FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: June 30, 2000
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-26540
-------
NewsEdge Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 04-3016142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Blanchard Road
Burlington, Massachusetts 01803
(Address of principal executive offices)
(781) 229-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 60 days. Yes X . No ___.
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at July 31, 2000
- ------------------- ----------------------------
Common Stock, par value $.01 17,717,140
NEWSEDGE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999
Notes to the Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 6(a) Exhibits
Item 6(b) Reports on Form 8-K
Signature
Exhibit Index
Exhibit
2
PART I - FINANCIAL INFORMATION
ITEM 1
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2000 1999
--------------------- ---------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 20,004 $ 20,278
Accounts receivable 12,720 11,280
Due from WinStar 3,000 -
Prepaid expenses and deposits 6,433 5,132
--------------------- ---------------------
Total current assets 42,157 36,690
--------------------- ---------------------
Property and equipment, net 7,732 9,398
--------------------- ---------------------
Other assets 1,124 1,766
--------------------- ---------------------
Total assets $ 51,013 $ 47,854
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,313 $ 2,869
Accrued expenses 16,504 14,837
Deferred revenue, current 27,348 23,010
Current portion of long-term obligations 74 303
--------------------- ---------------------
Total current liabilities 48,239 41,019
--------------------- ---------------------
Deferred revenue, noncurrent 222 124
--------------------- ---------------------
Stockholders' equity:
Common stock 182 181
Additional paid-in capital 130,783 130,136
Cumulative translation adjustment (87) (58)
Accumulated deficit (125,600) (120,822)
Treasury stock, at cost; 432,000 shares (2,726) (2,726)
--------------------- ---------------------
Total stockholders' equity 2,552 6,711
--------------------- ---------------------
Total liabilities & stockholders' equity $ 51,013 $ 47,854
===================== =====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Total revenues $ 17,672 $ 18,441 $ 35,001 $ 36,801
Costs and expenses:
Cost of revenues 7,605 7,616 15,171 15,336
Customer support expenses 1,345 1,226 2,843 2,519
Development expenses 2,384 2,146 5,627 4,485
Sales and marketing expenses 7,685 7,807 17,451 15,744
General and administrative expenses 1,420 723 4,013 1,450
Merger, disposition and other charges (453) - (453) -
-------- -------- -------- --------
Total costs and expenses 19,986 19,518 44,652 39,534
-------- -------- -------- --------
Loss from operations (2,314) (1,077) (9,651) (2,733)
Interest income and other, net 275 456 504 888
-------- -------- -------- --------
Loss from continuing operations before provision for
Income taxes (2,039) (621) (9,147) (1,845)
Provision for income taxes 15 18 39 51
-------- -------- -------- --------
Net loss from continuing operations (2,054) (639) (9,186) (1,896)
Loss from discontinued operations, net - (1,972) (1,859) (3,900)
Net gain on disposal of Individual.com, Inc. 773 - 6,267 -
-------- -------- -------- --------
Income (loss) from discontinued operations 773 (1,972) 4,408 (3,900)
-------- -------- -------- --------
Net Loss $ (1,281) $ (2,611) $ (4,778) $ (5,796)
======== ======== ======== ========
Basic and diluted net loss per share
Continuing operations $ (0.12) $ (0.04) $ (0.52) $ (0.11)
Discontinued operations 0.04 (0.11) 0.24 (0.22)
-------- -------- -------- --------
Total $ (0.08) $ (0.15) $ (0.28) $ (0.33)
======== ======== ======== ========
Weighted average common shares outstanding 17,696 17,351 17,690 17,328
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended
June 30,
--------------------------------------------------
2000 1999
--------------------- ---------------------
Cash flows from operating activities:
Net loss $ (4,778) $ (5,797)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,435 1,972
Gain from disposal of Individual.com, Inc. (5,494) -
Gain on disposal of property and equipment - -
Changes in assets and liabilities:
Accounts receivable (2,217) 1,031
Prepaid expenses and deposits (1,301) (54)
Accounts payable and accrued expenses 2,926 (2,887)
Deferred revenue 4,319 2,900
--------------------- ---------------------
Net cash used in operating activities (4,110) (2,835)
--------------------- ---------------------
Cash flows from investing activities:
Net proceeds from disposal of Individual.com, Inc. 4,368 -
Decrease in investments, net - 3,782
Purchases of property and equipment (1,023) (1,835)
Decrease in other assets 3 4
--------------------- ---------------------
Net cash provided by investing activities 3,348 1,951
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from issuances related to stock plans, including tax benefits 648 1,217
(Increase) Decrease in long-term obligations 98 (355)
Purchase of treasury stock - (484)
Principal payments under capital leases (229) (250)
--------------------- ---------------------
Net cash provided by financing activities 517 128
--------------------- ---------------------
Effect of exchange rate on cash and cash equivalents (29) (114)
--------------------- ---------------------
Decrease in cash and cash equivalents (274) (870)
Cash and cash equivalents, beginning of period 20,278 37,808
--------------------- ---------------------
Cash and cash equivalents, end of period $ 20,004 $ 36,938
===================== =====================
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 31 $ 44
===================== =====================
Cash paid for interest $ 16 $ 42
===================== =====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
NEWSEDGE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of the Business
NewsEdge Corporation ("the Company") is a leading provider of eContent
applications for business web sites and enterprise intranets. The Company's
mission is to make news and information valuable for business. NewsEdge
services provide access to value-added news over the Internet or customer
intranets. The Company aggregates and adds value to news and information from
over 2,000 sources published by over one hundred global content providers. This
information is customized and filtered so that users can readily find the most
important, relevant stories from the overwhelming volume of daily news that is
available.
NewsEdge Corporation is headquartered in Burlington, Massachusetts, with sales
offices and distributors throughout North America, South America, Europe, Asia
and the Middle East.
On December 7, 1999, the Company entered into a purchase and sale agreement
with RoweCom, Inc., whereby RoweCom would purchase all of the outstanding shares
of common stock of the Company for approximately $227 million. The acquisition
was subject to the approval of the stockholders of both companies. On March 6,
2000, the agreement was mutually terminated by both parties. The Company
incurred costs of $1.4 million, comprised of legal, employee retention and
acquisition-related expenses charged to operations during the first quarter of
2000. During the second quarter of 2000, the Company incurred an additional
$668,000 relating to remaining employee retention expenses.
