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, 1999
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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
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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 30, 1999
- ------------------- ----------------------------
Common Stock, par value $.01 17,341,267
NEWSEDGE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page Number
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998................................................ 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 1998.......................... 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998.................................... 5
Notes to the Condensed Consolidated Financial Statements.................................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.................................. 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 21
Item 4. Submission of Matter to a Vote of Security Holders..................................... 21
Item 6(a) Exhibits............................................................................... 21
Item 6(b) Reports on Form 8-K.................................................................... 21
Signature............................................................................................ 22
Exhibit Index........................................................................................ 23
Exhibit.............................................................................................. 24
2
PART I - FINANCIAL INFORMATION
ITEM 1
NEWSEDGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1999 1998
--------------- ---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 36,938 $ 37,808
Short-term investments - 3,782
Accounts receivable 12,080 13,112
Prepaid expenses and deposits 5,091 5,037
-------------- --------------
Total current assets 54,109 59,739
-------------- --------------
Property and equipment, net 9,101 9,138
-------------- --------------
Other assets 774 277
-------------- --------------
Total assets $ 63,984 $ 69,154
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,590 $ 2,864
Accrued expenses 15,240 17,853
Deferred revenue, current 30,737 27,837
Current portion of long-term obligations 641 891
-------------- --------------
Total current liabilities 49,208 49,445
-------------- --------------
Long-term obligations, less current portion 74 303
-------------- --------------
Deferred revenue, noncurrent 31 157
-------------- --------------
Stockholders' equity:
Common stock 177 175
Additional paid-in capital 126,705 124,890
Cumulative translation adjustment (51) 63
Accumulated deficit (109,625) (103,828)
Treasury stock, at cost; 404,500 and 345,000 shares at
June 30, 1999 and December 31, 1998, respectively (2,535) (2,051)
-------------- --------------
Total stockholders' equity 14,671 19,249
-------------- --------------
Total liabilities & stockholders' equity $ 63,984 $ 69,154
============== ==============
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,
------------------------- ------------------------
1999 1998 1999 1998
--------- --------- -------- ---------
Total revenues $ 19,578 $ 19,208 $ 38,957 $ 38,957
Costs and expenses:
Cost of revenues 8,246 7,998 16,645 16,016
Customer support expenses 1,330 1,407 2,730 3,074
Development expenses 2,856 2,866 5,949 6,272
Sales and marketing expenses 9,260 7,947 18,391 16,427
General and administrative expenses 935 1,105 1,875 2,634
Merger, disposition and other charges - - - 11,093
--------- --------- -------- ---------
Total costs and expenses 22,627 21,323 45,590 55,516
--------- --------- -------- ---------
Loss from operations (3,049) (2,115) (6,633) (16,559)
Interest income and other, net 456 643 888 1,271
--------- --------- -------- ---------
Net loss before provision for income taxes (2,593) (1,472) (5,745) (15,288)
Provision for income taxes 18 53 52 86
--------- --------- -------- ---------
Net loss $ (2,611) $ (1,525) $ (5,797) $ (15,374)
========= ========= ======== =========
Basic and diluted net loss per common share $ (0.15) $ (0.09) $ (0.33) $ (0.90)
========= ========= ======== =========
Weighted average common shares outstanding 17,351 17,250 17,328 17,109
========= ========= ======== =========
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,
--------------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $ (5,797) $ (15,374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,972 2,065
Gain on disposal of property and equipment - (139)
Changes in assets and liabilities:
Accounts receivable 1,031 3,303
Prepaid expenses and deposits (54) 1,443
Accounts payable and accrued expenses (2,887) 3,714
Deferred revenue 2,900 (1,422)
-------- ---------
Net cash used in operating activities (2,835) (6,410)
-------- ---------
Cash flows from investing activities:
Decrease (increase) in investments, net 3,782 (22,463)
Purchases of property and equipment (1,835) (1,741)
Contingent purchase price payment - (3,918)
Decrease in other assets 4 68
-------- ---------
Net cash provided by (used in) investing activities 1,951 (28,054)
-------- ---------
Cash flows from financing activities:
Proceeds from issuances related to stock plans, including tax benefits 1,217 2,965
Purchase of treasury stock (484) -
Decrease in long-term obligations (355) (430)
Principal payments under capital leases (250) (205)
-------- ---------
Net cash provided by financing activities 128 2,330
-------- ---------
Effect of exchange rate on cash (114) 9
-------- ---------
Decrease in cash and cash equivalents (870) (32,125)
Cash and cash equivalents, beginning of period 37,808 45,854
-------- ---------
Cash and cash equivalents, end of period $ 36,938 $ 13,729
======== =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 44 $ 68
======== =========
Cash paid for interest $ 42 $ 118
======== =========
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 is the independent leader in global news and current
awareness solutions for business. The Company's mission is to make news valuable
for business by helping business people find the most important, relevant
stories from an overwhelming volume of daily news and enabling them to act on
the most current information possible. NewsEdge's Enterprise business serves
approximately 1,400 organizations including 81 of Business Week's 100 largest
global companies. The Company's wholly-owned subsidiary, NewsPage.com, Inc., is
a leader in delivering personalized news and information to business people on
the Web. NewsEdge is headquartered in Burlington, Massachusetts with sales
offices and distributors throughout North America, South America, Europe, Japan
and the Middle East.
