per share.......................... $15.00 Pro forma net tangible book value per share as of June 30, 1995.......................................................... $(.74) Increase per share attributable to new investors............... 2.86 ----- Pro forma net tangible book value per share after the offer- ing(1).......................................................... 2.12 ------ Dilution per share to new investors(1)....................... $12.88 ======
- -------- (1) If the Underwriters' over-allotment option is exercised in full, the pro forma net tangible book value after this offering would be approximately $2.54 per share, resulting in dilution to new investors in this offering of $12.46 per share. See "Underwriting." The following table sets forth on a pro forma basis as of June 30, 1995, after giving effect to the conversion of all outstanding shares of Convertible Preferred Stock into 3,847,123 shares of Common Stock upon the closing of this offering, the number of shares of Common Stock purchased from the Company, the total cash paid to the Company, and the average price paid per share by existing stockholders and to be paid by purchasers of the shares offered by the Company hereby (before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing stockholders(1)........ 6,515,937 79.5% $ 6,652,371 20.9% $ 1.02 New investors................... 1,677,000 20.5 25,155,000 79.1 $15.00 --------- ----- ----------- ----- Total......................... 8,192,937 100.0% $31,807,371 100.0% ========= ===== =========== =====
- -------- (1) Sales by the Selling Stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 6,192,937 shares or 75.6% of the total number of shares of Common Stock outstanding after this offering, and will increase the number of shares held by new investors to 2,000,000 or 24.4% of the total number of shares of Common Stock outstanding after this offering. See "Principal and Selling Stockholders." As of June 30, 1995, there were 275,102 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.63 per share. The issuance of shares upon exercise of these options is not reflected in the preceding tables. If all of the options outstanding as of June 30, 1995 were exercised in full, the dilution per share to new investors would be $12.86. Such exercises would increase the number of shares held by existing stockholders to 6,791,039 shares, or 80.2% of the total number of shares of Common Stock to be outstanding after the offering, and would (i) decrease the number of shares held by the new investors to 19.8% of the total number of shares of Common Stock to be outstanding after the offering, (ii) increase the total consideration paid to the Company by existing stockholders to $7,374,750, or 22.7% of the total consideration paid to the Company, and (iii) increase the average price per share paid by existing stockholders to $1.09. 14 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following selected consolidated financial and operating data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The consolidated statement of operations data for the years ended December 31, 1992, 1993 and 1994 and the consolidated balance sheet data as of December 31, 1993 and 1994 presented below are derived from the Consolidated Financial Statements of the Company, which have been audited by Arthur Andersen LLP, independent public accountants, and together with their report thereon are included elsewhere in this Prospectus. The consolidated statement of operations data for the years ended December 31, 1990 and 1991 and the consolidated balance sheet data as of December 31, 1990, 1991 and 1992 are derived from the Company's audited Consolidated Financial Statements, which are not included herein, all of which have been audited by Arthur Andersen LLP, independent public accountants. The consolidated statement of operations data for the six months ended June 30, 1994 and 1995 and the consolidated balance sheet data as of June 30, 1995 are derived from the Company's unaudited Consolidated Financial Statements that are included elsewhere in this Prospectus and include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth therein. The results of operations for the six months ended June 30, 1995 are not necessarily indicative of future results. 15
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------ ---------------------- 1990 1991 1992 1993 1994 1994 1995 -------- -------- -------- -------- -------- --------- ------------ (IN THOUSANDS, EXPECT PER SHARE DATA AND OTHER OPERATING DATA) STATEMENT OF OPERATIONS DATA: Subscription and royalty revenues...... $ 529 $ 1,575 $ 3,441 $ 6,764 $ 12,925 $ 5,530 $ 9,821 Other revenues......... 8 431 766 896 1,433 718 678 -------- -------- -------- -------- -------- -------- -------- Total revenues......... 537 2,006 4,207 7,660 14,358 6,248 10,499 Cost of revenues....... 239 494 968 2,010 3,879 1,742 2,903 Customer support ex- penses................ 69 254 412 719 1,908 786 1,130 Development expenses... 927 1,059 1,172 1,654 1,902 897 1,289 Sales and marketing ex- penses................ 1,421 1,523 2,488 3,898 6,153 2,864 4,145 General and administra- tive expenses.............. 508 526 592 675 900 414 554 -------- -------- -------- -------- -------- -------- -------- Total costs and ex- penses................ 3,164 3,856 5,632 8,956 14,742 6,703 10,021 -------- -------- -------- -------- -------- -------- -------- Income (loss) from op- erations.............. (2,627) (1,850) (1,425) (1,296) (384) (455) 478 Interest income (ex- pense), net........... 82 32 (9) 34 97 30 157 -------- -------- -------- -------- -------- -------- -------- Income (loss) before provision for income taxes................. (2,545) (1,818) (1,434) (1,262) (287) (425) 635 Provision for income taxes................. -- -- -- -- -- -- 32 -------- -------- -------- -------- -------- -------- -------- Net income (loss)...... $ (2,545) $ (1,818) $ (1,434) $ (1,262) $ (287) $ (425) $ 603 ======== ======== ======== ======== ======== ======== ======== Pro forma net income (loss) per common and common equivalent share(1).............. $ (.06) $ (.07) $ .08 ======== ======== ======== Pro forma weighted average number of common and common equivalent shares outstanding(1)........ 6,670 6,648 6,922 ======== ======== ======== OTHER OPERATING DATA: Installed customers at end of period................ 59 101 139 195 255 239 297 Authorized users at end of period(2)............. 264 4,480 8,366 22,732 51,548 32,675 60,562 Average users per cus- tomer(3).............. 4 30 54 93 165 128 203 Average revenues per customer(4)........... $ 17,933 $ 19,686 $ 28,671 $ 40,503 $ 57,445 $ 25,484 $ 35,581 Annual renewal rate(5). N/A 90% 94% 99% 94% N/A N/A DECEMBER 31, JUNE 30, 1995 ------------------------------------------------ ---------------------- PRO 1990 1991 1992 1993 1994 ACTUAL FORMA (6) -------- -------- -------- -------- -------- --------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Working capital (defi- cit).................. $ 977 $ (925) $ (506) $ (1,967) $ (4,664) $ (4,545) $ (6,295) Total assets........... 2,143 1,967 3,706 4,875 8,220 12,630 12,630 Redeemable preferred stock................. 1,506 1,656 3,845 4,195 4,545 4,720 1,963 Total stockholders' deficit............... (213) (2,181) (3,841) (5,464) (6,077) (5,606) (4,818)
- -------- (1) Calculated on the basis described in Note 1 of Notes to Consolidated Financial Statements. (2) Number of users authorized pursuant to contracts with installed customers. (3) Calculated by dividing (i) the average of the number of authorized users at the end of the previous year and at the end of the current period, by (ii) the average of the number of installed customers at the end of the previous year and at the end of the current period. (4) Calculated by dividing (i) subscription and royalty revenues for the current period, by (ii) the average of the number of installed customers at the end of the previous year and at the end of the current period. (5) Total annualized amount due under subscription agreements in effect at the end of the previous year for installed customers who renew their subscriptions during the current year, as a percentage of the total annualized amount due under all subscriptions for installed customers in effect at the end of the previous year. (6) Gives effect to the conversion of all outstanding shares of the Company's Convertible Preferred Stock into an aggregate of 3,847,123 shares of Common Stock upon the closing of this offering. See Notes 3 and 4 of Notes to Consolidated Financial Statements. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Desktop Data, through its NewsEDGE service and software, delivers a large variety of news and information sources in real time to personal computers and workstations installed on LANs, automatically monitors and filters the news, and alerts users to stories of interest to them. The Company was organized in 1988 and installed the initial version of its software, NewsEDGE/PC, in 1990. Later in 1990, the Company introduced its current, LAN-based service. The number of customer organizations subscribing to NewsEDGE increased from 139 at December 31, 1992 to 297 at June 30, 1995. The number of authorized users within customer organizations increased from approximately 8,400 to approximately 60,000 over the same period. The Company's revenues consist primarily of NewsEDGE subscription fees and related royalties received from news providers in connection with sales of their newswires through NewsEDGE. Historically, royalties have constituted less than 10% of this amount. The Company's other revenues consist principally of NewsEDGE installation services and related computer hardware system sales, and non-recurring custom development projects related to the Company's software. NewsEDGE subscriptions are generally for an initial term of twelve months, payable in advance, and are automatically renewable for successive one year periods unless the customer delivers notice of termination prior to the expiration date of the then current agreement. NewsEDGE subscription revenues are recognized ratably over the subscription term, beginning on installation of the NewsEDGE service. Accordingly, a substantial portion of the Company's revenues are recorded as deferred revenues until they are recognized over the license term. The Company does not capitalize customer acquisition costs. Customers renewing their NewsEDGE subscriptions in the three years ended December 31, 1994 have accounted for 94%, 99% and 94%, respectively, of the total annualized amounts due under subscription agreements in effect at the end of each of the immediately preceding years. This calculation is referred to elsewhere in this Prospectus as the "annual renewal rate." The Company's experience has been that each year a substantial portion of customers renew subscriptions for an equal or higher level of subscription fees. Certain newswires offered by the Company through NewsEDGE are purchased by the customer directly from the news provider and payments are made directly from the NewsEDGE customer to the provider. For some of these newswires, the Company receives ongoing royalties on payments made by the customer to the news provider, and those royalties constitute part of the Company's subscription and royalty revenues. For other newswires that are resold by Desktop Data to the NewsEDGE customer, the Company includes a fee for the newswire in the NewsEDGE subscription fee paid by the customer and pays a royalty to the news provider. Such royalties are included in the Company's cost of revenues. The combination of quarter to quarter revenue growth, high customer subscription renewal rates and payments in advance from customers has resulted in positive cash flow from operations in each quarter commencing with the quarter ended December 31, 1993. The Company first achieved profitability during the quarter ended September 30, 1994 and has remained profitable for each successive quarter. 17 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain consolidated financial data as a percentage of total revenues:
PERCENTAGE OF TOTAL REVENUES ----------------------------------------- YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, --------------------- ----------------- 1992 1993 1994 1994 1995 ----- ----- ----- ------- ------- Subscription and royalty revenues... 81.8% 88.3% 90.0% 88.5% 93.5% Other revenues...................... 18.2 11.7 10.0 11.5 6.5 ----- ----- ----- ------- ------- Total revenues.................... 100.0 100.0 100.0 100.0 100.0 Cost of revenues.................... 23.0 26.2 27.0 27.9 27.7 Customer support expenses........... 9.8 9.4 13.3 12.6 10.7 Development expenses................ 27.9 21.6 13.2 14.3 12.3 Sales and marketing expenses........ 59.1 50.9 42.9 45.9 39.5 General and administrative expenses. 14.1 8.8 6.3 6.6 5.3 ----- ----- ----- ------- ------- Total costs and expenses.......... 133.9 116.9 102.7 107.3 95.5 ----- ----- ----- ------- ------- Income (loss) from operations....... (33.9) (16.9) (2.7) (7.3) 4.5 Interest income (expense), net...... (0.2) 0.4 0.7 0.5 1.5 ----- ----- ----- ------- ------- Income (loss) before provision for income taxes....................... (34.1) (16.5) (2.0) (6.8) 6.0 Provision for income taxes.......... 0.0 0.0 0.0 0.0 0.3 ----- ----- ----- ------- ------- Net income (loss)................. (34.1)% (16.5)% (2.0)% (6.8)% 5.7% ===== ===== ===== ======= =======
Years Ended December 31, 1992, 1993 and 1994 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 from $4.2 million in 1992 to $7.7 million in 1993 and $14.4 million in 1994, representing increases of 82% and 87%, respectively. Subscription and royalty revenues increased from $3.4 million in 1992 to $6.8 million in 1993 and $12.9 million in 1994, representing increases of 97% and 91%, respectively. These increases were attributable to increased market acceptance of the Company's NewsEDGE service, expansion of NewsEDGE offerings, successful retention and growth of existing customers and growth in the Company's sales, marketing and customer service organizations. Other revenues, consisting of revenues from NewsEDGE installation services, computer hardware system sales and non-recurring custom development projects, increased from $766,000 in 1992 to $896,000 in 1993 and $1.4 million in 1994, representing increases of 17% and 60%, respectively. The increase from 1993 to 1994 was due primarily to an increase in revenues derived from non-recurring custom development projects. The Company does not solicit hardware sales, and expects revenues from hardware sales to continue to decline as a percentage of total revenues. The following tables set forth, for the years indicated, the dollar amounts of the components of other revenues and such components as a percentage of total revenues:
YEAR ENDED DECEMBER 31, ---------------- 1992 1993 1994 ---- ---- ------ (IN THOUSANDS) Installation services.......................................... $233 $413 $ 497 Hardware sales................................................. 194 351 262 Development projects........................................... 339 132 673 ---- ---- ------ Total other revenues......................................... $766 $896 $1,432 ==== ==== ======
18
PERCENTAGE OF TOTAL REVENUES ------------------- YEAR ENDED DECEMBER 31, ------------------- 1992 1993 1994 ----- ----- ----- Installation services...................................... 5.5% 5.4% 3.5% Hardware sales............................................. 4.6 4.6 1.8 Development projects....................................... 8.1 1.7 4.7 ----- ----- ----- Total other revenues..................................... 18.2% 11.7% 10.0% ===== ===== =====