In March 2000, the Company's Board of Directors approved, and in early May
2000, the Company announced a strategic expansion of its traditional business
focus. In order to capitalize on its media sources, personalization strategy,
and international sales and support infrastructure the Company has moved into
the eContent business marketplace by offering competitive eContent applications
for business web sites and enterprise intranets. eContent is the constantly
changing information required for web-sites to encourage and foster high
frequency usage and support other web-based interactions. The Company believes
that syndicated eContent and contextual commerce (the ability to map business
content to transaction opportunities) offerings, in addition to providing
infrastructure and solution applications to the Company's clients, will allow
the Company to drive traffic and commerce on its client's web sites. The Company
incurred $2,066,000 of non-recurring expenses charged to operations as of June
30, 2000 related to transitioning the Company to its new strategic direction.
These costs were comprised primarily of asset write-offs and reserves.
2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements of the Company presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company and its subsidiaries.
Quarterly operating results are not necessarily indicative of the results that
would be expected for the full year.
6
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents and Investments
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company's investments are classified as held-to-maturity and
are recorded at amortized cost. Cash equivalents consist of highly-liquid
investments purchased with an original maturity of three months or less.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year's presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
This SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective in the fourth quarter 2000. The Company
does not expect the adoption of SAB 101 to have a material impact on the
Company's results of operations.
3. Discontinued Operations
On February 18, 2000, the Company entered into a purchase and sale agreement
to sell its ownership interest in its wholly owned subsidiary, Individual.com,
Inc. Upon the initial closing, the Company sold 80% of its ownership interest
in Individual.com, Inc. for a purchase price of $8,000,000 payable by $2,500,000
in cash and $5,500,000 in installment receivables payable through December 2000.
Upon a second closing which is scheduled to occur in February 2001, the Company
expects to receive an additional $2,000,000 in consideration for the remaining
20% ownership interest. The Company received $2,500,000 on both February 18,
2000 and May 1, 2000 representing the initial purchase and first installment
balances due. Individual.com, Inc. operated the Company's single-worker news
service business unit, which derives its revenues from targeted advertising and
electronic commerce.
7
The Company estimates a total gain on the sale of Individual.com totaling
$8,267,000 before applicable income taxes. The Company also made payments to
retain the Individual.com workforce, which along with other transaction fees,
have been included as a reduction in the gain on the sale. The Company recorded
$5,494,000 of the gain in February 2000. In the second quarter of 2000, the
Company recorded an adjustment to the sale transaction expenses in the amount of
$773,000. The Company expects to record the remainder of the gain in February
2001, when the second of the two closings is expected to occur.
Subsequent to the close of the second quarter of 2000, the Company completed
the sale of the remaining 20% of Individual.com. Under the terms of the new
agreement, the Company will receive a $3.0 million payment on September 1, 2000,
a $1.0 million payment on December 31, 2000 and the final $1.0 million payment
on February 28, 2001. As a result of this agreement, the Company will report a
gain in the third quarter of 2000 of approximately $2.0 million.
The Company has presented the operating results of Individual.com, Inc. as
discontinued operations for all periods presented. The Company has not restated
the consolidated balance sheet for the net assets of Individual.com, Inc., which
total $1.2 million at December 31, 1999. Included in these results are revenues
from the Individual.com business for the three- and six month periods ending
June 30, 2000 were $0 and $297,000, respectively, as compared to $1,137,000 and
$2,156,000, respectively for the same periods in 1999.
4. Segment Reporting
On December 31, 1998, NewsEdge Corporation adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. This pronouncement
established standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance of the business.
The Company evaluates its continuing operations in two product segments:
Enterprise and Other.
The Company pursues the market for news and current awareness through one
primary line of business: the Enterprise business. The Enterprise business uses
direct selling and telesales efforts and targets large organizations and
individual websites. The Enterprise services deliver news and information to
large numbers of users within organizations through their corporate intranet or
local area networks and to destination websites as a content service for
visitors of those sites.
In addition to the Enterprise business, the Company also reports a segment of
Other, which consists of services which were phased out by the Company during
1999.
Segment data excludes information pertaining to the discontinued operations of
Individual.com, Inc. (see Note 3).
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
of its segments based on revenues and segment profitability. Segment
profitability is defined by the Company as profit or loss from operations before
income taxes, interest and merger, disposition and other charges. Noncash
expenses included in the segment profitability measure have been detailed
separately in the table below. The Company does not evaluate the assets of each
operating segment separately as the majority of such assets are commingled and
transferable among the different segments.
8
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
--------------------- ---------------------
(in thousands)
Revenues:
Enterprise $ 17,672 $ 18,051 $ 35,001 $ 35,770
Other - 390 - 1,031
--------------------- ---------------------
Total revenues $ 17,672 $ 18,441 $ 35,001 $ 36,801
===================== =====================
Loss from continuing operations before mergers,
dispositions and other charges, interest and income
taxes:
Enterprise $ (2,767) $ (957) $(10,104) $ (2,661)
Other - (120) - (72)
Noncash expenses by segment:
Enterprise $ 860 $ 817 $ 2,414 $ 1,583
Other - 21 - 48
5. Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 requires that items defined as other
comprehensive income, such as foreign currency translation adjustments, be
separately classified in the financial statements and that the accumulated
balance of other comprehensive income be reported separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The components of comprehensive income for the three and six months ended
June 30, 2000 and 1999 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands)
----------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------
Comprehensive income (loss):
Net loss $ (1,281) $ (2,611) $ (4,778) $ (5,797)
Other comprehensive income (loss):
Foreign currency adjustment (106) (70) (29) (114)
----------------------------------------------------------
Comprehensive loss $ (1,387) $ (2,681) $ (4,807) $ (5,911)
==========================================================
6. Earnings Per Share
In accordance with SFAS No. 128, Earnings per Share, basic and diluted
earnings per share were computed by dividing net loss by the weighted average
number of common shares outstanding during the first six months of 2000 and
1999. Diluted earnings per share excludes shares issuable from the assumed
exercise of 5,022,886 and 4,092,679 of stock options and warrants as of June 30,
2000 and 1999, respectively, as their effect would be antidilutive.