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, 1998 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.
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. Those
securities with maturities of three months to twelve months as of the balance
sheet date are classified as short-term investments and securities with
maturities of greater than twelve months are classified as long-term
investments.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year's presentation.
6
3. 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 operations in three product segments: Enterprise,
NewsPage and Other.
The market for news and current awareness is pursued by the Company through
two primary lines of business: the Enterprise business and the NewsPage
business. The Enterprise business uses a direct selling effort and targets large
organizations. The Enterprise services deliver news and information to large
numbers of users within organizations through their corporate Intranet or local
area networks. The NewsPage business operates NewsPage.com, an Internet site
that offers customized, business-oriented news and information free on the
Internet. NewsPage.com is supported by targeted advertising and electronic
commerce.
In addition to the Enterprise business and the NewsPage business, the Company
also reports a segment of "other" revenue, which consists of services which will
be completely phased out by the Company by the end of 1999.
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. Non-cash
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.
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- -------------------------------------
Revenue: 1999 1998 1999 1998
--------------------------------------- -------------------------------------
Enterprise $ 18,051 $ 16,275 $ 35,770 $ 32,352
NewsPage 1,137 1,628 2,156 3,051
Other 390 1,305 1,031 3,554
--------------------------------------- -------------------------------------
Total revenue $ 19,578 $ 19,208 $ 38,957 $ 38,957
Profit (loss) before merger,
disposition and other charges:
Enterprise $ (957) $ (1,559) $ (2,661) $ (3,595)
NewsPage (1,972) (643) (3,900) (1,651)
Other (120) 87 (72) (220)
Non-cash expenses by segment:
Enterprise $ 817 $ 718 $ 1,583 $ 1,318
NewsPage 148 156 341 364
Other 21 115 48 299
4. Contingent Purchase Price Payment
In connection with the acquisition of FreeLoader, Inc. ("FreeLoader") in June
1996 by Individual, Inc. ("Individual"), which was merged with and into the
Company on February 24, 1998, Individual guaranteed the value of certain shares
issued to the two founders of FreeLoader, which was to be measured during the
period February 1998 through April 1998. If the fair value of the stock was less
than the guaranteed value, then the Company was obligated to pay the difference
in cash. In February 1998, the two founders of FreeLoader exercised their rights
under the value
7
guarantee and received a payment from the Company of approximately $3.9 million.
The contingent purchase price payment was recorded as a reduction to
stockholders' equity.
5. Other Contingencies
On November 13, 1996, a class action shareholder suit was filed against
Individual (now the Company), certain of its directors and officers and the
underwriters of its initial public offering claiming that the defendants made
misstatements, or failed to make statements, to the investing public in
Individual's Prospectus and Registration Statement in connection with its
initial public offering relating to the alleged existence of disputes between
Joseph A. Amram, Individual's former Chief Executive Officer, and Individual.
Plaintiffs seek unspecified damages plus interest, costs and fees. On May 27,
1998, the U.S. District Court for the District of Massachusetts dismissed the
class action in its entirety. Plaintiffs appealed the dismissal to the U.S.
Court of Appeals for the First Circuit. Oral arguments were heard on December
10, 1998. On March 22, 1999, the United States Court of Appeals for the First
Circuit entered judgment affirming the District Court's dismissal of the class
action.
6. 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,
1999 and 1998 are as follows:
Three months ended Six months ended
(in thousands) June 30, June 30,
--------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------
Comprehensive income:
Net loss $ (2,611) $ (1,525) $ (5,797) $ (15,374)
Other comprehensive income (loss):
Write down of investments to
amortized cost - (88) - (88)
Foreign currency adjustment (70) (33) (114) 9
--------------------------------------------------------------------
Comprehensive loss $ (2,681) $ (1,646) $ (5,911) $ (15,453)
====================================================================
7. 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 three and six months of
1999 and 1998. Diluted earnings per share excludes shares issuable from the
assumed exercise of stock options, as their effect would be antidilutive.
8
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction and Overview
NewsEdge Corporation (the "Company") is the independent leader in global news
and current awareness solutions for business. The Company's mission is to make
news valuable for business. NewsEdge services provide access to value added
news over the Internet or customer Intranets. The Company aggregates and adds
value to news and information from thousands of 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
two primary lines of business: the Enterprise business and the NewsPage
business. The Enterprise business uses a direct selling effort and targets
large organizations. The Enterprise services deliver news and information to
large numbers of users within organizations through their corporate Intranet or
local area networks. As of June 30, 1999, the Company had over 1,400 Enterprise
customers, up 19% from the previous year, with approximately 640,000 authorized
users.
The NewsPage business operates NewsPage.com, an Internet web site that offers
customized, business-oriented news and information. Through a series of
strategic relationships, the NewsPage business also provides news and
information for a number of other Internet web sites. These relationships
include Netscape Business Journal and Yahoo! Small Business. The NewsPage
service is supported by targeted advertising and electronic commerce, and is
offered to end users as a free service. As of June 30, 1999, NewsPage had
approximately 960,000 paid or registered users, up 22% from the previous year.