International revenues (revenues from customers outside of North America) accounted for less than 5% of revenues during each of the three years ending December 31, 1994. The Company established a sales and technical support operation in England during the second half of 1994. The Company expects international revenues to increase as a percentage of total revenues. 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. The total cost of revenues was $968,000 in 1992, $2.0 million in 1993 and $3.9 million in 1994, representing 23%, 26% and 27% of total revenues in 1992, 1993 and 1994, respectively. The increase in cost of revenues as a percentage of total revenues from 1992 to 1994 was primarily attributable to increased royalties paid to third party information providers resulting from the increase in newswires available through NewsEDGE. Customer support. Customer support expenses consist primarily of costs associated with technical support of the Company's installed base of customers. Customer support expenses increased from $412,000 in 1992 to $719,000 in 1993 and $1.9 million in 1994. The increase in customer support expenses during these periods was due primarily to the hiring of additional software and technical support personnel to provide enhanced and expanded telephone and site support to the growing number of the Company's customers. Customer support expenses decreased as a percentage of revenues from 10% in 1992 to 9% in 1993 but increased to 13% in 1994. The Company anticipates continuing to make significant expenditures in customer support as the Company provides service to a growing customer base. Development. Development expenses consist primarily of costs associated with the design, programming, and testing of the Company's new software and services. Development expenses increased from $1.2 million in 1992 to $1.7 million in 1993 and $1.9 million in 1994, representing increases of 41% and 15%, respectively. The increase in development expenses during these periods was due primarily to the hiring of additional software and test engineers to support increased development activities. Development expenses decreased as a percentage of revenues from 28% in 1992 to 22% in 1993 and 13% in 1994. The Company anticipates continuing to make significant expenditures in development as the Company develops new and enhanced services. Sales and marketing. 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 from $2.5 million in 1992 to $3.9 million in 1993 and $6.2 million in 1994, representing increases of 57% and 58%, respectively. The increases in sales and marketing expenses during these periods were due primarily to the expansion of the Company's direct sales force and marketing organization in North America. Sales and marketing expenses decreased as a percentage of revenues from 59% in 1992 to 51% in 1993 and 43% in 1994. As the revenues derived from subscription renewals and from the expansion of services to existing customers increases and as the productivity of the sales force increases, sales and marketing expenses are expected to increase in absolute dollar amounts but decline as a percentage of total revenues. 19 General and administrative. 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 from $592,000 in 1992 to $675,000 in 1993 and $900,000 in 1994. These increases were primarily due to the hiring of additional personnel to support the Company's expanding operations. General and administrative expenses decreased as a percentage of revenues from 14% in 1992 to 9% in 1993 and 6% in 1994, primarily due to the Company's ability to increase revenues without a corresponding increase in general and administrative expenses. The Company anticipates that general and administrative expenses will continue to increase in absolute dollar amounts as the Company hires additional personnel, but may vary as a percentage of revenues. Interest income (expense), net. Interest income (expense), net consists of interest earned on cash and cash equivalents, offset by interest expense on equipment financing. Interest income (expense), net of $(9,000) in 1992 included $32,000 in interest expense paid on short term loans from certain stockholders. The increase in interest income (expense), net from $34,000 in 1993 to $97,000 in 1994 was primarily the result of interest earned on higher cash balances generated from operations and higher interest rates paid on the invested cash balances. Provision for income taxes. The Company did not provide for income taxes in 1992, 1993 or 1994 because it incurred operating losses for these periods. As of December 31, 1994, the Company had available net operating loss carryforwards of approximately $6.8 million expiring in various amounts from 2004 to 2008. The Company's ability to utilize its net operating loss carryforwards may be limited in the future if it is determined that the Company experiences an ownership change, as defined in Section 382 of the Internal Revenue Code. Six Months Ended June 30, 1994 and 1995 Revenues. Total revenues increased 68%, from $6.2 million for the six months ended June 30, 1994 to $10.5 million for the six months ended June 30, 1995. Subscription and royalty revenues increased from $5.5 million for the six months ended June 30, 1994 to $9.8 million for the corresponding period in 1995, an increase of 78%. Other revenues decreased from $718,000 for the six months ended June 30, 1994 to $678,000 for the six months ended June 30, 1995, a decrease of 6%. The increase in subscription and royalty revenues was due to increased subscription revenues from new customers, the retention and growth of revenues from existing customers and increased royalties from the sale of third party information news. The decrease in other revenues was due to lower revenues from computer hardware system sales and non-recurring custom development projects offset by increased installations. The following tables set forth, for the periods indicated, the dollar amounts of the components of other revenues and such components as a percentage of total revenues:
SIX MONTHS ENDED JUNE 30, --------------- 1994 1995 ------- ------- (IN THOUSANDS) Installation services........................................... $ 265 $ 342 Hardware sales.................................................. 195 124 Development projects............................................ 258 212 ------- ------- Total other revenues.......................................... $718 $678 ======= =======
20
PERCENTAGE OF TOTAL REVENUES ----------------- SIX MONTHS ENDED JUNE 30, ----------------- 1994 1995 -------- ------- Installation services....................................... 4.3% 3.3% Hardware sales.............................................. 3.1 1.2 Development projects........................................ 4.1 2.0 -------- ------- Total other revenues ..................................... 11.5% 6.5% ======== =======
Cost of revenues. Cost of revenues as a percentage of total revenues remained constant at 28% in the six months ended June 30, 1994 and 1995. Customer support. Customer support expenses increased from $786,000 for the six months ended June 30, 1994 to $1.1 million for the six months ended June 30, 1995. Customer support expenses represented 13% of total revenues for the six months ended June 30, 1994, compared to 11% for the six months ended June 30, 1995. Customer support expenses increased as the result of higher staffing levels but decreased as a percentage of revenues due to the Company's significant growth in revenues without commensurate increases in the Company's customer support expenses. Development. Development expenses increased from $897,000 for the six months ended June 30, 1994 to $1.3 million for the six months ended June 30, 1995. Development expenses represented 14% of total revenues for the six months ended June 30, 1994, compared to 12% for the six months ended June 30, 1995. Development expenses increased as the result of higher staffing levels but declined as a percentage of revenues due to the Company's significant growth in revenues without commensurate increases in the Company's development expenses. Sales and marketing. Sales and marketing expenses increased from $2.9 million for the six months ended June 30, 1994 to $4.1 million for the six months ended June 30, 1995. Sales and marketing expenses represented 46% of total revenues in the six months ended June 30, 1994, compared to 39% for the six months ended June 30, 1995. Sales and marketing expenses increased as the result of the expansion of the sales and marketing organizations but declined as a percentage of revenues primarily as a result of the increase in the Company's total revenues, without a corresponding increase in sales and marketing expenses. General and administrative. General and administrative expenses increased from $414,000 in the six months ended June 30, 1994 to $554,000 in the six months ended June 30, 1995, primarily due to additions to staff to support the Company's growth. General and administrative expenses as a percentage of total revenues declined from 7% in the six months ended June 30, 1994 to 5% in the six months ended June 30, 1995, primarily due to the Company's ability to increase revenues without a corresponding increase in general and administrative expenses. Interest income (expense), net. Interest income (expense), net increased from $30,000 in the six months ended June 30, 1994 to $157,000 in the six months ended June 30, 1995 due to interest earned on higher cash balances generated from operations and higher interest rates paid on invested cash balances. Provision for income taxes. No provision for taxes was made for the six months ended June 30, 1994 because the Company experienced a net operating loss for such period. The provision for income taxes of $32,000 for the six months ended June 30, 1995 represents the alternative minimum tax due under the Internal Revenue Code and state taxes due in states that do not have net operating loss carryforwards available. 21 SELECTED QUARTERLY OPERATING RESULTS The following table presents unaudited quarterly financial information for each of the six quarters in the period beginning January 1, 1994 and ended June 30, 1995, as well as the percentage of the Company's total revenues represented by each item. This information has been derived from the Company's unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared on the same basis as the audited Consolidated Financial Statements contained herein and include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of such information when read in conjunction with the Company's audited Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. These operating results are not necessarily indicative of results for any future period. See "Risk Factors--Potential Fluctuations in Quarterly Results."
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1994 1994 1994 1994 1995 1995 --------- -------- --------- -------- --------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Subscription and royalty revenues............... $2,575 $2,955 $3,475 $3,920 $4,676 $5,145 Other revenues.......... 351 367 428 287 369 309 ------ ------ ------ ------ ------ ------ Total revenues........ 2,926 3,322 3,903 4,207 5,045 5,454 Cost of revenues........ 811 931 1,080 1,057 1,394 1,509 Customer support expenses............... 340 446 546 576 514 616 Development expenses.... 445 452 458 547 636 653 Sales and marketing expenses............... 1,318 1,546 1,576 1,713 2,010 2,135 General and administrative expenses............... 204 210 226 260 270 284 ------ ------ ------ ------ ------ ------ Total costs and expenses............. 3,118 3,585 3,886 4,153 4,824 5,197 ------ ------ ------ ------ ------ ------ Income (loss) from operations............. (192) (263) 17 54 221 257 Interest income (expense), net......... 14 16 28 39 70 87 ------ ------ ------ ------ ------ ------ Income (loss) before provision for income taxes.................. (178) (247) 45 93 291 344 Provision for income taxes.................. -- -- -- -- 15 17 ------ ------ ------ ------ ------ ------ Net income (loss)..... $ (178) $ (247) $ 45 $ 93 $ 276 $ 327 ====== ====== ====== ====== ====== ====== PERCENTAGE OF TOTAL REVENUES FOR THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1994 1994 1994 1994 1995 1995 --------- -------- --------- -------- --------- -------- Subscription and royalty revenues............... 88.0% 89.0% 89.0% 93.2% 92.7% 94.3% Other revenues.......... 12.0 11.0 11.0 6.8 7.3 5.7 ------ ------ ------ ------ ------ ------ Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues........ 27.8 28.0 27.7 25.1 27.6 27.7 Customer support expenses............... 11.6 13.4 14.0 13.7 10.2 11.3 Development expenses.... 15.2 13.6 11.7 13.0 12.6 12.0 Sales and marketing expenses............... 45.0 46.6 40.4 40.7 39.9 39.1 General and administrative expenses............... 7.0 6.3 5.8 6.2 5.3 5.2 ------ ------ ------ ------ ------ ------ Total costs and expenses............. 106.6 107.9 99.6 98.7 95.6 95.3 ------ ------ ------ ------ ------ ------ Income (loss) from operations............. (6.6) (7.9) 0.4 1.3 4.4 4.7 Interest income (expense), net......... 0.5 0.5 0.7 0.9 1.4 1.6 ------ ------ ------ ------ ------ ------ Income (loss) before provision for income taxes.................. (6.1) (7.4) 1.1 2.2 5.8 6.3 Provision for income taxes.................. -- -- -- -- 0.3 0.3 ------ ------ ------ ------ ------ ------ Net income (loss)..... (6.1)% (7.4)% 1.1% 2.2% 5.5% 6.0% ====== ====== ====== ====== ====== ======
22 The Company's subscription and royalty revenues have increased in each successive quarter shown above. This consistent increase is attributable to the increase in the number of customers together with the successful retention of and growth in revenues from existing customers and the Company's practice of recognizing revenues from its annually renewable subscription fees ratably over the subscription term. Cost of revenues has increased proportionately with revenues in each successive quarter in the quarters shown above, with the exception of the fourth quarter of 1994. In the fourth quarter of 1994 cost of revenues declined from 28% of total revenues in each of the immediately preceding three quarters to 25% of total revenues, due primarily to a non-recurring adjustment in royalties paid to a third party information provider as a result of a renegotiation of contract terms. In the first and second quarters of 1995, cost of revenues were 28% of total revenues. The Company has increased operating expenses in the quarters shown above to generate and support higher revenue levels and development efforts and, in part, based on its expectations regarding future revenues. If revenue levels are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenues because a proportionately smaller amount of the Company's expenses varies with its revenues. As a result, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily through private sales of preferred stock totaling $7.0 million (the last of which occurred in 1992), cash generated from operations and $500,000 of notes payable from certain principal stockholders in 1991. At June 30, 1995, the Company had approximately $7.8 million in cash and cash equivalents. Net cash used in operating activities was $374,000 in 1992. The combination of improved operating results and the growth in subscription fees, which are generally annually renewable and payable in advance, resulted in positive net cash generated from operations of $846,000 and $2.5 million in 1993 and 1994, respectively. For the six months ended June 30, 1995, net cash generated from operations totaled $4.4 million, due to profitable operations together with the continued growth in subscription fees and increased deferred revenue resulting from advanced payments received from customers. The Company's investing activities used net cash of $245,000, $384,000 and $659,000 in 1992, 1993 and 1994, respectively, and $573,000 for the six months ended June 30, 1995. The principal uses have been for capital expenditures, primarily computer equipment, required to support the expansion and growth of the business. The Company has no significant capital commitments and currently anticipates that additions to property and equipment for 1995 will be approximately $1.5 million, primarily for the purchase of computer equipment and leasehold improvements. The terms of the Series B Redeemable Preferred Stock prohibit capital expenditures in excess of $1.5 million per year without the consent of the holders of at least two-thirds of the Series B Redeemable Preferred Stock. See "Description of Capital Stock--Series B Redeemable Preferred Stock." The Company's financing activities provided (used) net cash of $1.5 million, $(11,000) and $10,000 in 1992, 1993 and 1994, respectively, and $(104,000) for the six months ended June 30, 1995. The Company sold an aggregate of $2.0 million of Series D Convertible Redeemable Preferred Stock in October 1992 and used a portion of the proceeds to repay $500,000 of notes payable to certain stockholders. The Company believes that the proceeds from this offering, together with existing cash balances and funds anticipated to be generated from operations, will be sufficient to satisfy working capital and capital expenditure requirements for at least the next twenty-four months. 23 BUSINESS Desktop Data 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 NewsEDGE service currently delivers up to 488 news and information sources in real time to users' personal computers, automatically monitors and filters the news according to pre-established personal interest profiles, and alerts users to stories matching their profiles. The NewsEDGE service is used by executives, salespeople, marketers, lawyers, accountants, consultants, bankers and financial professionals throughout customer organizations. As of June 30, 1995, NewsEDGE was installed by 297 customers, representing approximately 60,000 authorized users. 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. An industry source has estimated that businesses and organizations in the United States spent over $28 billion in 1994 on business information services. At the same time, the increasing power and declining cost of PCs, LANs and related software has fueled widespread investment in and adoption of distributed computing and communications systems utilizing client/server architectures. According to industry sources, by the end of 1994 over 66 million PCs worldwide were connected to LANs, at an estimated annual cost for equipment, installation and support of $8,200 for each PC. 