9
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's business; (iii) the Company's ability
to expand its service offerings; and (iv) the Company's ability to satisfy
working capital requirements. These forward-looking statements are based
largely on the Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual
results could differ materially from these forward-looking statements as a
result of a number of factors including, but not limited to, those factors
described in "Certain Factors Affecting Future Operating Results" contained in
the Company's Annual Report on Form 10-K for the fiscal year ended 1999.
Introduction and Overview
NewsEdge Corporation (the Company) is a leading provider of eContent
applications for business web sites and enterprise intranets. The Company's
mission is to make news and information valuable for business. NewsEdge
services provide access to value added news over the Internet or customer
Intranets. The Company aggregates and adds value to news and information from
over 2,000 sources published by over one hundred global content providers. This
information is customized and filtered so that users can readily find the most
important, relevant stories from the overwhelming volume of daily news that is
available.
The market for news and current awareness is pursued by the Company through
its Enterprise business, which uses a direct selling effort and targets large
organizations. The Enterprise services deliver news and information to large
numbers of users within organizations through their corporate Intranet or local
area networks and to destination websites as a content service for visitors of
those sites. The Company's Enterprise revenues consist primarily of
subscription fees related to the various Enterprise service offerings and
eContent products and services. Additionally, Enterprise revenues include
royalty revenues generated from content sales billed directly by third party
information providers to customers, revenue generated from professional
consulting services and revenue generated from installations and related
computer hardware sales.
Individual.com, Inc. operated the Company's single-worker news service
business unit, which derived its revenues from targeted advertising and
electronic commerce. On February 18, 2000, the Company, Office.com and
Individual.com, Inc. entered into the purchase and sale agreement providing for
the sale by the Company of all the issued and outstanding capital stock of
Individual.com, Inc. to Office.com. An initial purchase and sale of 4,000,000
of the shares occurred on February 18, 2000. The purchase and sale of the
remaining 1,000,000 shares shall occur no later than February 28, 2001.
Pursuant to the purchase agreement, the aggregate purchase price for the total
5,000,000 shares was $10,000,000 in cash payable in installments on February 18,
2000, May 1, 2000, December 26, 2000 and February 28, 2001.
Subsequent to the close of the second quarter of 2000, the Company completed
the sale of the remaining 20% of Individual.com. Under the terms of the new
agreement, the Company will receive a $3.0 million payment on September 1, 2000,
a $1.0 million payment on December 31, 2000 and the final $1.0 million payment
on February 28, 2001. As a result of this agreement, the Company will report a
gain in the third quarter of 2000 of approximately $2.0 million.
The Company estimates a total gain on the sale of Individual.com totaling
$8,267,000 before applicable income taxes. The Company also made payments to
retain the Individual.com workforce, which along with other transaction fees,
have been included as a reduction in the gain on the sale. The Company recorded
$5,494,000 of the gain in February 2000. In the second quarter of 2000, the
Company recorded and adjustment to the sale transaction in the amount of
$773,000. The Company expects to record the remainder of the gain in February
2001, as the second of the two closings is expected to occur.
10
In addition to the Enterprise business, the Company also reports a segment of
"other" revenue, which consists of services which were phased out by the Company
during 1999. The Company's "other" revenues consist primarily of subscription
fees generated from sales of services. The Company now reports the
Individual.com business as discontinued operations.
Subscription agreements across all product segments are primarily for an
initial term of twelve months, payable in advance, and are automatically
renewable for successive one-year periods unless the customer delivers notice of
termination prior to the expiration date of the then current agreement.
Subscription revenues associated with these agreements are recognized ratably
over the subscription term, beginning upon installation of the service.
Accordingly, a substantial portion of the Company's revenues is recorded as
deferred revenue.
Certain newswires offered by the Company for use within its services are
purchased by the customer directly from the news provider and payments are made
directly from the NewsEdge customer to the provider. For some of these
newswires, the Company receives royalty revenue based on payments made by the
customer to the news provider. For other newswires that are resold by the
Company to the NewsEdge customer, the Company bills the customer for the
newswire directly and then pays a royalty to the news provider. Such royalty
expenses are included in the Company's cost of revenues.
The Company is headquartered in Burlington, Massachusetts, with sales offices
and distributors throughout North America, South America, Europe, Asia and the
Middle East.
On December 7, 1999, the Company entered into a purchase and sale agreement
with RoweCom, Inc., whereby RoweCom would purchase all of the outstanding shares
of common stock of the Company for approximately $227 million. The acquisition
was subject to the approval of the stockholders of both companies. On March 6,
2000, the agreement was mutually terminated by both parties. The Company
incurred costs of $1.4 million, comprised of legal, retention and acquisition
related expenses charged to operations during the first quarter of 2000. During
the second quarter of 2000, the Company incurred an additional $668,000 related
to remaining employee retention expenses.
In March 2000, the Company's Board of Directors approved, and in early May
2000, the Company announced a strategic expansion of its traditional business
focus. In order to capitalize on its media sources, personalization strategy,
and international sales and support infrastructure the Company has moved into
the eContent business marketplace by offering competitive eContent applications
for business web sites and enterprise intranets. eContent is the constantly
changing information required for web-sites to encourage and foster high
frequency usage and support other web-based interactions. The Company believes
that syndicated eContent and contextual commerce (the ability to map business
content to transaction opportunities) offerings, in addition to providing
infrastructure and solution applications to the Company's clients, will allow
the Company to drive traffic and commerce on its client's web sites. The
Company incurred $2,066,000 of non-recurring expenses charged to operations
as of June 30, 2000 related to transitioning the Company to its new strategic
direction. These costs were comprised primarily of asset write-offs and
reserves.
Results of Operations for the Three- and Six- Month Periods Ended June 30, 2000
as Compared to the Three-and Six- Month Periods Ended June 30, 1999
Revenues
Total revenues for the three-month period ended June 30, 2000 decreased 3.8%
to $17.7 million compared to $18.4 million for the same period in 1999. Total
revenues for the six months ended June 30, 2000 decreased 4.9% to $35.0 million
compared to $36.8 million during the same period in 1999. The decrease is
primarily due to declines in revenues from both the Company's enterprise product
line and other harvested lines.