In an effort to gain market share, the Company anticipates making a significant
investment in the NewsPage business over the next year.
In addition to the Enterprise business and the NewsPage business, the Company
also reports a segment of "other" revenue, which consists of services which will
be discontinued by the Company by the end of 1999.
While the Company's decision to increase its investment in the NewsPage.com
business will increase the losses reported for that segment, it is the Company's
goal to have the Enterprise business segment achieve break-even by the end of
1999. The Company's plan to achieve break-even relies on continued revenue
growth as well as improved operating margins which the Company anticipates will
be primarily achieved by savings from headcount reductions. The Company has
made such headcount reductions in areas associated with product lines the
Company has discontinued within the last year. However, there can be no
assurance that the Enterprise segment will achieve its break-even goal in the
near future. For an additional discussion of the risks affecting the Company's
profitability, see the Risk Factor section of this filing regarding Future
Operating Results Uncertain.
The Company's Enterprise revenues consist primarily of subscription fees
related to the various Enterprise service offerings. Additionally, Enterprise
revenues include royalty revenues generated from content sales billed directly
by third party information providers to customers, revenue generated from
professional consulting services and revenue generated from installations and
related computer hardware sales. The Company's NewsPage revenues are primarily
derived from advertising sales and electronic commerce. The Company's "other"
revenues consist primarily of subscription fees generated from sales of services
being discontinued by the Company.
Subscription services offered through the Enterprise business are generally
for an initial term of twelve months, payable in advance, and are automatically
renewable for successive one-year periods unless the customer delivers notice of
termination prior to the expiration date of the then current agreement.
Subscription revenues associated with these agreements are recognized ratably
over the subscription term, beginning upon installation of the service.
Accordingly, a substantial portion of the Company's revenues is recorded as
deferred revenue.
Certain newswires offered by the Company for use within its services are
purchased by the customer directly from the news provider and payments are made
directly from the NewsEdge customer to the provider. For some of these
newswires, the Company receives royalty revenue based on payments made by the
customer to the news provider. For other newswires that are resold by the
Company to the NewsEdge customer, the Company bills the customer for the
9
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. The Company was formed as Desktop Data, Inc. in 1988, acquired
Investment Software Systems, Inc. ("ISS") from ADP Financial Services, Inc. in
January 1998, and upon the closing of the February 1998 merger (the "Merger")
with Individual, Inc. ("Individual") changed its name to NewsEdge Corporation.
Results of Operations for the Three- and Six- Month Periods Ended June 30, 1999
as Compared to the Three- and Six- Month Periods Ended June 30, 1998
Revenues
Total revenues for the three months ended June 30, 1999 increased 1.9% to $19.6
million compared to $19.2 million for the same period in 1998. Total revenues
for the six months ended June 30, 1999 remained constant at $39.0 million. For
both periods, an increase in Enterprise revenues of approximately 11% was offset
by decreases in both NewsPage and Other revenues.
Enterprise revenue for the three months ended June 30, 1999 increased 10.9% to
$18.1 million as compared to $16.3 million for the same period in 1998.
Enterprise revenue for the six months ended June 30, 1999 increased 10.6% to
$35.8 million as compared to $32.4 million for the same period in 1998. The
increase in Enterprise revenue was due primarily to increases in subscription
revenues from new customers and the retention and growth of revenues from
existing customers.
NewsPage revenue for the three months ended June 30, 1999 decreased 30.2% to
$1.1 million as compared to $1.6 million for the same period in 1998. NewsPage
revenue for the six months ended June 30, 1999 decreased 29.3% to $2.2 million
as compared to $3.1 million for the same period in 1998. The decrease in
NewsPage revenue resulted primarily from reductions in NewsPage subscription
revenue caused by the introduction of a free NewsPage service during the current
quarter and the gradual evolution of certain NewsPage single users to Enterprise
workgroup solutions.
Terminated or harvested product line revenues decreased 70.1% to approximately
$390,000 and 71.0% to $1.0 million for the three- and six-month periods ended
June 30, 1999, respectively. The decrease in revenues from terminated or
harvested product lines was due primarily to the spin out of the Clarinet
business unit effective March 31, 1998 and an overall reduced sales effort
directed at business lines that have been terminated or are being de-emphasized
by the Company. The Company expects that revenue from terminated or harvested
product lines will end by December 31, 1999.
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 as a percentage of total
revenues for the three- and six-month periods ended June 30, 1999 increased to
42.1% and 42.7%, respectively, from 41.6% and 41.1%, respectively, for the same
periods in 1998. The percentage increases in cost of revenues were due
primarily to increased royalties paid to third-party information providers.