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. While the demand for business information has created a profusion of information sources, including on-line services and, most recently, traditional print media taking electronic initiatives such as establishing World Wide Web sites on the Internet, these sources by themselves have not addressed the need for that information to be readily available to knowledge workers on the desktop systems that they use at work every day. Traditional electronic information sources often require stand-alone proprietary hardware systems and are typically accessed by centralized, specially trained library personnel who pass the information on to the knowledge workers who request it. This approach makes access to information relatively costly and time- consuming, discourages widespread use of an organization's electronic information resources, and fails to provide immediate notice of important breaking news. Consequently, traditional approaches to accessing electronic information are not well suited to meeting knowledge workers' needs in a fast- paced and competitive global economy with decentralized decision making and accountability. Traditional electronic information sources also have not generally taken advantage of the large investment in LAN infrastructure. While the major investment in LAN infrastructure by large organizations has connected knowledge workers to each other and allowed them to communicate and work together through E-mail, groupware and other client/server applications, to date it has not been used effectively to connect them to external information sources. As a result, the demand for organizations to widely distribute customized news on a timely basis to workers who need it has not been satisfied. THE NEWSEDGE SOLUTION Desktop Data's NewsEDGE service allows knowledge workers to take advantage of the abundance of news and information available to their organizations. The Company installs its NewsEDGE software on a dedicated, customer-owned network server which is connected to the customer's LAN. Desktop Data 24 arranges for the delivery to the server of real-time news and information from the customer's choice of over 100 newswires, aggregating news and information from up to 488 sources. 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. It is different than on-line systems because it is implemented on customer LANs and PCs where news can be profiled and distributed to all LAN users at a fixed, predictable cost. Unlike traditional on-line services, which require users to dial out and pull information when they think of it, NewsEDGE automatically pushes news to knowledge workers on their own PCs. 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. STRATEGY Desktop Data's objective is to capitalize on the growing demand for enterprise-wide information and the significant investments by businesses and organizations in LANs by enhancing its position as a leading provider of customized, real-time news and information to knowledge workers who need timely access to information. While there can be no assurance that this objective will be achieved, the Company's strategy to accomplish this objective includes the following key elements: Focus on the NewsEDGE service. The Company believes that by focusing on the NewsEDGE service it can increase its customer base, build strong brand recognition and enhance its leadership position in the enterprise-wide information services industry. Desktop Data intends to continue to enhance the NewsEDGE service by increasing the number of news sources available, by continuing to expand the NewsEDGE database, archiving and search capabilities, and by offering new services. For example, the Company intends to introduce, in the third quarter of 1995, a new feature designed to permit NewsEDGE users to directly access information provided by partners such as NBC Desktop, Inc. for television and Indepth Data, Inc. for SEC filings. NewsEDGE operates on a wide range of PC hardware and software and LAN architectures. The Company intends to continue to assure NewsEDGE's compatibility with emerging systems such as Windows 95. Build and maintain relationships with major content and systems providers. Desktop Data has established relationships with a number of major news providers, including Dow Jones, Pearson, Reuters and Thomson, as well as with major systems providers including Lotus, Microsoft and Teknekron Software Systems, Inc. ("Teknekron"). The Company seeks to position itself as an independent partner providing news publishers with wider distribution of their content and providing systems software companies with a core application for their technology. This approach has enabled the Company to offer its customers news from a variety of rival sources typically not combined with competitive offerings, and to provide them on a variety of LAN systems, including Lotus Notes and the Microsoft Windows NT operating system. Target large enterprises. Desktop Data targets as its customers major corporations, financial institutions and government agencies that have made substantial investments in PCs and LANs and have large numbers of knowledge workers requiring timely access to information. NewsEDGE is attractive to 25 these enterprises because it allows them to exploit their LAN investments, to deliver news and information to a wide range of knowledge workers tailored to their diverse information needs, and to take advantage of the economies of scale that result from NewsEDGE's use of the enterprises' own LANs and PCs as its delivery vehicle. Expand customer relationships. The Company believes it can increase revenue and enhance its profitability by expanding the use of NewsEDGE within existing customer organizations and working to assure continued renewal of annual subscriptions. Typically, initial NewsEDGE sales are made to one group within a large organization. The Company then encourages widespread adoption of the service within other areas of the organization, using the depth and breadth of the newswires offered, the flexibility of user profiling, and volume discounts to expand the number of authorized users within the organization. From December 31, 1991 through December 31, 1994, the Company's average revenues per customer grew at a compound annual rate of 43%, from $19,686 to $57,445. Through a high level of customer support and continuing customer contacts, the Company seeks to assure that existing customers renew their NewsEDGE subscriptions annually. As its installed base of NewsEDGE customers increases, the Company expects that an increasing percentage of its revenues will be derived from renewals of customer subscriptions, at a lower cost to the Company relative to sales to new customers. For each of the last four years, the Company's annual renewal rate has been at least 90%. Encourage wide-spread adoption with subscription-based pricing. The Company provides NewsEDGE to its customers on an annual subscription basis, which the Company believes is attractive to customers because it is fixed and predictable. The annual subscription fee is based on the number of authorized users and the number and type of news sources selected and is independent of actual usage. Because there is little incremental cost in supporting additional users on a network installation, the Company is able to offer substantial volume discounts to its customers. As additional users are added, the per user, per day cost of NewsEDGE decreases, encouraging customers to provide NewsEDGE to more users throughout the organization. From December 31, 1991 through December 31, 1994, the average per day, per user cost of NewsEDGE for the Company's customers decreased from $1.82 to $0.95, and the average number of authorized NewsEDGE users per customer increased from 30 to 165. The Company believes that its enterprise delivery strategy and subscription pricing model create favorable per-user cost characteristics relative to alternatives, encouraging its customers to expand the number of authorized users, select more news sources, increase the number of NewsEDGE servers and renew their NewsEDGE subscriptions. Provide direct sales and support. The Company has invested significantly in developing a direct sales force and customer support group of knowledgeable and experienced individuals to sell and support its NewsEDGE service. The Company believes that the size and experience of its sales force provide Desktop Data with a competitive advantage. Because many customers use NewsEDGE to support strategic and mission-critical aspects of their businesses, a high level of customer service and support is critical to customer satisfaction and retention. The Company maintains technical field service personnel located in key geographic locations throughout North America, as well as in the United Kingdom. Desktop Data's toll-free number provides customers in North America with access to the Company's internal customer support staff of individuals with extensive networking and customer support experience. THE NEWSEDGE SERVICE The Company's NewsEDGE service was designed to operate in a client/server environment. The Company installs its NewsEDGE software on a dedicated, customer-owned network server which receives broadcast news on a 24 hour per day basis. Desktop Data arranges for the communication of news selected by the customer to the server through leased telephone lines, satellites or FM sideband transmission. 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 26 of all NewsEDGE users on the LAN and alerts are sent to each user in accordance with the user's own profile. 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 software also provides links to other applications. Using NewsEDGE linkage and dynamic data exchange ("DDE") capabilities, tabular data in news stories may be cut and pasted into spreadsheets and text may be cut and pasted into word processing or E-mail software. For example, using NewsEDGE a user may be alerted to the release of quarterly financial results by a company the user follows, retrieve financial statements just released by the company, and copy those financial statements directly into a spreadsheet, where the data may be immediately analyzed and manipulated. In addition, the Company is developing interfaces to on-line resources provided by other news and information providers. This feature is scheduled for release in the third quarter of 1995. See "Development." The following diagram illustrates the NewsEDGE service: [ARTWORK APPEARS HERE] NewsEDGE is designed with client-server architecture to leverage customers' LAN investments. NewsEDGE operates on Windows NT and OS/2 servers. It supports 14 different desktop systems including 27 Windows, Macintosh, OS/2, Windows NT and the most common versions of UNIX. NewsEDGE supports 13 different LAN configurations, including Novell Netware, Banyan VINES and 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, Reuters RT3 and Teknekron Marketsheet. NewsEDGE provides its own application programming interface ("API") which is available for generalized, open system connection to an application server. News and Information Providers Desktop Data has contracted with providers to make available through the NewsEDGE service over 100 newswires, aggregating news and information from 488 news sources. News and information sources currently available on NewsEDGE include newswires from AFP/Extel News Limited ("AFX"), The Associated Press, Dow Jones, Knight-Ridder/Tribune Information Services, L.P., Nihon Shimbun America, Inc. ("Nikkei") (English language Japanese news) and Reuters, as well as the text of stories in The Financial Post (Toronto), Financial Times (London), The New York Times News Service, USA Today and The Wall Street Journal. Also available on NewsEDGE are the business sections of over 100 North American newspapers, periodicals such as Forbes, Fortune, InfoWorld, MacWeek and PC Week and newsletters such as those distributed by American Banker and Phillips Business Information Services, Inc. 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, Desktop Data'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 Waltham, Massachusetts, where it is reformatted for broadcast to NewsEDGE servers and retransmitted to customers by a common carrier communications provider (currently Mainstream Data, Inc.). See "Risk Factors--Dependence on News Transmission Sources." 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 is currently $55,000 per year for NewsEDGE, including a basic package of newswires, for a cost per user per day of $1.51. 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, as shown below:
NUMBER OF COST PER AUTHORIZED AUTHORIZED USERS ANNUAL LIST PRICE USER PER DAY ---------------- ----------------- ------------------- 100 $ 55,000 $1.51 200 $ 65,000 $0.89 500 $ 95,000 $0.52 1,000 $135,000 $0.37 2,000 $195,000 $0.27 5,000 $275,000 $0.15 10,000 $395,000 $0.11
28 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 June 30, 1995, consisted of 44 full time employees based at eleven locations throughout the United States and Canada and one location in the United Kingdom. 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. Desktop Data 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 and government agencies 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 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 four 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 Reuters and Teknekron to adapt NewsEDGE for use in conjunction with products sold by each of these companies to the trading floors of financial services firms, and to jointly market the resulting service. Similarly, Desktop Data has contracted with NBC Desktop to make NBC Desktop's television and video offerings available through NewsEDGE and to jointly market this service, which is currently scheduled to be introduced in the third quarter of 1995. Under agreements with Lotus and Microsoft, the Company is provided with access to alpha and beta versions of new products being developed by these companies. These arrangements enable the Company to develop and launch features and services which are complementary to new Lotus or Microsoft products simultaneously with the launch by Lotus or Microsoft of those products. In addition, the Company has a marketing agreement with Lotus under which Lotus and Desktop Data sales personnel exchange information concerning sales prospects and make joint sales calls. NEWSEDGE CUSTOMERS As of June 30, 1995, NewsEDGE had been installed by 297 customers, representing approximately 60,000 authorized users. NewsEDGE customers include: Corporate. Arthur Andersen LLP, AT&T Corporation, Compaq Computer Corporation, Computer Sciences Corporation, Deloitte & Touche LLP, Dow Jones, Hewlett-Packard Co., Johnson & Higgins, Johnson & Johnson, John Labatt Limited, Microsoft, NYNEX Corporation, Pfizer Inc., Royal Dutch/Shell Group, Unilever United States, Inc., U S West, Inc. Financial. Bankers Trust Company, Barclays Bank PLC, Citibank N.A., Credit Suisse, Donaldson, Lufkin & Jenrette, Inc., FMR Corp. (Fidelity Investments), Merrill Lynch & Co., Inc., Moody's Investment Services, NationsBank Services, Inc., Putnam Investment Management Inc., Standard & Poor's, Toronto Dominion Bank. 29 Government. California Legislative Commission, the U.S. Department of Defense, the U.S. Department of the Treasury, the U.S. Postal Service, the Executive Office of the President. 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 hotline telephone support, field installation, training and upgrade and maintenance support 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. As of June 30, 1995, the Company had 33 employees engaged in field and central customer support operations. DEVELOPMENT The Company recognizes that the continued enhancement of NewsEDGE and the extension of its news and information offerings is critical to obtaining new customers and to obtaining trade-up sales and renewals from existing customers. Since its inception, Desktop Data has made substantial investments in research and development, issuing six 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 2.05, was made available to customers beginning in April 1995. The Company is developing interfaces to on-line resources provided by other news and information providers. This feature is scheduled for release in the third quarter of 1995 and is designed to permit NewsEDGE users to be alerted to or search for these resources using NewsEDGE, and then to link directly to them. For example, a user may be alerted that a press conference announcing breaking developments for a company matching the user's profile is about to be broadcast by NBC Desktop, Inc. The new feature is designed to allow the user to directly access this press conference on the user's computer screen through NewsEDGE, rather than waiting for a later news story reporting on the event. Another application of this feature is designed to permit users to readily retrieve SEC filings by linking directly with Indepth Data, Inc., which distributes such filings. Other development efforts have been focused on supporting additional desktop operating platforms and LAN configurations, increasing the number of news sources, expanding storage for news history and providing enhanced precision and functionality for user searches and profiles. The Company's development expenses were $1.2 million, $1.7 million and $1.9 million in 1992, 1993 and 1994, respectively. 30 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. As of June 30, 1995, Desktop Data had 32 employees engaged in development and quality assurance operations. 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 Dialog, Dow Jones, Lexis/Nexis, Pearson, Reuters and Thomson; (ii) market data services companies such as ADP, Bloomberg, Quotron 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 and Microsoft, which could, in the future, ally with competing news and information providers; and (v) to a lesser degree, consumer-oriented commercial on-line services and Internet access providers. Many of these companies and market participants not named above have substantially greater financial, technical and marketing resources than the Company. The Company believes that NewsEDGE is differentiated from the news and system products offered by 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 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 scrolling of news stories, while others do not support Lotus Notes or other groupware applications. In addition, many competitors rely on database engines developed by third parties, and as a result the Company believes these services are not as readily adaptable to evolving customer information provider needs as is NewsEDGE. Finally, each of these smaller competitors is owned by a larger organization, which the Company believes restricts their ability to attract a large variety of news sources and makes it difficult for them to provide the same level and focus of sales, development and customer support as can be provided by Desktop Data. 31 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. 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 The Company had 118 full-time employees as of June 30, 1995. 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. FACILITIES The Company's corporate headquarters are located in Waltham, Massachusetts. The Company leases approximately 15,000 square feet of a multi-tenant facility under a lease expiring in March 1996. The Company leases additional facilities and offices for sales and customer service and support in New York, New Jersey, Washington D.C., Pennsylvania, Illinois, California, Toronto, Canada and London, England. The Company believes that its existing facilities and offices and additional or alternative space available to it are adequate to meet its requirements for the foreseeable future. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 32 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- -------- Donald L. McLagan.................. 53 Chairman, President, Chief Executive Officer and Director Edward R. Siegfried................ 50 Vice President--Finance and Operations, Treasurer and Assistant Secretary Clifford M. Pollan................. 38 Vice President--Sales and Marketing Daniel F. X. O'Reilly, Ph.D........ 48 Vice President--Development A. Baron Cass, III(2).............. 51 Director David R. Semmel(1)................. 38 Director Peter P. Homans(1)................. 44 Director Ellen Carnahan(2).................. 40 Director Rory J. Cowan(1)(2)................ 42 Director