Enterprise revenue for the three-month period ended June 30, 2000 decreased
2.2% to $17.7 million as compared to $18.1 million in 1999. Enterprise revenue
for the six months ended June 30, 2000 decreased 2.2% to $35.0 million as
compared to $35.8 million for the same period in 1999. The decrease reflects
disappointing new orders rates at the end of the fourth quarter of 1999 when our
sales force was distracted by the impending RoweCom merger transaction and the
highly competitive environment that has been affecting our enterprise business.
11
Other revenues consist of revenues from product lines being terminated or de-
emphasized by the Company. During the three- and six-months ended June 30, 1999
the Company recorded $390,000 and $1.0 million in other revenues, respectively.
No amounts were recorded during the comparable period in 2000 as these product
lines have been completely terminated by the Company.
Cost of revenues
Cost of revenues consists primarily of royalties paid to information
providers, payroll and related expenses for the editorial and news operations
staff, as well as data transmission and computer-related costs for the support
and delivery of the Company's services. Cost of revenues for the three-month
period ended June 30, 2000 and 1999 remained constant at $7.6 million. Cost of
revenues for the six month period ended June 30, 2000 decreased slightly to
$15.2 million from $15.3 million for the same period in 1999. As a percentage of
total revenues, cost of revenues for the three- and six-month periods ended June
30, 2000 increased to 43.0% and 43.4%, respectively from 41.1% and 41.6%,
respectively for the same period in 1999. The percentage increases in the three-
and six-month periods ended June 30, 2000 compared to the same periods in 1999
were primarily due to new fixed-price contracts with information providers.
On a sequential basis, the gross margin as a percentage of revenue increased
from 56.3% in the first quarter of 2000 to 57.0% in the second quarter of 2000,
reflecting the initial impact of a larger percentage of the Company's sales
coming from higher margin eContent business.
Customer support expenses
Customer support expenses consist primarily of costs associated with technical
support of the Company's installed base of customers. Customer support expenses
for the three-month period ended June 30, 2000 increased 8.3% to $1.3 million as
compared to $1.2 million for the same period in 1999. Customer support expenses
for the six-month period ended June 30, 2000 increased 12% to $2.8 million as
compared to $2.5 million for the same period in 1999. The increase in customer
support expenses resulted primarily from higher headcount and related expenses.
As a percentage of total revenues, customer support expenses for the three-month
period ended June 30, 2000 increased to 7.6% from 6.6% in the same period in
1999. Excluding nonrecurring charges, customer support expenses for the six-
month period ended June 30, 2000 were 8.0% of total revenues. As a percentage
of total revenues, customer support expenses for the six-month period ended June
30, 2000 increased to 8.1% from 6.8% in the same period in 1999.
Development expenses
Development expenses consist primarily of costs associated with the design,
programming, and testing of the Company's software and services. Development
expenses for the three-month period ended June 30, 2000 increased 14.3% to $2.4
million as compared to $2.1 million for the same period in 1999. Development
expenses for the six-month period ended June 30, 2000 increased 24.4% to $5.6
million as compared to $4.5 million for the same period in 1999. The increase
for the six-month period ended June 30, 2000 was primarily due to $600,000 of
expenses, which represent a write-off of a software asset, related to the
Company's new strategic direction, and the remainder of the increase is due to
new product development costs invested in the new strategy. As a percentage of
total revenues, development expenses for the three-month period ended June 30,
2000 increased to 13.5% from 11.6% in the same period in 1999. Excluding
nonrecurring charges, development expenses for the six-month period ended June
30, 2000 were 14.3% of total revenues. As a percentage of total revenues,
development expenses for the six-month period ended June 30, 2000 increased to
16.1% from 12.2% in the same period in 1999.
12
Sales and marketing expenses
Sales and marketing expenses consist primarily of compensation costs
(including sales commissions and bonuses), travel expenses, trade shows and
other marketing programs. Sales and marketing expenses for the three-month
period ended June 30, 2000 decreased 1.3% to $7.7 million as compared to $7.8
million for the same period in 1999. Sales and marketing expenses for the six-
month period ended June 30, 2000 increased 11.5 % to $17.5 million as compared
to $15.7 million for the same period in 1999. The increase for the six-month
period ended June 30, 2000, was primarily comprised of $1.0 million of expenses
related to the non-recurring charges for transitioning the Company to its new
strategic direction, which included $400,000 for a reserve for bad debts. The
remaining $800,000 of the increase in sales and marketing expenses were
primarily due to higher investments and spending in domestic and international
sales force and sales management headcount, related payroll expenses, and
events. As a percentage of total revenues, sales and marketing expenses for the
three-month period ended June 30, 2000 increased to 43.5% from 42.3% in the same
period in 1999. Excluding nonrecurring charges, sales and marketing expenses for
the six-month period ended June 30, 2000 were 47.1% of total revenues. As a
percentage of total revenues, sales and marketing expenses for the six-month
period ended June 30, 2000 increased to 49.9% from 42.8% in the same period in
1999.
Sales and marketing expenses, however, declined in the second quarter of 2000
sequentially by $1.9 million from the first quarter of 2000, excluding
nonrecurring items. This sequential decrease reflects headcount reductions,
improved sale productivity and a higher percentage of the Company's selling
resources being devoted to lower cost telesales efforts as part of its new
eContent strategy.
General and administrative expenses
General and administrative expenses consist primarily of expenses for finance,
office operations, administration and general management activities, including
legal, accounting and other professional fees. General and administrative
expenses for the three-month period ended June 30, 2000 increased $677,000 to
$1.4 million as compared to $723,000 for the same period in 1999. General and
administrative expenses for the six-month period ended June 30, 2000 increased
$2.5 million to $4.0 million as compared to $1.5 million for the same period in
1999. The increase for the six-month period ended June 30, 2000 was primarily a
result of the terminated merger agreement with Rowecom of which $668,000 of
employee retention expenses were incurred in the second quarter of 2000, and
$1.4 million of expenses were incurred during the first quarter of 2000. The
remainder of the increase was due to approximately $500,000 of expenses related
to the nonrecurring charge for transitioning the Company to its new strategic
direction. As a percentage of total revenues, general and administrative
expenses for the three-month period ended June 30, 2000 increased to 8.0% from
3.9% in the same period in 1999. Excluding nonrecurring charges, general and
administrative expenses for the three- and six-month period ended June 30, 2000
were both 4.3% of total revenues. As a percentage of total revenues, general
and administrative expenses for the six-month period ended June 30, 2000
increased to 11.5% from 3.9% in the same period in 1999.