Customer support expenses
Customer support expenses consist primarily of costs associated with technical
support of the Company's installed base of customers. Customer support expenses
for the three-month period ended June 30, 1999 decreased 5.5% to $1.3 million as
compared to $1.4 million for the same period in 1998. Customer support expenses
for the six months ended June 30, 1999 decreased 11.2% to $2.7 million as
compared to $3.1 million for the same period in 1998. The decrease in customer
support expenses resulted primarily from reductions in headcount and related
expenses. As a percentage of total revenues, customer support expenses for the
three- and six-month periods ended June 30, 1999 decreased to 6.8% and 7.0%,
respectively, from 7.3% and 7.9%, respectively, for the same periods in 1998.
10
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 periods ended June 30, 1999 and 1998 remained
constant at $2.9 million. Development expenses for the six months ended June
30, 1999 decreased 5.1% to $5.9 million as compared to $6.3 million for the same
period in 1998. The decrease in development expenses for the six months ended
June 30, 1999 resulted primarily from reductions in headcount and related
expenses associated with the spin out of the Clarinet business unit effective
March 31, 1998. As a percentage of total revenues, development expenses for the
three- and six-month periods ended June 30, 1999 decreased to 14.6% and 15.3%,
respectively, from 14.9% and 16.1%, respectively, for the same periods in 1998.
Sales and marketing expenses
Sales and marketing expenses consist primarily of compensation costs (including
sales commissions and bonuses), travel expenses, trade shows and other marketing
programs. Sales and marketing expenses for the three-month period ended June
30, 1999 increased 16.5% to $9.3 million as compared to $7.9 million for the
same period in 1998. Sales and marketing expenses for the six months ended June
30, 1999 increased 12.0% to $18.4 million as compared to $16.4 million for the
same period in 1998. The increase in sales and marketing expenses resulted
primarily from increases in headcount and related expenses. As a percentage of
total revenues, sales and marketing expenses for the three- and six-month
periods ended June 30, 1999 increased to 47.3% and 47.2%, respectively, as
compared to 41.4% and 42.2%, respectively, for the same periods in 1998.
General and administrative expenses
General and administrative expenses consist primarily of expenses for finance,
office operations, administration and general management activities, including
legal, accounting and other professional fees. General and administrative
expenses for the three-month period ended June 30, 1999 decreased 15.4% to
approximately $935,000 as compared to $1.1 million for the same period in 1998.
General and administrative expenses for the six months ended June 30, 1999
decreased 28.8% to $1.9 million as compared to $2.6 million for the same period
in 1998. The decrease in general and administrative expenses was due primarily
to reductions in headcount and related expenses as well as a reduction in
professional fees associated with special business development efforts. As a
percentage of total revenues, general and administrative expenses for the three-
and six-month periods ended June 30, 1999 decreased to 4.8%, as compared to 5.8%
and 6.8%, respectively, for the same periods in 1998.
Merger, disposition and other charges
Merger, disposition and other charges consist primarily of the nonrecurring
costs related to the Company's recent business combinations. For the three- and
six-month periods ended June 30, 1999, there were no additions to merger,
disposition and other charges. For the three- and six- month periods ended June
30, 1998, these costs, totaling $11.1 million, related primarily to costs
associated with the Merger with Individual and the purchase of ISS, the
termination of the Clarinet business unit, severance and benefits for terminated
employees and the cost of terminating and settling certain contractual
obligations of the combined companies.
Interest income (expense), net
Interest income (expense), net during the three- and six-month periods ended
June 30, 1999, decreased to approximately $456,000 and $888,000, respectively,
from approximately $643,000 and $1.3 million, respectively, for the same periods
in 1998, due to the interest earned on lower cash and investment balances.
11
Provision for income taxes
The provision for income taxes for the three- and six-month periods ended June
30, 1999 decreased to approximately $18,000 and $52,000, respectively, as
compared to approximately $53,000 and $86,000, respectively, for the same
periods in 1998. Components of the provisions include state taxes due in states
that do not have net operating loss carry-forwards available, foreign tax
liabilities and the alternative minimum tax due under the Internal Revenue Code.
The Company has not recorded a deferred tax benefit in the periods presented for
the potential future benefit of its tax loss carry-forwards as the Company has
concluded that it is not likely such deferred tax asset would be realized.
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments totaled $36.9 million at
June 30, 1999, as compared to $41.6 million at December 31, 1998, a decrease of
$4.7 million. Net cash of approximately $2.8 million was used in operations for
the six months ended June 30, 1999 primarily resulting from the Company's net
loss for the period. Net cash provided by investing activities for the six
months ended June 30, 1999 was approximately $2.0 million, resulting from a net
decrease in short-term investments of $3.8 million offset by purchases of $1.8
million in property and equipment. Net cash provided by financing activities
for the six months ended June 30, 1999 was approximately $128,000 resulting from
cash proceeds of $1.2 million from stock issuances made pursuant to the
Company's employee stock plans, offset by approximately $605,000 in payments
related to reducing current and long-term obligations, and approximately
$484,000 in payments related to treasury stock purchases.
The Company continues to investigate the possibility of investments in or
acquisitions of complementary businesses, products or technologies. The Company
also anticipates making a significant cash investment in its wholly-owned
subsidiary, NewsPage.com, Inc., over the next twelve months.
The Company believes that its current cash and cash equivalents balances, and
funds anticipated to be generated from operations, will be sufficient to satisfy
working capital and capital expenditure requirements for at least the next
twelve months.