- -------- (1) Member of Compensation Committee. (2) Member of Audit Committee. Mr. McLagan is the founder of the Company and has been President and a director since its inception in 1988. Mr. McLagan was elected Chairman and Chief Executive Officer in June 1995. From 1985 to 1988, Mr. McLagan was Vice President and General Manager of the Information Services Division of Lotus Development Corporation, a computer software company. From 1969 to 1984, Mr. McLagan was employed by Data Resources, Inc., an economic information service company, most recently as Executive Vice President. Mr. Siegfried joined the Company in 1989 as a Vice President, Treasurer and Assistant Secretary and was elected Vice President--Finance and Operations in May 1995. From 1985 to 1989, Mr. Siegfried served as the Vice President responsible for finance, administration and operations at Softbridge Microsystems, Inc., a computer software development company. From 1974 to 1985, Mr. Siegfried was the Senior Vice President--Finance and Administration of Data Resources, Inc. Mr. Siegfried is a certified public accountant and from 1967 to 1974 was employed by Arthur Andersen LLP, most recently as Audit Manager. Mr. Pollan joined the Company in 1989 as a Vice President and was elected Vice President--Sales and Marketing in May 1995. From 1986 to 1989, Mr. Pollan was a Director of Sales at Lotus Development Corporation. From 1985 to 1986, Mr. Pollan was the Vice President of Sales of Isys Corporation, a financial information company, and from 1978 to 1985 was employed by Data Resources, Inc., most recently as a Director of Consulting. Dr. O'Reilly joined the Company in 1989 as a Vice President and was elected Vice President--Development in May 1995. From 1979 to 1989, Dr. O'Reilly was the Vice President of the Information System Development Group of Data Resources, Inc. From 1975 through 1979, Dr. O'Reilly held various teaching positions in the Mathematics Departments of Marquette University, Simmons College and Boston College. Mr. Cass has served on the Board of Directors of the Company since November 1989. Mr. Cass has been a general partner of CCS & Associates, L.P., an investment general partnership, since 1983. Mr. Cass is also currently a general partner of CII Holdings L.P., an investment partnership, a general partner of Equity Analysts, L.P., a real estate investment partnership, and a general partner of Sands Partnership No. 1, L.P., an investment partnership. Previously, Mr. Cass was a Vice President with the investment firms of Goldman, Sachs & Co. and Bear Stearns & Co., Inc. 33 Mr. Semmel has served on the Board of Directors of the Company since November 1989. Mr. Semmel has been a general partner of Pangaea, L.P., an investment fund, since 1993 and a general partner of Pangaea Partners, L.P., a venture capital fund, since 1988. From 1981 to 1988, Mr. Semmel was a Vice President of System Software Associates, Inc., an applications software company. Mr. Homans has served on the Board of Directors of the Company since November 1989. Mr. Homans has been a general partner of Pangaea, L.P., an investment fund, since 1993. From 1990 to 1993, Mr. Homans was the President of Homans Research, Inc., a private investment research firm, which he founded. Prior to that time, Mr. Homans was a broker with H.C. Wainwright & Co., Inc., a brokerage firm with which he remains affiliated. Ms. Carnahan has served on the Board of Directors of the Company since March 1991. Ms. Carnahan has been a general partner of William Blair Venture Partners III, a venture capital firm, and Research Director of William Blair & Company, an investment banking firm, since 1988. Prior to 1988, Ms. Carnahan was Vice President of Marketing and Planning at SPSS, Inc., an applications software company. Mr. Cowan has served on the Board of Directors of the Company since May 1993. Mr. Cowan has been an Executive Vice President of R.R. Donnelley & Sons Company, a supplier of commercial print and print-related services, since 1991 and was a Group President from 1989 to 1991. Mr. Cowan has also been the Chairman of Stream International Inc., a software services company, since April 1995. Each director holds office until that director's successor has been duly elected and qualified. Upon the closing of this offering, the Company's Board of Directors will be divided into three classes. Messrs. Semmel and Cass will serve in the class the term of which expires in 1996; Mr. Homans and Ms. Carnahan will serve in the class the term of which expires in 1997; and Messrs. McLagan and Cowan will serve in the class the term of which expires in 1998. Upon the expiration of the term of each class of directors, directors comprising such class of directors will be elected for a three-year term at the next succeeding annual meeting of stockholders. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve until their successors are duly elected and qualified. All of the current directors were nominated in accordance with a stockholders agreement, which agreement will terminate upon the closing of this offering. There are no family relationships among any of the executive officers or directors of the Company. COMMITTEES OF THE BOARD OF DIRECTORS In June 1995, the Board of Directors established a Compensation Committee and an Audit Committee. The Compensation Committee makes recommendations concerning the salaries and incentive compensation of employees of and consultants to the Company and administers the Company's 1989 Stock Plan, 1995 Stock Plan, 1995 Employee Stock Purchase Plan and 1995 Non-Employee Director Stock Option Plan. The Audit Committee is responsible for reviewing the results and scope of audits and other services provided by the Company's independent auditors. DIRECTOR COMPENSATION All non-employee directors are reimbursed for travel and other related expenses incurred in attending meetings of the Board of Directors. The Company's 1995 Non-Employee Director Stock Option Plan (the "Director Option Plan") was adopted by the Board of Directors on June 16, 1995 and approved by the stockholders on June 26, 1995. The Director Option Plan provides for the grant of options to purchase a maximum of 100,000 shares of Common Stock of the Company to non-employee directors of the Company. Under the Director Option Plan, each non-employee director will receive, on the date such person is first elected to the Board, an option to purchase 5,000 shares of the Company's Common Stock, vesting over four years. Beginning at 34 the Company's next annual meeting and at each successive annual meeting, each non-employee director who has attended at least 75% of the board meetings during the previous fiscal year will receive an option to purchase 2,500 shares of Common Stock, vesting on the first anniversary of the date of such grant. All options granted under the Director Option Plan will have an exercise price equal to the fair market value of the Common Stock on the date of grant. The term of each option will be for a period of ten years from the date of grant. Options may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable to the extent vested only while the optionee is serving as a director of the Company or within 90 days after the optionee ceases to serve as a director of the Company (except that if a director dies or becomes disabled while he or she is serving as a director of the Company, the option is exercisable for a one-year period thereafter). EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the compensation of the Company's Chief Executive Officer and each of its other executive officers (collectively, the "Named Executive Officers"). The Company did not grant any stock options, restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts to any of the Named Executive Officers during 1994. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) --------------------------- ---------- --------- --------------- Donald L. McLagan......................... $ 115,500 -- $289 Chairman, President and Chief Executive Officer Edward R. Siegfried....................... 115,500 -- 289 Vice President--Finance and Operations, Treasurer and Assistant Secretary Clifford M. Pollan........................ 115,500 $ 45,157 271 Vice President--Sales and Marketing Daniel F. X. O'Reilly..................... 115,500 -- 289 Vice President--Development
- -------- (1) Represents matching contributions made by the Company to the Named Executive Officer under the Company's 401(k) plan. Each of the Named Executive Officers has entered into a non-competition agreement with the Company, which restricts him from competing with the Company through June 28, 1996, unless his employment is terminated involuntarily without cause or in connection with a change of control of the Company. The following table sets forth information with respect to the Named Executive Officers concerning options exercised during the year ended December 31, 1994. As of June 30, 1995, none of the Named Executive Officers held any options to purchase Common Stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES ACQUIRED ON VALUE NAME EXERCISE REALIZED(1) ---- ------------------ ----------- Donald L. McLagan................................ -- -- Edward R. Siegfried.............................. -- -- Clifford M. Pollan............................... 177,777 $216,000 Daniel F. X. O'Reilly............................ -- --
- -------- (1) Calculated on the basis of the fair market value of the underlying securities at the option exercise date, as determined by the Company's Board of Directors, minus the per share exercise price. 35 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to 1995, the Company had no separate compensation or stock option committee or other board committee performing equivalent functions, and these functions were performed by the Company's Board of Directors. In June 1995, the Company established compensation and audit committees of its Board of Directors which are composed of non-employee directors. See "Committees of the Board of Directors." STOCK PLANS 1989 Stock Plan. The Company's 1989 Stock Plan (the "1989 Plan") was adopted by the Company's Board of Directors on July 17, 1989 and approved by the Company's stockholders on July 18, 1989. The Board of Directors voted in June 1995 to terminate the 1989 Plan upon the effective date of this offering and no further options may be issued under the 1989 Plan after such date. Under the terms of the 1989 Plan, non-statutory stock options have been granted to employees, consultants and directors of the Company. Options granted under the 1989 Plan expire five years from the date of grant. Generally options issued under the 1989 Plan vest at a rate of 25% after one year, with the remainder vesting monthly over the next three years. 1995 Stock Plan. The Company's 1995 Stock Plan (the "1995 Plan") was adopted by the Board of Directors on June 16, 1995 and approved by the stockholders on June 26, 1995. The 1995 Plan provides for the grant of incentive stock options to employees and the grant of non-statutory stock options, stock awards and purchase rights to employees, consultants, directors and officers of the Company. The 1995 Plan provides for the issuance of up to 625,000 shares. Generally, under the 1995 Plan, an award is not transferable by the awardholder except by will or by the laws of descent and distribution. No incentive stock option may be exercised more than 90 days following termination of employment unless the termination is due to death or disability, in which case the option is exercisable for a maximum of 180 days after such termination. Options granted under the 1995 Plan expire ten years from the date of grant or five years from the date of grant in the case of incentive stock options issued to employees holding more than 10% of the total combined voting power of the Company. The 1995 Plan and the 1989 Plan are administered by the Compensation Committee of the Board of Directors, which currently consists of disinterested directors of the Company. Subject to the provisions of such plans, the Compensation Committee has the authority to select the optionees and determine the terms of the options granted, including: (i) the number of shares subject to each option, (ii) when the option becomes exercisable, (iii) the exercise price of the option (which in the case of an incentive stock option cannot be less than the market price of the Common Stock as of the date of grant), (iv) the duration of the option, and (v) the time, manner and form of payment upon exercise of an option. As of June 30, 1995, options to purchase 275,102 shares of Common Stock at a weighted average exercise price of $2.63 per share were outstanding under the 1989 Plan, options to purchase 343,922 shares of Common Stock had been exercised at a weighted average exercise price of $0.25 per share under the 1989 Plan, and no options or other awards had been granted under the 1995 Plan. 1995 Employee Stock Purchase Plan. The 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan") was adopted by the Board of Directors on June 16, 1995 and approved by the Company's stockholders on June 26, 1995. The 1995 Purchase Plan will take effect upon completion of this offering. The 1995 Purchase Plan provides for the issuance of up to 175,000 shares of Common Stock pursuant to the exercise of nontransferable options granted to participating employees. The 1995 Purchase Plan is administered by the Compensation Committee of the Board of Directors. All employees of the Company, except employees who own five percent or more of the Company's stock, whose customary employment is 20 hours or more per week and more than five months in any calendar year and who have completed at least one year of employment are eligible to participate in the 1995 Purchase Plan. Employees who own five percent or more of the Company's Common Stock and directors who are not employees of the Company may not participate in the 1995 Purchase Plan. To participate in 36 the 1995 Purchase Plan, an employee must authorize the Company to deduct an amount (not less than one percent nor more than ten percent of a participant's total cash compensation) from his or her pay during six-month offering periods commencing on January 1 and July 1 of each year (each a "Plan Period"). In no case may an employee purchase more than 250 shares in any Plan Period. The exercise price for the option for each Plan Period is 85% of the lesser of the market price of the Common Stock on the first or last business day of the Plan Period. If an employee is not a participant on the last day of the Plan Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions will be refunded. An employee's rights under the 1995 Purchase Plan terminate upon his or her voluntary withdrawal from the 1995 Purchase Plan at any time or upon termination of