Operating loss
Operating loss for the quarter ended June 30, 2000 was $2.3 million compared
to $1.1 million for the same period in 1999. Excluding one-time items, the
operating loss was $2.1 million, which represents an approximate 50% sequential
reduction from the $3.9 million operating loss recorded in the first quarter of
2000, excluding one-time items. This sequential reduction is due to $343,000
sequential revenue increase and $1.6 million reduction in total expenses
resulting from the Company's cost reduction efforts that began as part of its
transition to the eContent strategy.
Merger, disposition and other expenses
Merger, disposition and other related expenses for the three- and six-month
period ended June 30, 2000 consisted of the reversal of acquisition-related
reserves no longer deemed necessary by the Company. There were no merger,
disposition and other related expenses during the three- and six-month periods
ended June 30, 1999.
13
Interest income and other, net
Interest income and other, net for the three- and six-month periods ended June
30, 2000 decreased to $275,000 and $504,000, respectively from $456,000 and
$888,000, respectively for the same period in 1999. The decrease is due to a
reduction in interest income associated with lower cash and investment balances.
Provision for income taxes
The provision for income taxes for the three-and six-month periods ended June
30, 2000 decreased to $15,000 and $39,000, respectively from $18,000 and
$51,000, respectively for the same period in 1999. Components of the provisions
include state taxes due in states that do not have net operating loss carry-
forwards available, foreign tax liabilities and the alternative minimum tax due
under the Internal Revenue Code of 1986, as amended. The Company has not
recorded a deferred tax benefit in the periods presented for the potential
future benefit of its tax loss carry-forwards as the Company has concluded that
it is not likely such deferred tax asset would be realized.
Discontinued operations
In February 2000, the Company's Board of Directors decided to sell its
ownership interest in Indivdiual.com, Inc., due to the lack of growth in
revenue, increase in expenses and ongoing funding. The Company has reported the
historical operating results of its Individual.com business segment as
discontinued operations. Revenues from the discontinued operations for the
three-and six month periods ending June 30, 2000 were $0 and $297,000,
respectively, (for the time period from January 1, 2000 to the February 18, 2000
disposal date) as compared to $1,137,000 and $2,156,000, respectively for the
same periods in 1999. Revenues decreased as a result of the shorter reporting
period and the decision by new management to convert from a mix of subscription
fees and advertising revenue model to a advertising revenue only model. Expenses
from discontinued operations for the three- and six-month period ended June 30,
2000, were $0 and $2.2 million, respectively (for the time period January 1,
2000 to the February 18, 2000 sale date to Winstar) compared to $3.1 million and
$6.0 million, respectively for the same periods in 1999. See Note 3 in the
accompanying Notes to Condensed Consolidated Financial Statements.
Net Loss
The net loss for the three-month period ended June 30, 2000 was $1.3 million,
or $0.08 per which compares to a net loss of $2.6 million, or $0.15 per share
during the same period in 1999. The second quarter of 2000 results reflect the
favorable impact of a $773,000 net gain relating to an adjustment to sale
transaction expenses resulting from the February sale of 80% of the Company's
equity interest in Individual.com, Inc. In addition, the results for the quarter
ended June 30, 1999 include the operating loss from discontinued operations of
approximately $2.0. As a result, the net loss from continuing operations
increased to $2.1 million for the quarter ended June 30, 2000, or $0.12 per
share, compared to $639,000, or $0.04 per share for the same period in 1999.
The net loss for the six-month period ended June 30, 2000 was $4.8 million, or
$0.28 per share, respectively, which compares to a net loss of $5.8 million, or
$0.33 per share, respectively during the same period in 1999. The six-month
ended June 30, 2000 results reflect the favorable impact of the $6.3 million net
gain on the February sale of 80% of the Company's equity interest in
Individual.com, Inc., offset by $1.9 million of operating loss from discontinued
operations for the period prior to the sale. The net loss from continuing
operations for the six-month period ended June 30, 2000 increased to $9.2
million, or $0.52 per share, compared to $1.9 million, or $0.10 per share for
the same period in 1999. The increase resulted from two different nonrecurring
charges taken in the first six months of 2000 totaling $4.1 million, of which
$2.0 million was related to retention payments, transaction costs, and expenses
incurred as part of the termination of the RoweCom, Inc. acquisition. An
additional $2.1 million in asset write-offs and reserves associated with costs
to be incurred in transitioning the Company to the new strategy were also
recorded in the first quarter of 2000. Excluding all the year-to-date
nonrecurring charges, net loss from continuing operations for the six months
ended June 30, 2000 amounted to $5.5 million, which compares to a net loss of
$1.9 million for the same period in 1999. The increase was due to a decline in
revenue and increased expenses within sales and marketing and development.
14
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $20.0 million at June 30,
2000, as compared to $20.3 million at December 31, 1999, a decrease of $300.000.
The Company's operations used $4.1 million of cash in the six-months ended
June 30, 2000. The use of cash in operations primarily resulted from the
Company's net loss for the period, of which $1.9 million in operating losses
were from the Individual.com, Inc. discontinued business. The Company's
investing activities provided $3.3 million of cash for the period, due primarily
to the $4.3 million net cash proceeds from the February 2000 sale of
Individual.com, Inc., partially offset by approximately $1.0 million fixed asset
purchases. The Company's financing activities provided $517,000 for the period,
derived primarily from employee stock option exercises (including tax benefits).
In connection with the sale of Individual.com Inc., the Company expects to
receive an additional $5.0 million of which $3.0 million will be received on
September 1, 2000, $1.0 million will be received on December 26, 2000 and the
final $1.0 million will be received on February 28, 2001.
The Company continues to investigate the possibility of investments in or
acquisitions of complementary businesses, services or technologies, although the
Company has not entered into any commitments or negotiations with respect to any
such transactions.