Year 2000 Readiness Disclosure Statement
The Company has established a Year 2000 compliance program. The Company has
been performing Year 2000 tests for the past three years and a formal
organization structure of senior management and quality assurance personnel for
support of Year 2000 initiatives has been in place since April 1997. While the
Company anticipates that its services and internal systems should operate
correctly at the turn of the century, unforeseen "bugs" or "glitches" with
respect to the Company's services or services of its vendors may arise.
Compliance Program: The scope of the Company's compliance program focuses on
four key areas: service offerings, third-party information providers, business
partners' applications and internal systems. The Company's compliance program
has a three-step process to evaluate each of the key areas which includes (i)
inventory review, (ii) assessment/testing, and (iii) resolution and contingency
planning.
. Service offerings. The Company continues to test released services offered, as
needed, for Year 2000 compliance. As of June 30, 1999, the Company had
completed testing on approximately 85% of its supported services and estimates
completion of this test process by September 30, 1999. When testing services
for Year 2000 compliance, the Company attempts to confirm that (i) news can be
collected over the boundary from 12/31/1999 to 1/1/2000, (ii) date fields with
either two or four digit year formats will function correctly for years in the
new millennium, (iii) date fields in both server and client log files will be
displayed correctly, (iv) the services will be able to conduct searches for
date ranges that overlap the new millennium, and (v) the Year 2000 will be
recognized as a leap year. New services under development for this year have
Year 2000 qualification as part of the products' test plans. None of these
development projects have been materially delayed or impacted by the Company's
Year 2000 readiness efforts.
. Third-party information providers. The Company relies on content provided by
third-party information providers. As of June 30, 1999, the Company had
contacted all of its information providers with respect to their
12
Year 2000 compliance status. Approximately 48% of the information providers
contacted returned their compliance responses and the Company has identified
issues with twelve. The Company expects that these issues will be addressed
by the end of the year. The Company's goal is to have all information
providers' compliance responses complete by August 30, 1999. Also, the
Company is trying to minimize its dependence on third party information
provider's external date formats by internally generating timestamps on its
server. While the Company is committed to taking every reasonable action to
obtain assurances from such third-party information providers that their
software is Year 2000 compliant, it can not guarantee the performance of
such providers or predict whether the assurances provided by them may be
accurate and realistic.
. Business Partners' Applications. The Company's customers invest in third-
party software, some of which is supplied by the Company's business partners
for the purpose of integrating news into the customer's applications. The
Company has identified such business partners and has requested from them
the status of their Year 2000 compliance efforts. These communications were
50% complete as of June 30, 1999. The Company's goal is to have all business
partners' compliance responses received by September 30, 1999. Additionally,
the Company has an arrangement with WAVO Corporation, a common carrier
communications vendor, for the delivery of news and information from third
party news providers who do not have their own broadcast communications
capability. WAVO has stated that the replacement or remediation of its
critical IT and Business Systems will be completed by December 31, 1999.
While the Company is committed to taking every reasonable action to obtain
assurances from such business partners that their software is Year 2000
compliant, it can not guarantee the performance of such business partners or
predict whether any of the assurances provided by them may be accurate and
realistic.
. Internal Systems. The Company has completed its inventory of its internal
systems and its assessment of such systems' compliance status is 95%
complete, with an anticipated completion date of September 30, 1999. The
scope of these systems ranges from accounting, payroll, communications,
network hardware and applications, internet access, and internal information
systems. The majority of the Company's internal systems and equipment are
currently Year 2000 compliant.
Costs: Due to assessments made in the recent quarter, which reflect changes in
the scope of the Year 2000 testing, outside consulting expertise has been
contracted. It is anticipated that this cost will not exceed $125,000. The
Company continues to utilize internal personnel to identify Year 2000 readiness
in its supported services, network hardware/applications, internal business and
information systems. The Company estimates that the total direct cost of the
Company's internal Year 2000 compliance efforts will be approximately $1.2
million. The total time estimated for the project for internal employees would
equate to approximately ten person years. As of June 30, 1999, the Company had
spent approximately $600,000. These costs do not include estimates of indirect
costs associated with time spent by the Company's management or staff discussing
Year 2000 issues internally or with third parties. Such discussions are handled
by existing employees through the ordinary course of business. The Company has
not identified the need to hire additional staff specifically to address third
party questions or concerns.
Risks: With regard to third party information suppliers, the Company is
addressing, through normal operating procedures, two categories of possible
issues: (i) a small percentage of wires may exhibit presentation issues with the
new millennium and (ii) some third party information providers may have delivery
problems associated with Year 2000 issues. The Company is identifying
presentation issues by internal quality assurance or editorial reviewers. When
identified, presentation issues are being handled by contacting the information
provider who may correct the problem at the source or by having the Company
develop a workaround in the software. The risks associated with delivery
problems present more serious issues for the Company as the Company would be
without certain news content. The Company will seek to obtain substitute news
sources if specific news providers experience technical difficulties delivering
their content as a result of a Year 2000 problem, but the Company cannot
guarantee the availability of such substitute content.