employment. No options have been granted to date under the 1995 Purchase Plan. As of June 30, 1995, approximately 68 employees would have been eligible to participate in the 1995 Purchase Plan. 401(K) PLAN The Company maintains a 401(k) retirement savings plan (the "401(k) Plan"). All employees of the Company who have completed at least three consecutive months of service are eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each participant may contribute from 1% to 15% of his or her pre-tax compensation (up to a statutorily prescribed annual limit, $9,240 in 1995) to the 401(k) Plan. The percentage elected by certain highly compensated participants may be required to be lower. All amounts contributed to the 401(k) Plan by employee participants and earnings on these contributions are fully vested at all times. The Company matches employee contributions to the 401(k) Plan in an amount equal to a percentage of the employees' eligible compensation contributed to the 401(k) Plan (not to exceed 6% of employee compensation) which is determined annually by the Board of Directors. Employee participants may elect to invest their contributions in various established funds, which include fixed income, growth and equity funds. CERTAIN TRANSACTIONS R.R. Donnelley & Sons Company ("Donnelley"), which holds 10.3% of the Common Stock of the Company prior to this offering, is a customer of the Company, and was billed an aggregate of $91,833 in NewsEDGE subscriber fees in the year ended December 31, 1994. Mr. Cowan, Executive Vice President of Donnelley, serves on the Board of Directors of the Company. The Company has retained R.R. Donnelley Financial International Printing Services, a division of Donnelley, as its financial printer for this Prospectus. Printing expenses in connection with this offering are estimated to be approximately $120,000. William Blair & Company, an affiliate of William Blair Venture Partners III ("Blair"), a 10.3% holder of the Company's Common Stock prior to this offering and a Selling Stockholder in this offering, is a customer of the Company and was billed an aggregate of $65,500 in NewsEDGE subscriber fees in the year ended December 31, 1994. Ms. Carnahan, a general partner of Blair, serves on the Board of Directors of the Company. In connection with the Company's payment upon the closing of this offering of all accrued and unpaid dividends on the Series A Convertible Preferred Stock, Messrs. Cass, Homans, McLagan and Semmel, together with their respective affiliates, will receive an estimated $255,000, $12,000, $435,000 and $168,000, respectively, in their capacities as holders of Series A Convertible Preferred Stock of the Company. In connection with the Company's payment upon the closing of this offering of all accrued and unpaid dividends on the Series B Redeemable Preferred Stock, Messrs. Cass, McLagan and Semmel, together with their respective affiliates, will receive an estimated $12,000, $30,000 and $11,000, respectively, in their capacities as holders of Series B Redeemable Preferred Stock, and Blair will receive an estimated $530,000. The Company may use a portion of the proceeds of this offering to redeem the Series B Redeemable Preferred Stock. Messrs. Cass, McLagan and Semmel are the holders of 261, 641.25 and 225 shares of Series B Redeemable Preferred Stock, respectively, and Blair is the holder of 11,250 shares of Series B Redeemable Preferred Stock. 37 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of June 30, 1995 and as adjusted to reflect the sale of the shares offered hereby by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director and Named Executive Officer of the Company, (iii) all directors and executive officers of the Company as a group, and (iv) each Selling Stockholder. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
SHARES TO BE SHARES BENEFICIALLY BENEFICIALLY OWNED PRIOR TO THE OWNED AFTER THE OFFERING(1) OFFERING(1)(2) NAME AND ADDRESS OF ----------------------- SHARES BEING ----------------- BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT ------------------- ------------ ---------- ------------ --------- ------- DIRECTORS, OFFICERS AND 5% STOCKHOLDERS Donald L. McLagan (3).... 2,189,791 33.6% -- 2,189,791 26.7% c/o Desktop Data, Inc. 1601 Trapelo Road Waltham, MA 02154 William Blair Venture Partners III (4)........ 668,620 10.3 94,000 574,620 7.0 222 West Adams Street Chicago, IL 60606 R.R. Donnelley & Sons Company................. 673,514 10.3 -- 673,514 8.2 Corporate Headquarters 77 West Wacker Drive Chicago, IL 60601 A. Baron Cass, III (5)... 314,064 4.8 -- 314,064 3.8 David R. Semmel (6)...... 213,239 3.3 -- 213,239 2.6 Peter P. Homans.......... 65,302 1.0 -- 65,302 * Rory J. Cowan............ -- -- -- -- -- Ellen Carnahan (7)....... 668,620 10.3 94,000 574,620 7.0 c/o William Blair Venture Partners III 222 West Adams Street Chicago, IL 60606 Edward R. Siegfried...... 271,110 4.2 -- 271,110 3.3 Daniel F. X. O'Reilly.... 222,221 3.4 -- 222,221 2.7 Clifford M. Pollan....... 213,332 3.3 -- 213,332 2.6 All Executive Officers and Directors as a group (nine persons) (3) (5) (6) (7)................. 4,157,679 63.8 94,000 4,063,679 49.6 OTHER SELLING STOCKHOLDERS Gwendolyn Garland Babcock................. 135,502 2.1 67,751 67,751 * Clark L. Bernard......... 17,886 * 8,888 8,998 * Corning Partners II...... 83,797 1.3 17,000 66,797 * Adam Crescenzi........... 23,713 * 7,114 16,599 * Brenda Earl.............. 33,875 * 3,111 30,764 * Mark Hager............... 67,751 1.0 8,888 58,863 * David E. Mullare......... 26,836 * 4,444 22,392 * Myrna H. Freedman Irrevocable Trust....... 42,937 * 11,826 31,111 * Edward G. Pringle........ 17,886 * 17,886 -- -- Sherman H. Starr......... 26,836 * 4,615 22,221 * Catherine W. Tennican.... 16,937 * 16,937 -- -- Michael Tennican......... 84,688 1.3 17,777 66,911 * Richard Trull............ 40,355 * 8,888 31,467 * Allen H. Wolozin......... 35,787 * 33,875 1,912 *
38 - -------- * Less than 1% of the outstanding Common Stock. (1) The number of shares of Common Stock deemed outstanding prior to this offering includes 6,515,937 shares of Common Stock outstanding as of June 30, 1995. The number of shares of Common Stock deemed outstanding after this offering includes an additional 1,677,000 shares of Common Stock which are being offered for sale by the Company in this offering. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) Includes 444,442 shares held in trust for the benefit of Mr. McLagan's two children, of which Mr. McLagan's wife is the sole trustee. Does not include 44,443 shares held by Mr. McLagan's sister, Mr. McLagan disclaims beneficial ownership in such shares. In addition, Mr. McLagan holds 641.25 shares of Series B Redeemable Preferred Stock. (4) The general partner of William Blair Venture Partners III ("Blair") is William Blair Venture Management Co. ("Blair Management"). The general partners of Blair Management, who may be deemed to share voting and investment power with respect to the shares held by Blair, are Ms. Carnahan, a director of the Company, George S. Newmark and Samuel Guren. Ms. Carnahan and Messrs. Newmark and Guren disclaim beneficial ownership of such shares, except to the extent of their proportionate interests in Blair. In addition, Blair holds 11,250 shares of Series B Redeemable Preferred Stock. (5) Includes 70,460 shares held by Prime Petroleum, Inc. Profit Sharing Trust ("Prime"), of which Mr. Cass is the sole trustee, and of which he and his spouse are the sole beneficiaries, and 70,460 shares held by Sands Partnership No. 1 Money Purchase Pension Plan, of which Mr. Cass is a co- trustee but not a beneficiary. In addition, Mr. Cass holds 261 shares of Series B Redeemable Preferred Stock. (6) Includes 30,491 shares held by Pangaea Partners, L.P., of which Mr. Semmel is a general partner and may be deemed to share voting and investment power with respect to the shares held by Pangaea Partners, L.P. Mr. Semmel disclaims beneficial ownership of such shares, except to the extent of his proportionate interest in Pangaea Partners, L.P. In addition, Mr. Semmel holds 225 shares of Series B Redeemable Preferred Stock. (7) Includes 668,620 shares held by Blair. The general partner of Blair is Blair Management. The general partners of Blair Management, who may be deemed to share voting and investment power with respect to the shares held by Blair, are Ms. Carnahan, a director of the Company, George S. Newmark and Samuel Guren. Ms. Carnahan and Messrs. Newmark and Guren disclaim beneficial ownership of such shares, except to the extent of their proportionate interests in Blair. In addition, Blair holds 11,250 shares of Series B Redeemable Preferred Stock. DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, the authorized capital stock of the Company will consist of 15,000,000 shares of Common Stock, $.01 par value per share, 1,000,000 shares of Preferred Stock, $.01 par value per share, and 13,500 shares of Series B Redeemable Preferred Stock, $.01 par value per share. COMMON STOCK As of June 30, 1995, there were 6,515,937 shares of Common Stock outstanding. Based upon the number of shares outstanding as of that date and giving effect to the issuance of the 1,677,000 shares of Common Stock offered by the Company hereby, there will be 8,192,937 shares of Common Stock outstanding upon the closing of this offering. Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Preferred Stock. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. Upon the closing of this offering, there will be no shares of Preferred Stock outstanding other than shares of Series B Redeemable Preferred Stock. 39 PREFERRED STOCK The Board of Directors is authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of 1,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present plans to issue any additional shares of Preferred Stock. SERIES B REDEEMABLE PREFERRED STOCK In December 1990, the Company issued and sold 13,500 shares of the Company's Series B Redeemable Preferred Stock. The Series B Redeemable Preferred Stock has no voting or conversion rights. Dividends accrue cumulatively on the Series B Redeemable Preferred Stock at an annual rate of $10.00 per share, whether or not declared, and are payable upon redemption (except under certain circumstances, as described below) or liquidation, unless earlier declared by the Board of Directors. At June 30, 1995, dividends aggregating $613,000 had accrued on the Series B Redeemable Preferred Stock. The Series B Redeemable Preferred Stock was issued and sold in conjunction with shares of the Company's Series C Convertible Preferred Stock, all of which will be converted to shares of Common Stock on the closing of this offering. The Company may redeem the Series B Redeemable Preferred Stock at its option, at any time, at a redemption price equal to $100 per share plus all accrued but unpaid dividends, although the redemption price is subject to reduction under the circumstances described below. If the former holders of Series C Preferred Stock receive, in the aggregate, more than $9,165,726 (the "Threshold Amount") from the sale of shares of Common Stock issued upon the conversion of the Series C Preferred Stock ("Underlying Common Stock"), the redemption price for the Series B Redeemable Preferred Stock is subject to reduction (but not below $.01 per share) by an amount equal to the aggregate amount received on the sale of Underlying Common Stock in excess of the Threshold Amount. If such liquidation value is adjusted to $.01 per share, the redemption price of the Series B Redeemable Preferred Stock will not include dividends accrued after the closing of this offering. The Company may also be obligated to redeem the Series B Redeemable Preferred Stock if: there is a significant change in ownership of the Company; the Company fails to fulfill its obligations under the terms of the Series B Redeemable Preferred Stock or the stock purchase agreement pursuant to which the Company issued and sold the Series B Redeemable Preferred Stock (the "Series B Agreement"); any representation or warranty of the Company contained in the Series B Agreement or made in connection therewith proves to have been false or misleading in any material respect when made; the Company or any subsidiary makes an assignment for the benefit of creditors or becomes bankrupt or insolvent; a judgment in excess of $100,000 is rendered against the Company or any subsidiary and is not paid or discharged within 90 days; or the Company or any subsidiary defaults in the performance of any obligation resulting in the acceleration of obligations in excess of $250,000. For so long as at least 20% of the originally issued Series B Redeemable Preferred Stock remains outstanding, the Company must obtain the consent of holders of at least 66.67% of the outstanding shares 40 of Series B Redeemable Preferred Stock to take various actions, including: redeeming shares of stock other than shares of the Series B Redeemable Preferred Stock; incurring debt or acquiring an interest in any business for an amount in excess of $250,000; issuing shares on a parity with or senior to the Series B Redeemable Preferred Stock; merging with another entity; selling more than 20% of its assets other than in the ordinary course of business; liquidating, dissolving or effecting a recapitalization or reorganization; making acquisitions or capital expenditures in excess of $1,500,000 in any twelve month period; entering into leases (other than capitalized leases) providing for annual payments in excess of $300,000; and amending any stock option or employee stock plan. The Company may redeem the Series B Redeemable Preferred Stock at its option at any time and intends to do so if the covenants or restrictions described in this paragraph limit its ability to take actions otherwise desired. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the Board of Directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Amended and Restated Certificate provides for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. See "Management--Executive Officers and Directors." Any director may be removed without cause only by the vote of at least 75% of the shares entitled to vote for the election of directors or with cause by the vote of at least a majority of such shares. The classification of the Board of Directors could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The Company's Amended and Restated By-laws, which will be in effect upon the closing of this offering, provide that for nominations for the Board of Directors or for other business to be properly brought by a stockholder before a meeting of stockholders, the stockholder must first have given timely notice thereof in writing to the Secretary of the Company. To be timely, a notice of nominations or other business to be brought before an annual meeting must be delivered not less than 120 days nor more than 150 days prior to the first anniversary of the date of the proxy statement delivered to stockholders in connection with the preceding year's annual meeting or, if either the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary, or if no proxy statement was delivered to stockholders in connection with the preceding year's annual meeting, such notice must be delivered not earlier than 90 days prior to such annual meeting and not later than the later of 60 days prior to the annual meeting or 10 days following the date on which public announcement of the date of such annual meeting is first made by the Company. With respect to special meetings, notice must generally be delivered not more than 90 days prior to such meeting and not later than the later of 60 days prior to such meeting or 10 days following the day on which public announcement of such meeting is first made by the Company. The notice must contain, among other things, certain information about the stockholder delivering the notice and, as applicable, background information about each nominee or a description of the proposed business to be brought before the meeting. The Company's Amended and Restated Certificate authorizes the Board of Directors, when considering a tender offer or merger or acquisition proposal, to take into account factors in addition to potential economic benefits to stockholders. Such factors may include: (i) the interests of the Company's 41 stockholders, including the possibility that these interests might be best served by the continued independence of the Company; (ii) whether the proposed transaction might violate Federal or state laws; (iii) the consideration being offered in the proposed transaction in relation to the then current market price for the outstanding capital stock of the Company, as well as in relation to the market price for the capital stock of the Company over a period of years, the estimated price that might be achieved in a negotiated sale of the Company 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 Company'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 Company, upon the communities in which the Company conducts its business and upon the economy of the state, region and nation. The foregoing provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The Company's Amended and Restated Certificate provides that any action required or permitted to be taken by the stockholders of the Company may be taken only at a duly called annual or special meeting of the stockholders, and that special meetings may be called only by the Chairman of the Board of Directors, a majority of the Board of Directors, or the President of the Company. These provisions could have the effect of delaying until the next annual stockholder's meeting stockholder actions that are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholder's meeting, and not by written consent. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or By-laws, unless a corporation's certificate of incorporation or By-laws, as the case may be, requires a greater percentage. The Amended and Restated Certificate requires the affirmative vote of the holders of at least 75% of the outstanding voting stock of the Company to amend or repeal certain provisions of the Amended and Restated Certificate and to reduce the number of authorized shares of Common Stock and Preferred Stock. The By-laws may be amended or repealed by a majority vote of the Board of Directors or the holders of a majority of the shares of the Company's voting stock, provided that the affirmative vote of the holders of at least 75% of the voting stock is required to amend or repeal certain of the indemnification provisions contained in the By-laws. Such 75% stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any Preferred Stock that might be outstanding at the time any such amendments are submitted to stockholders. The foregoing provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Amended and Restated Certificate contains certain provisions permitted under the DGCL relating to the liability of directors. These provisions eliminate a director's personal liability for monetary damages resulting from a breach of fiduciary duty, except in certain circumstances involving certain wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. These provisions do not limit or eliminate the rights of the Company or any stockholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director's fiduciary duty. These provisions will not alter a director's liability under Federal securities laws. The Company's Amended and Restated Certificate also contains provisions indemnifying the directors and officers of the Company to the fullest extent permitted by the DGCL. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. 42 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The First National Bank of Boston. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, based on the number of shares of Common Stock outstanding as of June 30, 1995, and assuming no exercise of the options to purchase 275,102 shares of Common Stock outstanding on such date, the Company will have 8,192,937 shares of Common Stock outstanding. Of these shares, the 2,000,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining 6,192,937 shares of Common Stock are deemed "Restricted Shares" under Rule 144. Of the Restricted Shares, up to 1,260,743 may be eligible for sale in the public market immediately after this offering pursuant to Rule 144(k) under the Securities Act. An additional 314,164 Restricted Shares may be eligible for sale in the public market in accordance with Rule 701 under the Securities Act beginning 90 days after the effective date of this offering. Of the remaining 4,618,030 outstanding Restricted Shares, 4,452,751 will be eligible for resale under Rule 144 commencing 90 days after the effective date of this offering. 6,079,554 of such shares are subject to lock-up agreements as described below (the "Lock-Up Agreements"). In addition, 3,524,123 of the Restricted Shares are entitled to registration rights as described below. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned Restricted Shares for at least two years is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately 82,000 shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock in the over-the-counter market during the four calendar weeks preceding the date on which notice of such sale is filed, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, Affiliates must comply with the restrictions and requirements of Rule 144, other than the two-year holding period requirement, in order to sell shares of Common Stock which are not restricted securities. Also, under Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for at least three months prior to the sale and who has beneficially owned Restricted Shares for at least three years may resell such shares without compliance with the foregoing requirements. In meeting the two and three year holding periods described above, a holder of Restricted Shares can include the holding periods of a prior owner who was not an Affiliate. The Securities and Exchange Commission has proposed an amendment to Rule 144 which would reduce the holding period required for shares subject to Rule 144 to become eligible for sale in the public market from two years to one year, and from three years to two years in the case of Rule 144(k). If this proposal is adopted, an additional 31,950 shares will become eligible for sale to the public 180 days after the Effective Date. Rule 701 under the Securities Act provides that the shares of Common Stock acquired on the exercise of currently outstanding options issued under an employee benefit plan may be resold by persons, other than Affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144 without compliance with its two-year minimum holding period, subject to certain limitations. OPTIONS As of June 30, 1995, options to purchase a total of 275,102 shares of Common Stock were outstanding (of which options to purchase 99,111 shares were then exercisable); 272,104 of the total shares issuable 43 pursuant to such options are subject to Lock-up Agreements. An additional 900,000 shares of Common Stock are available for future grants under the Company's stock plans. See "Management--Stock Plans." The Company intends to file one or more registration statements on Form S-8 under the Securities Act to register all shares of Common Stock subject to outstanding stock options and Common Stock issuable pursuant to the Company's stock plans that do not qualify for an exemption under Rule 701 from the registration requirements of the Securities Act. The Company expects to file these registration statements 90 days following the closing of this offering, and such registration statements are expected to become effective upon filing. Shares covered by these registration statements will thereupon be eligible for sale in the public markets, subject to Rule 144 limitations applicable to Affiliates and the Lock-up Agreements, to the extent applicable. LOCK-UP AGREEMENTS The Company, certain security holders, including the Selling Stockholders, and all officers and directors of the Company, who in the aggregate will hold, following the offering, 6,079,554 shares of Common Stock and options to purchase 272,104 shares of Common Stock, have agreed, pursuant to the Lock-up Agreements, not to directly or indirectly, without the prior written consent of the Representatives of the Underwriters, offer, sell, offer to sell, contract to sell, or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 180 days after the date of this Prospectus; provided, however, that certain current and former employees of the Company who are also stockholders of the Company may sell an aggregate of up to 38,970 of these shares commencing 90 days after the date of this Prospectus. REGISTRATION RIGHTS At the completion of this offering, the holders of 2,166,327 shares of Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock will be entitled to certain rights contained in a certain Series A Preferred Stock Purchase Agreement dated as of November 13, 1989 and the holders of 1,357,796 shares of Common Stock issuable upon the conversion of the Series C Convertible Preferred Stock and the Series D Redeemable Convertible Preferred Stock will be entitled to certain registration rights contained in a certain Amended and Restated Registration Agreement dated as of October 20, 1992. The Company is generally obligated to bear the expenses of all such registrations, except underwriting discounts and commissions. For purposes of the description below, Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock is referred to as "Series A Registration Rights Shares" and Common Stock issuable upon the conversion of the Series C Convertible Preferred Stock and the Series D Redeemable Convertible Preferred Stock are referred to as "Series C and D Registration Rights Shares." If the Company files any registration statement with the Securities and Exchange Commission in connection with a public offering of any shares of Common Stock, holders of Series A Registration Rights Shares may require the Company to include such shares in such registration statement, unless the managing underwriter of such registration determines that the inclusion of the shares would adversely affect the public offering. Holders of 25% of the Series A Registration Rights Shares may, at any time, require the Company to file a registration statement on Form S-3 under the Securities Act, or any successor form thereto, if the aggregate price to the public of such offering can reasonably be anticipated to exceed $250,000 and if the Company is entitled to use Form S-3. There is no limitation on the number of registrations on Form S-3 that may be requested by the holders of Series A Registration Rights Shares. At any time after six months from the completion of the sale of Common Stock offered hereby, holders of at least 40% of the Series C and D Registration Rights Shares may require the Company to file a registration statement with respect to all or part of their Series C and D Registration Rights Shares on either Form S-1 or Form S-3 under the Securities Act. If the Company files any registration statement with 44 the Securities and Exchange Commission in connection with a public offering on either a Form S-1 or Form S-3 under the Securities Act, holders of Registration Rights Shares may require the Company to include such shares in a registration statement, unless the managing underwriter of such registration determines that the inclusion of the shares would adversely affect the public offering. There is no limitation on the number of registrations on Forms S-1 or Form S-3 that may be requested by the holders of Series C and D Registration Rights Shares, although the Company is not required to bear the expenses of more than two required S-1 registrations. No predictions can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the prevailing market price for the Common Stock. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. 45 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Alex. Brown & Sons Incorporated and Volpe, Welty & Company, have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES ----------- --------- Alex. Brown & Sons Incorporated.................................... 417,500 Volpe, Welty & Company............................................. 417,500 Bear, Stearns & Co. Inc............................................ 75,000 Donaldson, Lufkin & Jenrette Securities Corporation................ 75,000 Hambrecht & Quist LLC.............................................. 75,000 Lehman Brothers Inc................................................ 75,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 75,000 Montgomery Securities.............................................. 75,000 Morgan Stanley & Co. Incorporated.................................. 75,000 Oppenheimer & Co., Inc............................................. 75,000 Robertson, Stephens & Company, L.P................................. 75,000 William Blair & Company............................................ 50,000 Cowen & Company.................................................... 50,000 Dain Bosworth Incorporated......................................... 50,000 First Albany Corporation........................................... 50,000 Punk, Ziegel & Knoell.............................................. 50,000 SoundView Financial Group, Inc..................................... 50,000 Wessels, Arnold & Henderson........................................ 50,000 Pennsylvania Merchant Group LTD.................................... 35,000 Rodman & Renshaw Inc............................................... 35,000 The Seidler Companies Incorporated................................. 35,000 H.C. Wainwright Co., Inc........................................... 35,000 --------- Total............................................................ 2,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Company and the Selling Stockholders have been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $.60 per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.10 per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock, at the initial offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 2,000,000, and the Company will 46 be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 2,000,000 shares are being offered. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act. The Company, each of its officers and directors, and certain of its securityholders have agreed, subject to certain exceptions, not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives of the Underwriters; provided, however, that certain of the Company's current and former employees who are also stockholders of the Company may sell an aggregate of up to 38,970 of these shares commencing 90 days after the date of this Prospectus. The Representatives of the Underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to Lock-up Agreements. See "Shares Eligible for Future Sale." This offering will be made pursuant to the provisions of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. ("Schedule E"). Due to the indirect ownership interest of William Blair & Co. in William Blair Venture Partners III, which is a principal and selling stockholder in the offering, William Blair & Co. may be deemed to be participating in this offering. William Blair & Co. is also an underwriter in this offering. Accordingly, under Schedule E the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. In accordance with Schedule E, Alex. Brown & Sons Incorporated is serving as a qualified independent underwriter in pricing this offering and in conducting due diligence with respect to the Company. The Representatives have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock has been determined by negotiations among the Company, representatives of the Selling Stockholders and the Representatives of the Underwriters. Among the factors considered in such negotiations were the prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which this Company, representatives of the Selling Stockholders and the Representatives of the Underwriters believed to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The Common Stock has been approved for quotation on The Nasdaq National Market under the symbol "DTOP." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Testa, Hurwitz & Thibeault, Boston, Massachusetts, and for the Underwriters by Hale and Dorr, Boston, Massachusetts. EXPERTS The Consolidated Financial Statements as of December 31, 1993 and December 31, 1994 and for each of the three years in the period ended December 31, 1994 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report and are included herein in reliance on the authority of said firm as experts in giving said reports. 47 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (including all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement including exhibits, schedules and reports filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission in Washington, D.C. and copies of all or any part of which may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the prescribed fees. The Company intends to furnish to its stockholders annual reports containing financial statements audited by an independent accounting firm and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year. 48 DESKTOP DATA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................................. F-2 Consolidated Balance Sheets as of December 31, 1993 and 1994, June 30, 1995 and Pro Forma as of June 30, 1995...................................................... F-3 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1994 and for the Six Months Ended June 30, 1994 and 1995.... F-4 Consolidated Statements of Stockholders' Deficit for Each of the Three Years in the Period Ended December 31, 1994, the Six Months Ended June 30, 1995 and Pro Forma as of June 30, 1995............................... F-5 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1994 and for the Six Months Ended June 30, 1994 and 1995.... F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Desktop Data, Inc.: We have audited the accompanying consolidated balance sheets of Desktop Data, Inc. (a Delaware corporation) as of December 31, 1993 and 1994, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 1994. 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 financial statements referred to above present fairly, in all material respects, the financial position of Desktop Data, Inc. as of December 31, 1993 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts February 24, 1995 (except with respect to the matters discussed in Note 9, as to which the date is June 26, 1995) F-2 DESKTOP DATA, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, PRO FORMA ------------------------ JUNE 30, JUNE 30, 1993 1994 1995 1995 ----------- ----------- ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents............. $ 2,209,365 $ 4,073,450 $ 7,760,435 $ 7,760,435 Accounts receivable...... 