On August 4, 2000, the Company consummated a sale of 868,234 shares of its
Common Stock for an aggregate purchase price of $1,845,000. The sale was
accomplished by a private placement of the Common Stock to primarily officers,
directors and affiliates of the Company. In connection with the private
placement, the Company also issued warrants to purchase approximately 492,000
shares of Common Stock with an exercise price of $4.00 per share.
The Company believes that its current cash and cash equivalents, the expected
proceeds from the sale of Individual.com, Inc., the just completed sale of
common stock, and the impact of expense reduction programs will be sufficient to
satisfy working capital and capital expenditure requirements for at least the
next twelve months.
Certain Factors Affecting Future Operating Results
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control. Actual results could
differ materially as a result of a variety of factors. The discussion
highlights some of the risks which may affect future operating results.
Management of Growth and Hiring of Additional Personnel
The Company has experienced growth in its new eContent revenues and expansion
of its operations which have placed significant demands on the Company's
management, development, sales and customer support staff. Continued growth
will require the Company to hire and retain more development, selling and
customer support personnel. The Company has at times experienced difficulty in
recruiting and retaining qualified personnel. Recruiting and retaining qualified
personnel is an intensely competitive and time-consuming process. There can be
no assurance that the Company will be able to attract and retain the necessary
personnel to accomplish its growth strategies. Continued difficulties with the
recruiting and retention of personnel could adversely affect the Company's
ability to satisfy customer demand in a timely fashion or to support
satisfactorily its customers and operations, which could in turn, materially
adversely affect its business, operating results and financial condition.
Fluctuations in Quarterly Results
The Company's quarterly operating results may fluctuate significantly in the
future depending on factors such as demand for its services, changes in service
mix, the size and timing of new and renewal subscriptions from corporate
customers, advertising revenue levels, the effects of new service announcements
by the Company and its competitors, the ability of the Company to develop,
market and introduce new and enhanced versions of its services on a timely basis
and the level of product and price competition. A substantial portion of the
Company's cost of revenue, which consists principally of fees payable to
information providers, communications costs and personnel expenses, is
relatively fixed in nature. The operating expense levels of the Company are
based, in significant part, on their expectations of future revenue. If
quarterly revenues are below management's expectations, results of operations
would be adversely affected because a relatively small amount of the Company's
costs and expenses will vary with its revenues.
15
Future Operating Results Uncertain
The Company's ability to increase its revenues will depend upon its ability to
expand its sales force, increase sales to new customers and penetration into
existing customers, as well as its ability to successfully implement its plans
to provide digital eContent to business web-sites. In addition, as of June 30,
2000, the Company had an accumulated deficit of approximately $125.6 million.
The time required for the Company to reach profitability is highly uncertain and
there can be no assurance that the Company will be able to achieve profitability
on a sustained basis, if at all. As a result, it is possible that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected. Although the
Company experienced growth in revenues in recent years, there can be no
assurance that, in the future, the Company will sustain revenue growth or be
profitable on a quarterly or annual basis.
On May 31, 2000, the Company received a notice from the Nasdaq Stock Market,
Inc. ("Nasdaq") indicating that, as of March 31, 2000, the Company was not in
compliance with the net tangible assets maintenance standards required for
continued listing on the Nasdaq National Market System. The Company thereafter
requested a hearing before a Nasdaq panel to evaluate the Company's ability to
satisfy the maintenance standards established by Nasdaq and that hearing has
been scheduled for August 10, 2000. If the Nasdaq panel makes an adverse
determination regarding the Company's continued listing, the Company's stock may
not continue to be listed on the Nasdaq National Market System. In that
circumstance, the Company will seek to have its Common Stock continue to be
listed on Nasdaq's Small Cap Market or on another appropriate trading exchange
or market. The failure of the Company's Common Stock to remain listed on the
Nasdaq National Market or Nasdaq Stock Market could adversely affect the
liquidity of the Company's Common Stock.
Dependence on Continued Growth in Use of the Internet
The Company distributes certain services across multiple delivery platforms,
including the Internet, private networks based on Lotus Notes and other
groupware products, electronic mail, and facsimile. Sales of certain of the
Company's services depend upon the adoption of the Internet as a widely used
medium for commerce and communication. Rapid growth in the use of and interest
in the Internet is a recent phenomenon. As a result, there can be no assurance
that communication or commerce over the Internet will continue to develop at
historical rates or that extensive content will continue to be provided over the
Internet. The Internet may not prove to be a viable commercial marketplace for
a number of reasons, including potentially inadequate development of the
necessary infrastructure, or timely development and commercialization of
performance improvements. In addition, to the extent that the Internet
continues to experience significant growth in the number of users and level of
use, there can be no assurance that the Internet infrastructure will continue to
be able to support the demands placed upon it by such potential growth or that
the performance or reliability of the web will not be adversely affected by this
continued growth. The Internet could lose its viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Laws and regulations that address issues such as user privacy,
pricing and the characteristics of and quality of products or services are
becoming more prevalent. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the web and the Company's online
services. If the necessary infrastructure or complementary services necessary
to make the Internet a viable commercial marketplace are not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
business, results of operations, and financial condition could be materially
adversely affected.
16
Competition
The business information services industry is intensely competitive and is
characterized by rapid technological change and entry into the field by
extremely large and well-capitalized companies.
The Company competes or may compete directly or indirectly with the following
categories of companies:
. large, well-established news and information providers such as Dow
Jones, Lexis/Nexis, Pearson, and Thomson;
. eContent providers such as ScreamingMedia.com, Inc., iSyndicate and
WAVO,
. market data services companies such as ADP, Bloomberg and Bridge;
. traditional print media companies that are increasingly searching for
opportunities for on-line provision of news, including through the
establishment of web sites on the Internet;
. large providers of LAN-based software systems such as Lotus/IBM and
Microsoft, which could, in the future, ally with competing news and
information providers; and
. to a lesser degree, consumer-oriented, advertising-subsidized Web-based
services and Internet access providers.
Many of the market participants named above have substantially greater
financial, technical and marketing resources than the Company.
Increased competition, on the basis of price or otherwise, may require price
reductions or increased spending on marketing or software development, which
could have a material adverse effect on the Company's business and results of
operations.