In connection with the Company's business partners' applications, the Company
has developed alternative delivery solutions, such as the internet or leased
line transmission, to be used if WAVO experiences similar delivery difficulties
as discussed above. The Company estimates that in the worst case scenario, it
would take approximately eight weeks for it to remedy such a delivery problem.
While the Company does not anticipate a failure in its ability to deliver news,
and has established contingency plans as discussed above, such a failure may (i)
have a material adverse effect upon the Company's business, results of
operations and financial condition, (ii) require the Company to incur
unanticipated material expenses to remedy any problem and (iii) result in
litigation due to the Company's inability to fulfill its contractual
obligations. In such cases, the Company would likely suffer a disruption in its
revenue stream and
13
operations could be materially impacted. For an additional discussion of the
risks associated with the Company's dependence on news transmission sources, see
the Risk Factor section of this filing regarding Dependence on News
Transmissions Sources.
Contingency Plans: At this time, the Company's contingency plans relating to
the above discussed Year 2000 issues include (i) having additional support staff
and programmers on call for January 1, 2000, in the event of a disruption of the
Company's services, (ii) seeking alternative news sources and (iii) preparing
alternative news delivery mechanisms. The Company's assessment of its services
and internal systems for Year 2000 compliance will be an ongoing effort
throughout the remainder of this year. The information contained herein is the
product of conclusions made from the information and test results available to
the Company at this time.
Certain Factors Affecting Future Operating Results
Certain of the above statements in this report are forward-looking statements
that involve risks and uncertainties. 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 below and in the Company's other SEC reports
highlights some of the risks which may affect future operating results.
Management of Growth and Hiring of Additional Personnel
The Company has experienced growth in revenues and expansion of its
operations, which have placed significant demands on the Company's management,
development, sales and customer support staff. Continued growth will require the
Company to hire and retain more development, selling and customer support
personnel. The Company has at times experienced, and is currently experiencing,
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.
Future Operating Results Uncertain
The Company's ability to increase its revenues will depend upon its ability to
expand its sales force, to increase sales to new customers as well as increase
penetration into existing customers. In addition, as of June 30, 1999, the
Company had an accumulated deficit of approximately $110 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.
14
Dependence on Continued Growth in Use of the Internet
The Company distributes certain services across multiple delivery platforms,
including facsimile, electronic mail, the Internet and private networks based on
Lotus Notes and other groupware products. 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. There can be no assurance that communication or
commerce over the Internet will become widespread or that extensive content will
continue to be provided over the Internet. The Internet may not prove to be a
viable commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development and commercialization of performance
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by such potential
growth or that the performance or reliability of the Web will not be adversely
affected by this continued growth. The Internet could lose its viability due to
delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity, or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet also could result in slower response times and
adversely affect usage of the Web and the Company's online services. If the
necessary infrastructure or complementary services necessary to make the
Internet a viable commercial marketplace are not developed, or if the Internet
does not become a viable commercial marketplace, the Company's business, results
of operations, and financial condition could be materially adversely affected.
Reliance on Advertising Revenues and Uncertainty of the Web as an Advertising
Medium
The Internet is an unproven medium for paid advertising sponsorship of Web-
based services such as the Company's NewsPage service. NewsPage's revenues are
generated from the sale of advertisements and e-commerce on its Web page. Most
of the Company's advertising customers have only limited experience with the Web
as an advertising medium, have not devoted a significant portion of their
advertising expenditures to Web-based advertising and may not find such
advertising to be effective for promoting their services relative to traditional
print and broadcast media. The Company's ability to generate significant
advertising and e-commerce revenues from its NewsPage service will depend upon,
among other things:
. advertisers' acceptance of the Web as an effective and sustainable
advertising medium;
. the development of a large base of users of the Company's services
possessing demographic characteristics attractive to advertisers;
. the Company's ability to work with its advertisers' varying sales cycles;
. the resolution of internet security concerns;
. the determination of government regulation and the law governing the
internet; and
. the ability of the Company to develop and update effective advertising
delivery and measurement systems.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that such
standards will develop sufficiently to support Web-based advertising as a
significant advertising medium. In addition, there is intense competition in the
sale of advertising on the Internet, which has resulted in a wide range of rates
quoted by different vendors for a variety of advertising services, which makes
it difficult to project future levels of Internet advertising revenues that will
be realized generally or by any specific company. Competition among current and
future Web sites, as well as competition with other traditional media for
advertising placements, could result in significant price competition and
reductions in advertising revenues. As a result of these factors, there can be
no assurance that the Company will sustain or increase current advertising sales
levels. Failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition.
15
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 as well as smaller competitors.
Enterprise Business
The Company's Enterprise business 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, Reuters and Thomson;
. 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 World Wide 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.
NewsPage Business
The Company's NewsPage business competes directly with many other Web-based
news and information services. The market for Internet services is
relatively new, intensely competitive and rapidly changing. The number of Web
sites on the Internet competing for consumers' attention and spending has
proliferated and it is expected that competition will continue to intensify.