1,535,063 2,257,830 2,254,855 2,254,855 Prepaid expenses and deposits................ 432,813 744,416 1,004,456 1,004,456 ----------- ----------- ----------- ----------- Total current assets... 4,177,241 7,075,696 11,019,746 11,019,746 ----------- ----------- ----------- ----------- Property and equipment, at cost: Computer equipment....... 977,689 1,544,845 2,057,148 2,057,148 Furniture and fixtures... 145,212 199,687 225,567 225,567 Machinery and equipment.. 56,742 70,056 90,030 90,030 Equipment under capital lease................... -- 95,081 95,081 95,081 ----------- ----------- ----------- ----------- 1,179,643 1,909,669 2,467,826 2,467,826 Less--accumulated depreciation............ 514,378 821,747 1,064,597 1,064,597 ----------- ----------- ----------- ----------- 665,265 1,087,922 1,403,229 1,403,229 ----------- ----------- ----------- ----------- Other Assets............... 32,317 56,317 207,450 207,450 ----------- ----------- ----------- ----------- $ 4,874,823 $ 8,219,935 $12,630,425 $12,630,425 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable......... $ 409,371 $ 421,876 $ 762,336 $ 762,336 Accrued expenses......... 717,133 1,629,219 2,547,798 2,547,798 Currently redeemable Series B preferred stock................... -- 1,895,625 1,963,125 1,963,125 Currently redeemable Series C preferred stock................... -- 210,625 218,125 -- Deferred revenue, current................. 5,017,351 7,563,767 10,053,920 10,053,920 Obligation under capital lease, current.......... -- 19,016 19,016 19,016 Accrued dividends on Series A preferred stock................... -- -- -- 1,968,765 ----------- ----------- ----------- ----------- Total current liabilities........... 6,143,855 11,740,128 15,564,320 17,314,960 ----------- ----------- ----------- ----------- Obligation under capital lease, noncurrent......... -- 61,803 50,710 50,710 ----------- ----------- ----------- ----------- Deferred revenue, noncurrent................ -- 56,514 82,489 82,489 ----------- ----------- ----------- ----------- Commitments (Note 6) Redeemable preferred Stock, $.01 par value Series B--authorized, issued and outstanding-- 13,500 shares........... 1,760,625 -- -- -- Series C--authorized, issued and outstanding-- 1,500 shares............ 195,625 -- -- -- Series D--authorized, issued and outstanding-- 20,000 shares........... 2,238,900 2,438,900 2,538,900 -- Stockholders' deficit: Series A convertible preferred stock, $.01 par value--Authorized, issued and outstanding-- 5,335,410 shares Liquidation preference-- $5,468,794.............. 53,354 53,354 53,354 -- Common stock, $.01 par value-- Authorized--15,000,000 shares Issued and outstanding--2,400,876 shares, 2,642,213 shares, 2,668,814 shares and 6,515,937 shares, respectively.. 24,009 26,422 26,688 65,159 Additional paid-in capital................. 2,803,287 2,479,277 2,316,879 3,120,022 Accumulated deficit...... (8,318,641) (8,605,708) (8,002,915) (8,002,915) ----------- ----------- ----------- ----------- (5,437,991) (6,046,655) (5,605,994) (4,817,734) Less--treasury stock, at cost--27,457 shares at December 31, 1993 and 29,485 shares at December 31, 1994, and no shares at June 30, 1995 and pro forma...... 26,191 30,755 -- -- ----------- ----------- ----------- ----------- Total stockholders' deficit............... (5,464,182) (6,077,410) (5,605,994) (4,817,734) ----------- ----------- ----------- ----------- $ 4,874,823 $ 8,219,935 $12,630,425 $12,630,425 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 DESKTOP DATA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------- ----------------------- 1992 1993 1994 1994 1995 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Revenues................ $4,206,776 $ 7,660,177 $14,357,624 $6,247,710 $10,498,560 Costs and expenses: Cost of revenues....... 968,182 2,009,807 3,878,896 1,742,201 2,903,125 Customer support expenses.............. 411,922 719,725 1,907,926 786,291 1,130,247 Development expenses... 1,172,164 1,653,643 1,902,200 896,509 1,288,397 Sales and marketing expenses.............. 2,487,346 3,897,665 6,152,745 2,864,116 4,144,646 General and administrative expenses.............. 592,159 674,833 899,796 414,248 554,330 ----------- ----------- ----------- ---------- ----------- Total costs and expenses............. 5,631,773 8,955,673 14,741,563 6,703,365 10,020,745 Income (loss) from operations........... (1,424,997) (1,295,496) (383,939) (455,655) 477,815 Interest income (expense), net......... (8,677) 33,815 96,872 30,458 156,978 ----------- ----------- ----------- ---------- ----------- Income (loss) before provision for income taxes.................. (1,433,674) (1,261,681) (287,067) (425,197) 634,793 Provision for income taxes.................. -- -- -- -- 32,000 ----------- ----------- ----------- ---------- ----------- Net income (loss)..... $(1,433,674) $(1,261,681) (287,067) (425,197) 602,793 =========== =========== Accretion of dividends on Series B preferred stock.................. (135,000) (67,500) (67,500) ----------- ---------- ----------- Net income (loss) available for common stockholders........... $ (422,067) $ (492,697) $ 535,293 =========== ========== =========== Pro forma net income (loss) per common and common equivalent share (Note 1)............... $ (.06) $ (.07) $ .08 =========== ========== =========== Pro forma weighted average number of common and common equivalent shares outstanding (Note 1)... 6,670,410 6,648,123 6,921,619 =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 DESKTOP DATA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
SERIES A CONVERTIBLE PREFERRED STOCK COMMON STOCK TREASURY STOCK --------------------- -------------------- ADDITIONAL ------------------ TOTAL NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED NUMBER STOCKHOLDERS' OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT OF SHARES COST DEFICIT ---------- --------- --------- --------- ---------- ----------- --------- -------- ------------- Balance, December 31, 1991........... 5,335,410 $ 53,354 2,367,425 $23,674 $3,367,847 $(5,623,286) 5,574 $ (2,662) $(2,181,073) Issuance costs of Series D redeemable preferred stock... -- -- -- -- (34,802) -- -- -- (34,802) Purchase of treasury stock.... -- -- -- -- -- -- 9,781 (8,553) (8,553) Exercise of stock options........... -- -- 23,271 233 5,612 -- -- -- 5,845 Accretion of dividends on redeemable preferred stock... -- -- -- -- (188,900) -- -- -- (188,900) Net loss........... -- -- -- -- -- (1,433,674) -- -- (1,433,674) ---------- -------- --------- ------- ---------- ----------- ------- -------- ----------- Balance, December 31, 1992........... 5,335,410 53,354 2,390,696 23,907 3,149,757 (7,056,960) 15,355 (11,215) (3,841,157) Purchase of treasury stock.... -- -- -- -- -- -- 12,102 (14,976) (14,976) Exercise of stock options........... -- -- 10,180 102 3,530 -- -- -- 3,632 Accretion of dividends on redeemable preferred stock... -- -- -- -- (350,000) -- -- -- (350,000) Net loss........... -- -- -- -- -- (1,261,681) -- -- (1,261,681) ---------- -------- --------- ------- ---------- ----------- ------- -------- ----------- Balance, December 31, 1993........... 5,335,410 53,354 2,400,876 24,009 2,803,287 (8,318,641) 27,457 (26,191) (5,464,182) Purchase of treasury stock.... -- -- -- -- -- -- 2,028 (4,564) (4,564) Exercise of stock options........... -- -- 241,337 2,413 25,990 -- -- -- 28,403 Accretion of dividends on redeemable preferred stock... -- -- -- -- (350,000) -- -- -- (350,000) Net loss........... -- -- -- -- -- (287,067) -- -- (287,067) ---------- -------- --------- ------- ---------- ----------- ------- -------- ----------- Balance, December 31, 1994........... 5,335,410 53,354 2,642,213 26,422 2,479,277 (8,605,708) 29,485 (30,755) (6,077,410) Purchase of treasury stock.... -- -- -- -- -- -- 281 (1,930) (1,930) Retirement of treasury stock.... -- -- (29,766) (298) (32,387) -- (29,766) 32,685 -- Exercise of stock options........... -- -- 56,367 564 44,989 -- -- -- 45,553 Accretion of dividends on redeemable preferred stock... -- -- -- -- (175,000) -- -- -- (175,000) Net income......... -- -- -- -- -- 602,793 -- -- 602,793 ---------- -------- --------- ------- ---------- ----------- ------- -------- ----------- Balance, June 30, 1995 (unaudited)... 5,335,410 53,354 2,668,814 26,688 2,316,879 (8,002,915) -- -- (5,605,994) Pro forma adjustments (unaudited)....... (5,335,410) (53,354) 3,847,123 38,471 803,143 -- -- -- 788,260 ---------- -------- --------- ------- ---------- ----------- ------- -------- ----------- Pro Forma Balance, June 30, 1995 (unaudited)........ -- $ -- 6,515,937 $65,159 $3,120,022 $(8,002,915) -- $ -- $(4,817,734) ========== ======== ========= ======= ========== =========== ======= ======== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 DESKTOP DATA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------ --------------------------- 1992 1993 1994 1994 1995 ----------- ----------- ---------- ---------- ---------- (UNAUDITED) Cash flows from operating activities: Net income (loss)..... $(1,433,674) $(1,261,681) $ (287,067) $ (425,197) $ 602,793 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Depreciation.......... 134,996 196,127 307,369 147,210 242,850 Changes in assets and liabilities-- Accounts receivable.. (710,693) (358,350) (722,767) (676,264) 2,975 Prepaid expenses and deposits............ (73,597) (172,939) (311,603) (305,995) (260,040) Accounts payable..... 174,033 60,811 12,505 43,634 340,460 Accrued expenses..... 167,665 185,701 912,086 440,461 918,579 Deferred revenue..... 1,367,520 2,195,833 2,602,930 1,479,499 2,516,128 ----------- ----------- ---------- ---------- ---------- Net cash provided by (used in) operating activities......... (373,750) 845,502 2,513,453 703,348 4,363,745 ----------- ----------- ---------- ---------- ---------- Cash flows from investing activities: Purchase of property and equipment........ (237,559) (383,648) (634,946) (335,488) (558,157) Increase in other assets............... (7,317) -- (24,000) -- (14,559) ----------- ----------- ---------- ---------- ---------- Net cash used in investing activities......... (244,876) (383,648) (658,946) (335,488) (572,716) ----------- ----------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from sale of redeemable preferred stock, net of issuance costs....... 1,965,198 -- -- -- -- Proceeds from exercise of stock options..... 5,845 3,632 28,403 15,035 45,553 Repayment of notes payable to stockholders......... (500,000) -- -- -- -- Purchase of treasury stock................ (8,553) (14,976) (4,564) (4,564) (1,930) Payments on obligation under capital lease.. -- -- (14,261) (1,781) (11,093) Deferred registration costs................ -- -- -- -- (136,574) ----------- ----------- ---------- ---------- ---------- Net cash provided by (used in) financing activities......... 1,462,490 (11,344) 9,578 8,690 (104,044) ----------- ----------- ---------- ---------- ---------- Increase in cash and cash equivalents...... 843,864 450,510 1,864,085 376,550 3,686,985 Cash and cash equivalents, beginning of period............. 914,991 1,758,855 2,209,365 2,209,365 4,073,450 ----------- ----------- ---------- ---------- ---------- Cash and cash equivalents, end of period................ $ 1,758,855 $ 2,209,365 $4,073,450 $2,585,915 $7,760,435 =========== =========== ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for interest.. $ 32,133 $ 2,184 $ 2,578 $ 1,197 $ 1,466 =========== =========== ========== ========== ========== Supplemental disclosure of noncash transactions: Equipment acquired under capital lease obligation........... $ -- $ -- $ 95,081 $ 95,081 $ -- =========== =========== ========== ========== ========== Accretion of dividends on redeemable preferred stock...... $ 188,900 $ 350,000 $ 350,000 $ 175,000 $ 175,000 =========== =========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Desktop Data, Inc. (the Company) was incorporated on July 11, 1988, and through its NewsEDGE service and software, delivers a large variety of news and information sources in real time to personal computers installed on LANs, 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 consolidated financial statements and notes. (a) Unaudited Pro Forma Presentation As discussed in Notes 3 and 4, all outstanding shares of Series A, Series C and Series D preferred stock will convert into common stock upon the closing of the Company's initial public offering contemplated herein. The pro forma unaudited consolidated balance sheet and statement of stockholders' deficit as of June 30, 1995 reflect the conversion of the Series A, Series C and Series D preferred stock into shares of common stock and the accrual of $1,968,765 of Series A preferred stock dividends payable upon consummation of the Company's proposed initial public offering. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and Desktop Data Canada, Inc., its wholly owned subsidiary. All material intercompany accounts and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, effective January 1, 1994. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. Under SFAS No. 115, investments for which the Company has the positive intent and ability to hold to maturity are reported at amortized cost, which approximates fair market value, and are classified as held-to-maturity. These investments include all cash equivalents. Cash equivalents have original maturities of less than three months at the time of acquisition and consist of the following:
DECEMBER 31, --------------------- JUNE 30, 1993 1994 1995 ---------- ---------- ----------- (UNAUDITED) Money market accounts..................... $1,141,981 $ 709,137 $6,123,536 Securities purchased under agreements to resell................................... 900,000 1,800,000 -- U.S. Treasury bills....................... -- 986,730 999,829 ---------- ---------- ---------- $2,041,981 $3,495,867 $7,123,365 ========== ========== ==========
(d) Depreciation 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. (e) Research and Development and Software Development Costs Research and development costs are expensed as incurred. SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed, requires the capitalization of certain F-7 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) 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. (f) Revenue Recognition Revenues in the accompanying consolidated statements of operations consist of the following:
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------- ---------------------- 1992 1993 1994 1994 1995 ---------- ---------- ----------- ---------- ----------- (UNAUDITED) Subscription and royalty revenues............... $3,440,567 $6,764,028 $12,925,145 $5,529,924 $ 9,820,463 Other revenues.......... 766,209 896,149 1,432,479 717,786 678,097 ---------- ---------- ----------- ---------- ----------- $4,206,776 $7,660,177 $14,357,624 $6,247,710 $10,498,560 ========== ========== =========== ========== =========== 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, and consist of the following: SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------- ---------------------- 1992 1993 1994 1994 1995 ---------- ---------- ----------- ---------- ----------- (UNAUDITED) Installation services... $ 233,450 $ 412,700 $ 497,223 $ 264,836 $ 342,476 Hardware sales.......... 193,877 351,338 262,438 194,579 124,073 Development projects.... 338,882 132,111 672,818 258,371 211,548 ---------- ---------- ----------- ---------- ----------- $ 766,209 $ 896,149 $ 1,432,479 $ 717,786 $ 678,097 ========== ========== =========== ========== ===========