Risks Relating to Acquisitions
Management may from time to time consider acquisitions of assets or businesses
that it believes may enable the Company to obtain complementary skills and
capabilities, offer new services, expand its customer base or obtain other
competitive advantages. Such acquisitions involve potential risks, including
difficulties in assimilating the acquired company's operations, technology,
services and personnel, completing and integrating acquired in-process
technology, diverting management's resources, uncertainties associated with
operating in new markets and working with new employees and customers, and the
potential loss of the acquired company's key employees.
Dependence on Cooperative Marketing Arrangements
The Company has entered into certain cooperative marketing agreements and
informal arrangements with software vendors, Web site sponsors and operators of
online services, including Microsoft, Netscape, Yahoo! and Dow Jones. These
companies presently market services that compete directly with those of the
Company. If the Company's marketing activities with such companies were
terminated, reduced, curtailed, or otherwise modified, the Company may not be
able to replace or supplement such efforts alone or with others. If these
companies were to develop and market their own business information services or
those of the Company's competitors, the Company's business and results of
operations and financial condition may be materially and adversely affected.
17
Dependence on News Providers
A significant percentage of the Company's customers subscribe to services
provided by one or more of Press Association Inc., a subsidiary of The
Associated Press, Dow Jones, The Financial Times and Thompson. The Company's
agreements with news providers are generally for terms of one to three years,
with automatic renewal unless notice of termination is provided before the end
of the term by either party. These agreements may also be terminated by the
provider if the Company fails to fulfill its obligations under the agreement.
Many of these news and information providers compete with one another and, to
some extent, with the Company. Termination of one or more significant news
provider agreements would decrease the news and information which the Company
can offer its customers and could have a material adverse effect on the
Company's business, results of operations and financial condition. Also, an
increase in the fees required to be paid by the Company to its information
providers would have an adverse effect on the Company's gross margins and
results of operations.
Dependence on News Transmission Sources
The Company's news and information for certain of the NewsEdge services is
transmitted using one or more of four methods: leased telephone lines,
satellites, FM radio transmission or the Internet. None of these methods of
news and information transmission is within the control of the Company, and the
loss or significant disruption of any of them could have a material adverse
effect on the Company's business. Many newswire providers have established
their own broadcast communications networks using one or more of these four
vehicles. In these cases, the Company's role is to arrange communications
between the news provider and the NewsEdge customer's server. For sources which
do not have their own broadcast communications capability, news and information
is delivered to the Company news consolidation facility, where it is reformatted
for broadcast to NewsEdge servers and retransmitted to customers through one of
two methods:
. an arrangement between the Company and WAVO Corporation, a common
carrier communications vendor, or
. the Company's own NewsEdge Network, a proprietary entitlement and
delivery system launched in the fall of 1998 that takes advantage of
both leased line and Internet delivery.
WAVO presently also markets services that compete directly with those of the
Company. WAVO is also the communications provider for many newswires offered by
the Company through NewsEdge services. The Company's agreement with WAVO
expires on December 31, 2002. This agreement can be terminated earlier in the
event of a material breach by the Company of the agreement. If the agreement
with WAVO were terminated on short notice, or if WAVO were to encounter
technical or financial difficulties adversely affecting its ability to continue
to perform under the agreement or otherwise, the Company's business could be
materially and adversely affected. The Company believes that if WAVO were
unable to fulfill its obligations, other sources of retransmission would be
available to the Company including the NewsEdge Network, although the transition
from WAVO to those sources could result in delays or interruptions of service
that could have a material adverse affect on the Company's business, results of
operations and financial condition. WAVO did experience technical difficulties
in May 1998 due to the disablement of the PanAmSat Galaxy IV satellite. This
disablement caused an interruption in the delivery of news services to between
one-third and one-half of the Company's customers. The interruption was
resolved in approximately ten days and did not have a material impact on the
Company's financial results.
18
Risk of System Failure or Inadequacy
The Company's operations are dependent on its ability to maintain its computer
and telecommunications systems in effective working order. These systems and
operations are vulnerable to damage or interruption from human error, natural
disasters, telecommunication failures, break-ins, sabotage, computer viruses,
intentional acts of vandalism and similar events. Although the Company has
limited back-up capability, this measure does not eliminate the significant risk
to the Company's operations from a natural disaster or system failure at its
principal site. In addition, any failure or delay in the timely transmission or
receipt of news feeds and computer downloads from its information providers, due
to system failure of the information providers, the public network or otherwise,
could disrupt the Company's operations. The Company's insurance policies may
not adequately compensate us for any losses that it may incur because of any
failures in its system or interruptions in delivery of content. The Company's
business, results of operations and financial condition could be materially
adversely affected by any event, damage or failure that interrupts or delays our
operations.
Rapid Technological Change
The business information services, software and communications industries are
subject to rapid technological change, which may render existing services
obsolete or require significant unanticipated investments in research and
development. The Company's future success will depend, in part, upon its
ability to enhance its service offerings and keep pace with technological
developments. The Company's future success will depend on its ability to
enhance its existing services, to develop new services that address the needs of
its customers and to respond to technological advances and emerging industry
standards and practices, each on a timely basis. Services as complex as those
offered by the Company entail significant technical risks, often encounter
development delays and may result in service failures when first introduced or
as new versions are released. Any such delays in development or failures that
occur after commercial introduction of new or enhanced services may result in
loss of or delay in market acceptance, which could have a material adverse
effect upon the Company's business, results of operations and financial
condition.
Proprietary Rights and Intellectual Property
The Company is heavily dependent upon proprietary technology. In addition,
the Company relies on a combination of trade secret, copyright and trademark
laws and non-disclosure agreements to protect its proprietary rights in its
software and technology. There can be no assurance that such measures are or
will be adequate to protect the Company's proprietary technology. In addition,
there can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies or services. The Company licensed the proprietary SMART
filtering software, which is used as the filtering engine within the Company's
news Refinery, from Cornell Research Foundation, Inc. ("Cornell University").
Under the terms of the license agreement with Cornell University, the Company
had exclusive worldwide rights until February 1999 to design, develop, market,
and sell systems and services based on the SMART software for the retrieval and
dissemination of data from recent and continually changing data sources.