NewsPage competes, directly and indirectly, for advertisers, viewers, members
and content providers with the following categories of companies:
. publishers and distributors of traditional off-line media, such as
television, radio and print, including those targeted to business,
finance and investing needs, many of which have established or may
establish Web sites, such as The Wall Street Journal, CNN and CNBC;
. general purpose consumer online services such as America Online and
Microsoft Network, each of which provides access to financial and
business-related content and services;
. online services or Web sites targeted to business, finance and
investing needs, such as TheStreet.com and Motley Fool; and
. Web search and retrieval and other online services, such as Excite,
Inc., InfoSeek Corporation, Lycos, Inc., Yahoo! Inc., and other
high-traffic Web sites, such as those operated by Netscape
Communications Corporation, which offer quotes, financial news and
other programming and links to other business and finance related
Web sites.
16
It is anticipated that the number of direct and indirect
competitors will increase in the future. This could result in price
reductions for advertising, reduced margins, greater operating
losses or loss of market share, any of which would materially
adversely affect the business of the Company, results of operations
and financial condition.
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.
Litigation Risks
On November 13, 1996, a class action shareholder suit was filed against
Individual (now the Company), certain of its directors and officers and the
underwriters of its initial public offering claiming that the defendants made
misstatements, or failed to make statements, to the investing public in
Individual's Prospectus and Registration Statement in connection with its
initial public offering relating to the alleged existence of disputes between
Joseph A. Amram, Individual's former Chief Executive Officer, and Individual.
Plaintiffs seek unspecified damages plus interest, costs and fees. On May 27,
1998, the U.S. District Court for the District of Massachusetts dismissed the
class action in its entirety. Plaintiffs appealed the dismissal to the U.S.
Court of Appeals for the First Circuit. Oral arguments were heard on December
10, 1998. On March 22, 1999, the United States Court of Appeals for the First
Circuit entered judgment affirming the District Court's dismissal of the class
action.
Dependence on News Providers
A significant percentage of the Company's customers subscribe to services
provided by one or more of Press Association Inc., a subsidiary of The
Associated Press, Dow Jones, The Financial Times, Reuters and Thompson. The
Company's agreements with news providers are generally for terms of one to three
years, with automatic renewal unless notice of termination is provided before
the end of the term by either party. These agreements may 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, or problems receiving news from providers
as a result of Year 2000 issues, would decrease the news and information which
the Company can offer its customers and could have a material adverse effect on
the Company's business, results of operations and financial condition.
Also, an increase in the fees required to be paid by the Company to its
information providers would have an adverse effect on the Company's gross
margins and results of operations. Because the Company licenses the
informational content included in its services from third parties, the Company's
exposure to copyright infringement actions may increase. Although the Company
generally obtains representations as to the origins and ownership of such
licensed content and generally obtains indemnification for any breach thereof,
there can be no assurance that such representations will be accurate or that
indemnification will adequately compensate the Company for any breach.
17
Dependence on News Transmission Sources
The Company's news and information for certain of the NewsEdge services is
transmitted using one or more of four methods: leased telephone lines,
satellites, FM radio transmission or the Internet. None of these methods of news
transmission is within the control of the Company, and the loss or significant
disruption of any of them could have a material adverse effect on the Company's
business. Many newswire providers have established their own broadcast
communications networks using one or more of these three vehicles. In these
cases, the Company's role is to arrange communications between the news provider
and the NewsEdge customer's server. For sources which do not have their own
broadcast communications capability, news and information is delivered to the
Company news consolidation facility, where it is reformatted for broadcast to
NewsEdge servers and retransmitted to customers through one of two methods: 1)
an arrangement between the Company and WAVO Corporation, a common carrier
communications vendor, or 2) the Company's own NewsEdge Network, a proprietary
entitlement and delivery system launched in the fall of 1998 that takes
advantage of both leased line and Internet delivery. WAVO presently also markets
services that compete directly with those of the Company. WAVO is also the
communications provider for many newswires offered by the Company through
NewsEdge services. The Company's agreement with WAVO expires on December 31,
1999. This agreement can be terminated earlier in the event of a material breach
by the Company of the agreement. If the agreement with WAVO were terminated on
short notice, or if WAVO were to encounter technical or financial difficulties
adversely affecting its ability to continue to perform under the agreement or
otherwise, the Company's business could be materially and adversely affected.
The Company believes that if WAVO were unable to fulfill its obligations, other
sources of retransmission would be available to the Company including NewsEdge
Network, although the transition from WAVO to those sources could result in
delays or interruptions of service that could have a material adverse affect on
the Company's business, results of operations and financial condition. WAVO did
experience technical difficulties in May 1998 due to the disablement of the
PanAmSat Galaxy IV satellite. This disablement caused an interruption in the
delivery of news services to between one-third and one-half of the Company's
customers. The interruption was resolved in approximately ten days and did not
have a material impact on the Company's financial results. WAVO has stated that
the replacement or remediation of its critical IT and Business Systems will be
completed by December 31, 1999.
Risk of System Failure or Inadequacy
The Company's operations are dependent on its ability to maintain its computer
and telecommunications systems in effective working order and to protect its
systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Although the Company 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.