Cost of revenues includes royalties payable to news service and transmission providers and is expensed over the term of the subscription agreement. (g) Foreign Currency Translation The functional currency of the Company's foreign subsidiary is the U.S. dollar. Monetary assets and liabilities are translated using the exchange rate in effect at the end of the period, while non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated using exchange rates in effect during the period. Gains or losses from foreign currency translation are expensed as incurred. There were no significant gains or losses from foreign currency translations during any period presented. (h) Postretirement Benefits The Company has no obligations for postretirement benefits. (i) Concentration of Credit Risk SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration 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. No single customer accounted for greater than 10% of revenues or represents a significant credit risk to the Company. F-8 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (j) Pro forma Net Income (Loss) Per Common and Common Equivalent Share For the year ended December 31, 1994, and for the six months ended June 30, 1994 and 1995, pro forma net income (loss) per common and common equivalent share is computed by dividing net income (loss), less the charge for the accretion of the Series B preferred stock, by the pro forma weighted average number of common and dilutive common stock equivalent shares outstanding during that period, plus the number of shares of common stock issuable upon conversion of all shares of Series A, Series C and Series D preferred stock and the number of shares of common stock to be issued pursuant to the proposed initial public offering sufficient to generate proceeds for the payment of approximately $2,660,000 of dividends on the Series A and Series B preferred stock which will be paid upon consummation of the proposed initial public offering. Stock options granted after July 1, 1994 have been reflected as outstanding for all periods presented, using the treasury stock method required by the Securities and Exchange Commission. Other common stock equivalents have not been included for the year ended December 31, 1994 and the six months ended June 30, 1994, as the amounts would be antidilutive. Historical net income (loss) per share data has not been presented, as such information is not considered to be relevant or meaningful. (k) Interim Financial Statements The accompanying consolidated balance sheet as of June 30, 1995, the consolidated statements of operations and cash flows for the six months ended June 30, 1994 and 1995, and the consolidated statement of stockholders' deficit for the six months ended June 30, 1995, are unaudited, but in the opinion of management, include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for these interim periods. The results of operations for the six months ended June 30, 1995 are not necessarily indicative of results to be expected for the entire year. (l) New Accounting Standard During October 1994, the Financial Accounting Standards Board issued SFAS No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, which requires disclosures about derivative financial instruments. SFAS No. 119 will be effective for 1995. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. (2) INCOME TAXES The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes, the objective of which is to recognize the amount of current and deferred income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements as measured by enacted tax laws. At December 31, 1994, the Company has net operating loss carryforwards for federal income tax purposes of approximately $6,800,000. The net operating loss carryforwards expire from 2004 through 2008 and are subject to review and possible adjustment by the Internal Revenue Service. The Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards available to be used in any given year in the event of significant changes in ownership interest. F-9 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (2) INCOME TAXES--(CONTINUED) The approximate income tax effect of each type of temporary difference and carryforward is as follows:
DECEMBER 31, ------------------------ 1993 1994 ----------- ----------- Net operating loss carryforwards................... $ 2,933,000 $ 2,756,000 Deferred revenue................................... -- 185,000 Nondeductible accruals............................. 64,000 168,000 Nondeductible depreciation......................... 40,000 56,000 Other temporary differences........................ (5,000) (5,000) Valuation allowance................................ (3,032,000) (3,160,000) ----------- ----------- $ -- $ -- =========== ===========
Due to the uncertainty surrounding the realization of the net deferred tax asset, the Company has provided a full valuation allowance against this amount. The increase in the valuation allowance from December 31, 1993 to December 31, 1994 is primarily the result of 1994 operations. The provision for income taxes in the accompanying consolidated statement of operations for the six months ended June 30, 1995 represents the alternative minimum tax due, as required under the Internal Revenue Code, and state taxes due in states that do not have net operating loss carryforwards available. (3) 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. The underlying agreements place certain restrictions on the Company with respect to the use of funds and transfers of ownership, among others. The rights, preferences and privileges of the redeemable preferred stock are as follows. (a) Liquidation Preferences and Voting Rights The redeemable preferred stockholders have a preference in liquidation, pari passu with the holders of Series A preferred stock, over common stockholders of $100 per share plus any accrued and unpaid dividends whether or not declared. If the offering price of the Company's common stock in a public offering exceeds $13.10 per share and all accrued dividends on the Series B preferred stock have been paid through that date, the liquidation value per share of the Series B preferred stock may be reduced to a minimum of $.01 depending upon the proceeds received by certain stockholders following the conversion of the Series C preferred stock into shares of common stock. Series C and Series D preferred stockholders are entitled to one vote on an as-converted basis for each share of common stock issuable upon conversion. The Series B preferred stockholders have no voting rights. F-10 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (3) REDEEMABLE PREFERRED STOCK--(CONTINUED) (b) Conversion Each share of Series C and Series D preferred stock is convertible at any time into approximately 534.90 shares and 33.68 shares of common stock, respectively, subject to adjustment for certain dilutive events. Conversion is at the option of the stockholder; however, upon a public offering of the Company with gross proceeds and a price per share of at least $10,000,000 and $5.61, respectively, the Company may require the conversion of all shares of the Series C and Series D preferred stock. The Series B preferred stock is not convertible. (c) Dividends Dividends accrue cumulatively on the Series B, Series C and Series D preferred stock at an annual rate of $10.00 per share, whether or not declared, and are payable upon redemption (except under certain circumstances, as described below) or liquidation, unless earlier declared by the Board of Directors. At June 30, 1995, dividends of $613,125, $68,125 and $538,900, on the Series B, Series C and Series D preferred stock, respectively, have accrued. No dividends are payable on the Series C and Series D preferred stock upon the conversion into common stock in the event of a public offering. No dividends may be paid on the Company's common stock while the Series B preferred stock remains outstanding. (d) Redemption The Company is obligated to redeem the Series B and Series C preferred stock on December 14, 1995. The redemption price is equal to the liquidation value, as defined above. In the event that the Series B liquidation value has been reduced to $.01 per share, the Series B redemption price shall not include dividends accrued through that date. The mandatory redemption requirement related to Series B preferred stock is relieved upon a public offering with an offering price which exceeds $13.10 per share. The Company is obligated to redeem the Series D preferred stock, together with accrued but unpaid dividends, on October 20, 1997. The Company may also be required to redeem the Series B, Series C and Series D preferred stock upon a greater than 50% change in ownership, as defined, and in the event of certain defined defaults. The Company may, at any time, redeem any or all of the then outstanding Series B preferred stock at the redemption price noted above. (4) SERIES A CONVERTIBLE PREFERRED STOCK The rights, preferences and privileges of the Series A convertible preferred stock (the Series A preferred stock) are as follows. (a) Liquidation Preferences and Voting Rights Series A preferred stockholders have a preference in liquidation, pari passu with the holders of the redeemable preferred stock, over common stockholders of $.656 per share plus any accrued and unpaid dividends whether or not declared. Series A preferred stockholders are entitled to vote as if the preferred stock had been converted into common stock. F-11 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (4) SERIES A CONVERTIBLE PREFERRED STOCK--(CONTINUED) (b) Conversion Each share of Series A preferred stock is convertible into approximately .444 shares of common stock, subject to adjustment for certain dilutive events. Conversion is at the option of the stockholder; however, the Company may require the conversion of all the Series A preferred stock upon any of the following: (i) the closing of a public offering of the Company's common stock, (ii) approval by a majority of the holders of the then outstanding shares of Series A preferred stock, or (iii) at such a time that less than 40% of the originally issued Series A preferred stock remains outstanding. (c) Dividends Dividends accrue cumulatively at $.0656 per share per annum, whether or not declared, and are payable upon liquidation or mandatory conversion. Dividends on Series A preferred stock are payable in cash or, upon the occurrence of certain events, in shares of common stock at the Company's option. As of June 30, 1995, $1,968,765 of dividends have accrued to Series A preferred stockholders. (5) STOCK OPTION PLAN The Company has a stock option plan (the Plan) pursuant to which 622,222 shares of common stock are reserved for issuance. The Plan is administered by the Board of Directors and provides for the granting of incentive stock options, non-statutory stock options, stock awards and direct stock purchases. Under the Plan, the Company has granted non-statutory stock options to certain employees. The options vest generally over a four-year period and expire not more than five years from the date of grant. The Company has the right to repurchase shares acquired through these options upon the occurrence of certain events. The Company also has the right of first refusal to repurchase any shares of stock acquired from the exercise of options should the optionholder decide to sell them. The Company's right of first refusal will expire upon a public offering with proceeds to the Company of at least $5,000,000. The following schedule summarizes the nonqualified stock option activity:
NUMBER OF OPTIONS PRICE RANGE ---------- ----------- Outstanding, December 31, 1991....................... 302,261 $ .02-$ .68 Granted............................................ 117,851 .90- 1.24 Exercised.......................................... (23,271) .02- .68 Terminated......................................... (17,042) .02- .90 -------- ----------- Outstanding, December 31, 1992....................... 379,799 .02- 1.24 Granted............................................ 77,823 1.24 Exercised.......................................... (10,180) .02- .90 Terminated......................................... (7,022) .02- 1.24 -------- ----------- Outstanding, December 31, 1993....................... 440,420 .02- 1.24 Granted............................................ 91,655 2.25- 2.81 Exercised.......................................... (241,337) .02- 1.24 Terminated......................................... (14,857) .34- 2.81 -------- ----------- Outstanding, December 31, 1994....................... 275,881 .34- 2.81 Granted............................................ 65,036 4.50- 7.43 Exercised.......................................... (56,367) .34- 2.25 Terminated......................................... (9,448) 1.24- 4.50 -------- ----------- Outstanding, June 30, 1995........................... 275,102 $ .34-$7.43 ======== =========== Exercisable, June 30, 1995........................... 99,111 $ .34-$2.25 ======== ===========
F-12 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (6) COMMITMENTS (a) Operating Leases The Company conducts its operations in facilities under operating leases expiring through 1996. The Company's future minimum lease payments under these leases as of December 31, 1994 are approximately as follows:
YEAR AMOUNT ---- -------- 1995............................ $344,000 1996............................ 63,000 -------- $407,000 ========
Rent expense charged to operations was approximately $240,000, $319,000 and $452,000 for the years ended December 31, 1992, 1993 and 1994, respectively, and $200,000 and $242,000 for the six months ended June 30, 1994 and 1995, respectively. (b) Capital Lease The Company leases equipment under a capital lease. Future minimum lease payments under the capital lease as of December 31, 1994 are as follows:
YEAR AMOUNT ---- ------- 1995................................................................. $21,530 1996................................................................. 21,530 1997................................................................. 21,530 1998................................................................. 21,530 1999................................................................. 5,383 ------- Total minimum lease payments......................................... 91,503 Less--Amount representing interest................................... 10,684 ------- Obligation under capital lease....................................... 80,819 Less--Current portion of capital lease obligation.................... 19,016 ------- $61,803 =======
(7) PREPAID EXPENSES AND DEPOSITS Prepaid expenses and deposits in the accompanying consolidated balance sheets consist of the following:
DECEMBER 31, ------------------- JUNE 30, 1993 1994 1995 -------- ---------- ----------- (UNAUDITED) Prepaid commissions.......................... $342,088 $ 597,729 $ 787,197 Other........................................ 90,725 146,687 217,259 -------- ---------- ---------- $432,813 $ 744,416 $1,004,456 ======== ========== ==========
F-13 DESKTOP DATA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (8) ACCRUED EXPENSES Accrued expenses in the accompanying consolidated balance sheets consist of the following:
DECEMBER 31, ------------------- JUNE 30, 1993 1994 1995 -------- ---------- ----------- (UNAUDITED) Payroll and payroll-related.................. $348,107 $ 697,647 $ 709,385 Other........................................ 369,026 931,572 1,838,413 -------- ---------- ---------- $717,133 $1,629,219 $2,547,798 ======== ========== ==========
(9) SUBSEQUENT EVENTS (a) Stock Split On June 26, 1995, the Company's stockholders approved a 1-for-2.25 reverse stock split of the common stock. The reverse stock split has been retroactively reflected in the accompanying consolidated financial statements and notes for all periods presented. (b) Stock Plans On June 26, 1995, the Company's stockholders approved the 1995 Stock Plan, which allows for stock awards, direct purchases and the grant of options to purchase shares of the Company's common stock. A maximum of 625,000 shares may be issued under the plan. The stockholders also approved the 1995 Non-Employee Director Stock Option Plan, which allows for the grant of options to purchase up to 100,000 shares of the Company's common stock to the directors of the Company, and the 1995 Employee Stock Purchase Plan, which permits eligible employees to purchase up to an aggregate of 175,000 shares of the Company's common stock at a price per share equal to 85% of the fair market value during certain specified periods. (c) Authorized Preferred Stock On June 26, 1995, the Company's stockholders approved a new class of undesignated preferred stock, subject to the closing of the initial public offering contemplated herein, after which time the Series A, Series C and Series D preferred stock will no longer be authorized. F-14 [ARTWORK APPEARS HERE] NEWSEDGE SERVER SOFTWARE NEWSFEED DELIVERY . Dedicated PC Server . Satellite . OS/2 or Windows NT . FM . May be duplexed for fault- . Leased Line tolerant applications NEWSEDGE CLIENT INTERFACES LANS SUPPORTED . Windows . Novell Netware . Lotus Notes . FTP's PC/TCP . OSF/Motif . Banyan VINES . Macintosh . Microsoft LAN Manager . OS/2 Presentation Manager . IBM LAN Server . Windows NT . DEC Pathworks . E-Mail . API - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 The Company............................................................... 11 Use of Proceeds........................................................... 11 Dividend Policy........................................................... 12 Capitalization............................................................ 13 Dilution.................................................................. 14 Selected Consolidated Financial and Operating Data........................ 15 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 17 Business.................................................................. 24 Management................................................................ 33 Certain Transactions...................................................... 37 Principal and Selling Stockholders........................................ 38 Description of Capital Stock.............................................. 39 Shares Eligible for Future Sale........................................... 43 Underwriting.............................................................. 46 Legal Matters............................................................. 47 Experts................................................................... 47 Additional Information.................................................... 48 Index to Consolidated Financial Statements................................ F-1
------------ UNTIL SEPTEMBER 5, 1995 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL- ERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,000,000 Shares [LOGO OF DESKTOP DATA, INC. APPEARS HERE] Desktop Data, Inc. Common Stock ------------ PROSPECTUS ------------ Alex. Brown & Sons INCORPORATED Volpe, Welty & Company August 11, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----