Provided that the Company does not default on the license agreement, the Company
will retain a continuing worldwide, non-exclusive, perpetual royalty-free right
to use the SMART software; and in addition, the Company owns, and will continue
to own, all enhancements to the SMART software that it has developed. There can
be no assurance, however, that Cornell University has not or will not license
the SMART software to a third-party, including a competitor of the Company. In
addition, Cornell University may terminate the license agreement if the Company
has materially breached the agreement and such breach remains uncured for 60
days after written notice of such breach has been given. If the license
agreement for the SMART technology were to terminate, there can be no assurance
that a replacement solution could be developed or acquired, on a timely basis or
at all, and on favorable terms to the Company. Consequently, any termination of
the Company's license agreement with Cornell University would have a material
adverse effect on the Company's business, results of operations, and financial
condition.
19
There has been substantial litigation in the information services industry
involving intellectual property rights. Although the Company believes that it
is not infringing the intellectual property rights of others, there can be no
assurance that such claims, if asserted, would not have a material adverse
effect on the Company's business, results of operations, and financial
condition. In addition, inasmuch as the Company licenses the informational
content that is included in its services from third parties, its exposure to
copyright infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of such
licensed content. Although the Company generally obtains representations as to
the origins and ownership of such licensed informational content and generally
obtains indemnification to cover any breach of any such representations, there
can be no assurance that such representations will be accurate or that such
indemnification will provide adequate compensation for any breach of such
representations. In the future, litigation may be necessary to enforce and
protect trade secrets, copyrights and other intellectual property rights of the
Company. The Company may also be subject to litigation to defend against
claimed infringement of the rights of others or to determine the scope and
validity of the intellectual property rights of others. Any such litigation
would be costly and divert management's attention, either of which would have a
material adverse effect on the Company's business, results of operations, and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties, and
prevent the Company from selling its services, any one of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Potential Liability For Information Transmitted
The Company may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to the information it
publishes through its services. These types of claims have been brought,
sometimes successfully, against online services as well as print publications in
the past. The Company's insurance may not adequately protect it against these
claims.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
This SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective in the fourth quarter 2000. The Company
does not expect the adoption of SAB 101 to have a material impact on the
Company's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign currency exchange rates.
As of June 30, 2000, the Company did not use derivative financial instruments
for speculative or trading purposes.
Interest Rate Risk
The Company invests in short-term and cash equivalent investment instruments
such as U.S. treasury notes, U.S. Government agencies and corporate bonds.
These held-to-maturity securities are subject to interest rate risk and will
fall in value if market interest rates increase. The Company has the ability to
hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates on
its securities portfolio.
20
Foreign Currency Exchange Risk
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures have
been related to non-dollar-denominated operating expenses in Canada. The
majority of Company sales are denominated in U.S. dollars. The Company has not
determined what impact, if any, the introduction of the Euro will have on its
foreign exchange exposure. The Company is prepared to hedge against
fluctuations in the Euro if this exposure becomes material. As of June 30,
2000, the assets and liabilities of the Company related to non-dollar-
denominated currencies was not material.
21
NEWSEDGE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on June 15, 2000. Holders of an
aggregate of 18,148,535 shares at the close of business on April 15, 2000 were
entitled to vote at the meeting. At such meeting, the Company's stockholders
voted as follows:
Proposal I. To re-elect Messrs. Rory J. Cowan and William A. Devereaux and to
elect Messr. Murat H. Davidson to the Board of Directors for a three-year term.
Total Vote for Total Vote Against Abstentions from Broker
Director Name Proposal Proposal I Proposal I Non-votes
- -----------------------------------------------------------------------------------------------------------
Rory J. Cowan 15,605,421 582,618 N/A N/A
William A. Devereaux 15,696,119 591,920 N/A N/A
Murat H. Davidson 15,635,216 552,832 N/A N/A
Messrs. Clifford M. Pollan, Peter Woodward and Michael E. Kolowich will
continue to hold office until the 2001 Annual Meeting of Stockholders or until
their successors have been duly elected or until their earlier resignation or
removal. Messrs., James D. Daniell and Basil P. Regan will continue to hold
office until the 2002 Annual Meeting of Stockholders or until their successors
have been duly elected or until their earlier resignation or removal
Proposal II. To approve a further increase of 1,537,600 shares for issuance
under the Company's 1995 Stock Plan.
Total Vote for Total Vote Against Abstentions from Broker Non-
Proposal I Proposal II Proposal II votes
- ----------------------------------------------------------------------------------------
7,828,338 1,246,058 6,807 7,106,836
Proposal III. To approve the 2000 Non-Officer and Non-Director Stock Plan.
Total Vote for Total Vote Against Abstentions from Broker Non-
Proposal I Proposal II Proposal II votes
- ----------------------------------------------------------------------------------------
7,826,210 1,244,177 10,816 7,106,836
Proposal IV. To ratify the selection of the firm of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 2000.
Total Vote for Total Vote Against Abstentions from Broker Non-
Proposal I Proposal II Proposal II votes
- ----------------------------------------------------------------------------------------
16,155,507 19,508 13,024 N/A
Item 6. Exhibits and Reports Filed on Form 8-K.
6(a) Exhibits.
27.1 - Financial Data Schedule for the three-month period ended June
30, 2000
6(b) REPORTS ON FORM 8-K
None
22
NEWSEDGE CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NEWSEDGE CORPORATION
(Registrant)
Date: August 7, 2000 /s/ Ronald Benanto
------------------------------
Ronald Benanto
Vice President - Finance and CFO
23
NEWSEDGE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 -- Amendment No. 1 dated August 1, 2000 to Stock Purchase Agreement dated
February 18, 2000 by and among the Company, Office.com Inc. and
Individual.com, Inc.
10.1 -- 2000 Non-Officer and Non-Director Stock Plan (filed as Annex B to the
- ------- ---------------------------------------------------------------------
Company's Proxy Statement filed pursuant to Section 14(A) of the
----------------------------------------------------------------
Securities and Exchange Act of 1934 on May 22, 2000 and incorporated
herein by reference)
----------------------------------------------------
27.1 -- Financial Data Schedule for June 30, 2000