Risks Relating to Year 2000 Issues
The Company believes that its software and services are substantially Year
2000 compliant and currently does not anticipate material expenditures to remedy
any year 2000 problems. However, many computer systems were not designed to
handle any dates beyond the year 1999, and therefore, many companies will be
required to modify their computer hardware and software prior to the year 2000
in order to remain functional. The Company utilizes third-party computer and
telecommunications equipment to produce and distribute its services as well as
to operate other aspects of its business, and while the Company is currently
testing all such systems, there can be no assurances that such equipment is Year
2000 compliant. The Company also is addressing two categories of possible issues
relating to its third party information suppliers: (i) a small percentage of
wires may exhibit presentation issues with the new millennium and (ii) some
third party information providers may have delivery problems associated with
Year 2000 issues. The Company is identifying presentation issues and when
identified, they are being handled by contacting the information provider who
may correct the problem at the source or by having the Company develop a
workaround in the software. The risks associated with delivery problems present
more serious issues for the Company as the Company would be without certain news
content. The Company will seek to obtain substitute news sources if specific
news providers experience technical difficulties delivering their content as a
result of a Year 2000 problem, but the Company cannot guarantee the availability
of such substitute content. Also, the Company has developed alternative delivery
solutions, such as the internet or leased line transmission, to be used if WAVO,
a common carrier communications vendor that delivers news and information from
certain third party news providers, experiences
18
delivery difficulties due to the Year 2000 problem. The Company estimates that
in the worst case scenario it would take approximately eight weeks for it to
remedy such a delivery problem. While the Company is committed to taking every
reasonable action to obtain assurances from such business partners that their
software and services are Year 2000 compliant, it can not guarantee the
performance of such business partners or predict whether any of the assurances
provided by them may be accurate and realistic. Although the Company does not
anticipate a failure in its ability to delivers news, and has established
contingency plans, such a failure may (i) have a material adverse effect upon
the Company's business, results of operations and financial condition, (ii)
require the Company to incur unanticipated material expenses to remedy any
problem and (iii) result in litigation due to the Company's inability to fulfill
its contractual obligations. In such cases the Company would likely suffer a
disruption in its revenue stream and operations could be materially impacted.
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. Since
February 1999, the Company has retained 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.
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
19
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.
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, 1999, 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.
Foreign Currency Exchange Risk
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures have
been related to nondollar-denominated operating expenses in Canada. The majority
of Company sales are denominated in U.S. dollars. The Company has not determined
what impact, if any, the introduction of the Euro will have on its foreign
exchange exposure. The Company is prepared to hedge against fluctuations in the
Euro if this exposure becomes material. As of June 30, 1999, the assets and
liabilities of the Company related to nondollar-denominated currencies was not
material.
20
NEWSEDGE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 13, 1996, a class action shareholder suit was filed against
Individual (now the Company), certain of its directors and officers and the
underwriters of its initial public offering claiming that the defendants made
misstatements, or failed to make statements, to the investing public in
Individual's Prospectus and Registration Statement in connection with its
initial public offering relating to the alleged existence of disputes between
Joseph A. Amram, Individual's former Chief Executive Officer, and Individual.
Plaintiffs seek unspecified damages plus interest, costs and fees. On May 27,
1998, the U.S. District Court for the District of Massachusetts dismissed the
class action in its entirety. Plaintiffs appealed the dismissal to the U.S.
Court of Appeals for the First Circuit. Oral arguments were heard on December
10, 1998. On March 22, 1999, the United States Court of Appeals for the First
Circuit entered judgment affirming the District Court's dismissal of the class
action.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 27, 1999. Holders of an
aggregate of 17,322,595 shares at the close of business on April 15, 1999 were
entitled to vote at the meeting. At such meeting, the Company's stockholders
voted as follows:
Proposal I. To re-elect Ms. Ellen Carnahan and Mr. James D. Daniell to the
Board of Directors for a three-year term.
Total Vote for Total Vote Against Abstentions from Broker Non-
Director Name Proposal Proposal I Proposal I votes
------------- -------- ---------- ---------- -----
Ellen Carnahan 15,824,774 252,183 N/A N/A
James D. Daniell 15,889,974 176,983 N/A N/A
Messrs. William A. Devereaux and Rory J. Cowan will continue to hold office
until the 2000 Annual Meeting of Stockholders or until their successors have
been duly elected or until their earlier resignation or removal. Messrs. Donald
L. McLagan, Michael E. Kolowich and Ms. June Rokoff 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
Proposal II. To ratify the selection of the firm of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 1999.
Total Vote for Total Vote Against Abstentions from Broker Non-
Proposal I Proposal II Proposal II votes
---------- ----------- ----------- -----
16,014,988 50,399 11,570 N/A
Item 6. Exhibits and Reports Filed on Form 8-K.
6(a) Exhibits.
27.1 - Financial Data Schedule for the three- and six- month periods
ended June 30, 1999
6(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
21
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 10, 1999 /s/ Ronald Benanto
----------------------------
Ronald Benanto
Vice President - Finance and CFO
22
NEWSEDGE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27.1 -- Financial Data Schedule for June 30, 1999 24
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