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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the Fiscal Year Ended: December 31, 1996
or
[_] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from to
COMMISSION FILE NUMBER: 0-27734
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INDIVIDUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3036959
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8 NEW ENGLAND EXECUTIVE PARK WEST, 01803
BURLINGTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 273-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing price as quoted on the Nasdaq National Market
on March 21, 1997 was $69,334,147.
As of March 21, 1997, 14,591,024 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 1996. Portions of such proxy statement are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
The following description contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such differences include, but are not limited to, those discussed
in "Factors Affecting Future Performance".
Individual, Inc. (the "Company" or "Individual") develops and markets a
suite of customized news and information services that provide knowledge
workers with daily personalized current awareness reports, while offering
information providers and advertisers new ways to reach targeted audiences.
Leveraging its knowledge processing systems, editorial knowledge bases, and an
exclusive license to Cornell University's SMART technology, the Company's
intelligent software agents search each day through approximately 10,000 to
20,000 stories drawn from approximately 600 broad (e.g., Reuters) and
specialized (e.g., PC Week) information sources, and prepare for each user a
highly relevant daily news briefing with full-text retrieval options. In
addition, the Company's Hoover Business Intelligence Service ("Hoover"),
acquired in October 1996, integrates and organizes news and information from
internal and external sources and provides real-time and archival electronic
services to organizations. The Company delivers its information services to
more than 460,000 users across a range of delivery platforms, including
facsimile, electronic mail, groupware, intranets, and the Internet.
INDUSTRY BACKGROUND
The Company's principal focus is the expanding market for business news and
the corporate knowledge worker, whose effectiveness often depends on the
ability to keep current with and make sense of large volumes of random
information in a short period of time. The size of the overall market for
business and professional information is large and growing. Forrester Research
estimates that electronic delivery of information to corporate desktops will
account for $800 million of that market by the year 2001. In addition,
according to Jupiter Communications, as much as $5 billion will be spent on
Internet-based advertising in the year 2000.
In recent years, the proliferation of personal computers, desktop publishing
software, and LANs has resulted in the rapid growth of sources of news and
other information distributed electronically. As a result, electronically
available information accounts for a significant and growing share of the
total information market. Methods of accessing information have also evolved
dramatically over the past decade, as technological advances have created a
flexible and far-reaching set of delivery platforms, such as facsimile
transmission, electronic mail, groupware, and online technologies. More
recently, the increasing popularity of the Internet and World Wide Web has
introduced a structural change in the way information is produced,
distributed, and consumed, dramatically lowering the cost of publishing
information and significantly increasing its reach. Web servers have also been
implemented on corporate intranets which disseminate internal information
throughout an organization. By facilitating the publishing and consumption of
information, the Internet and intranets are dramatically increasing the amount
of information, both relevant and irrelevant, readily available to corporate
knowledge workers.
Three recent trends are further accelerating the significance of current
awareness information services to corporate knowledge workers: consolidation
of buying influence in corporations, universal connectivity, and coalescence
around Internet standards. Only recently, departments and other smaller
corporate units were buying information in isolated pockets within the
corporation. Now, more companies are creating comprehensive knowledge
management strategies and consolidating their buying in one place--often at an
executive-level position such as "Chief Knowledge Officer". Such concentration
makes it more efficient to sell to an entire company, rather than having to
approach and educate multiple isolated buyers. A second major trend is the
movement towards universal desktop connectivity. Knowledge workers across
corporations and industries are being hooked up to the Internet, corporate
intranets, e-mail systems, and large-scale groupware systems like Lotus Notes
in greater numbers than ever. Finally, the proliferation of Internet standards
increases the number of corporate desktops with HTML browsers (the standard
for Internet distribution).
2
Traditional methods of maintaining current awareness are proving
increasingly inadequate in light of the dynamic changes affecting information
technologies and the corporation. Subscribing to and reviewing a full set of
potentially relevant information sources, such as newspapers and trade
publications, may provide comprehensive coverage, but is no longer practical
from both a cost and time perspective. Proprietary online electronic
databases, such as Dialog, Dow Jones News Retrieval, Lexis/Nexis, and Reuters,
contain extensive information, but generally require specialized search
languages to query the database. Although direct access to the Internet or
consumer online services offer inexpensive access to information, they
generally do not employ sophisticated filtering systems, sources may be
limited and lack depth, and few professionals have the inclination or time to
maintain current awareness by exploring the myriad of available sites each day
in order to locate relevant news and information.
The rapid growth of information sources and delivery platforms also creates
both challenges and opportunities for information providers and advertisers.
New electronic information delivery platforms offer information providers the
potential to establish additional distribution channels to reach a broader
audience, thereby realizing incremental revenues without incurring significant
additional costs. Moreover, the emergence of highly customized news sources
also provides advertisers with a means of cost-effectively reaching a micro-
targeted audience. In addition, the deployment of online technologies provides
advertisers with the ability to establish interactive relationships with
potential customers.
THE INDIVIDUAL SOLUTION
The Individual solution offers a suite of customized information services
that provide knowledge workers with relevant current awareness reports while
offering information providers and advertisers new ways to reach targeted
audiences. The Company's intelligent software agents filter information from
approximately 600 sources, prepare a customized report of highly-relevant
information, and proactively deliver a user's personal report by 8:00 a.m.
Eastern Time each business day. These reports are delivered via platforms
convenient to the user, including facsimile, electronic mail, groupware,
intranets, and the Internet.
The Company's extensive suite of services is tailored to address the news
and information needs of multiple market segments ranging from individuals to
enterprises. The Company's principal services include First! and Hoover,
targeted to corporate workgroups and enterprises, and a series of single-user
services, including HeadsUp, targeted for the individual business executive or
knowledge worker, and NewsPage, a Web-based news site that offers information
and targeted advertising to knowledge workers with Internet access. The
Company believes that these services offer prospective customers a range of
information solutions according to their desired breadth and depth of content,
delivery platform, and level of customization.
The Company believes its business model creates a mutually reinforcing
relationship among knowledge workers, information providers and advertisers:
Key Benefits to Knowledge Workers
High Relevance. The Company's services are customized to the unique
interests of each customer. Once a customer's profile is established, the
Company, through its proprietary filtering software, editorial expertise, and
industry-segment knowledge bases, provides those news items of highest
relevance to the specific interests of the customer, while eliminating
redundant and irrelevant items.
Intraday News Alerting. The Company's First! and Hoover services provide a
news alerting service that gives customers late-breaking news of specific
companies tracked by the customer.
Ease of Use. The Company's services provide customers with exceptional ease
of use. To initiate use of one of the Company's services, a customer is only
required to spend a short amount of time configuring the initial profile of
interests. Once the profile of interests has been established, the Company
proactively delivers to
3
the user a customized report each business day which can be read at the user's
convenience. In addition, there is no need for specialized hardware, software,
or search languages.
Single Point of Access to Broad Set of Sources. The Company's solutions
offer customers a convenient, single point of access to a global array of
information. The Company offers users approximately 600 information sources,
depending on level of service, including both broad horizontal sources (e.g.,
Knight-Ridder, Kyodo News International, and Reuters) and specialized vertical
industry sources (e.g., Communications Week, ComputerWorld, and PC Week in the
computer industry).
Access to Archival Information. The Hoover service provides access to up to
two years of information from more than 6000 sources.
Multiple Delivery Platforms. The Company delivers its services across an
extensive set of platforms, including, in the case of the Company's enterprise
services, facsimile, electronic mail, groupware, and intranets, and, in the
case of the Company's single-user services, facsimile (HeadsUp), electronic
mail (HeadsUp and NewsPage), and the Internet (NewsPage). These capabilities
allow the Company to address a broad audience and to meet the requirements of
large enterprises with heterogeneous delivery needs.
Key Benefits to Information Providers
Incremental Revenues. Information providers receive fees for content
delivered to the Company's customers. These fees provide information providers
with additional revenues, leveraging the fixed editorial investment in their
published information.
Alternative Distribution Channels. The Company's services offer information
providers access to alternative distribution channels, such as electronic
mail, groupware, intranets and the Internet, that might otherwise be difficult
for them to establish.
Brand Name Awareness. When users of the Company's services read an abstract
or full text of a story, they see a clear citation specifying the source of
the item, thereby promoting awareness of the information provider's brand
name.
Source of New Subscribers. Information providers who license the use of
their content to the Company reach an interested audience of non-subscribers,
who are potential new subscribers for the information provider, and earn
revenues from vertical markets otherwise not reached by other media.
Key Benefits to Advertisers
Targeted Audience. The Company's NewsPage Web site is organized in a topic-
based menu system, which can be customized to the user's specific areas of
interest, featuring current awareness information on more than 30 different
industries. This structure allows advertisers to promote their services in a
defined and relevant segment of NewsPage, reaching highly qualified customers
with a micro-targeted message.
New Interactive Media. The Company's Web-based NewsPage service provides
interactive advertising platforms that offer advertisers greater flexibility
and functionality than traditional broadcast and print media. An interested
reader can link directly to the appropriate page on the advertiser's Web site,
allowing the advertiser to provide an unlimited amount of information in a
rich multimedia format; also, advertisers can modify their advertising in real
time and collect data on audience responses.
Potential for Online Commerce. Web-based advertising with links to the
advertiser's Web site can provide readers with the opportunity to learn more
about products, request further information, and complete transactions online.
The Company's Web-based information exchange capability not only introduces
efficiencies into the product awareness process, but also has the potential to
significantly compress the advertiser's sales cycle.
4
STRATEGY
The Company's objective is to be the industry's leading provider of current
awareness business news through a strategy that links a growing user base of
knowledge workers to relevant information providers and advertisers. By
executing this strategy, the Company believes that it is establishing a brand
name identified with high relevance, breadth and depth of information content,
and ease of use. The Company's strategy includes the following key elements:
Maintain Knowledge Processing and Relevance Leadership. The Company has
invested considerable resources to develop and refine the SMART filtering
technology and its proprietary knowledge bases of more than 2,500 distinct
editorial topics in a range of vertical markets and more than 20,000 company
tracking profiles. The Company believes that its knowledge processing
capabilities coupled with the editorial process enable it to achieve much
higher relevancy than generic filtering or search-and-retrieval technologies.
The Company intends to continue to refine and enhance its technology and
knowledge processing capabilities, including expanding the scope of its
proprietary knowledge bases, editorial topics, and thesauri.
Expand the Breadth and Depth of Information Content. As of December 31,
1996, the Company had established contractual license agreements that enable
it to offer its users access to information from more than 6000 sources, up
from 630 sources at December 31, 1995. Approximately 600 of these sources have
been integrated into the daily production process. Additional sources will be
added throughout 1997 as additional capacity is added to the production
process. The Company intends to continue to add information sources in current
categories, as well as to expand coverage to new vertical markets.
Expand Sales Channels. The Company has developed sales expertise in
multiple, complementary channels, including direct and indirect sales as well
as marketing and strategic relationships. The Company seeks to reach a wider
audience of users for its NewsPage product by developing and leveraging
marketing and strategic relationships, including with over 800 affiliated Web
sites that comprise the "NewsPage Network". At December 31, 1996, the Company
had sales and marketing relationships established with Microsoft, MSNBC,
Netscape, Netcom, Infoseek, Intuit, Toshiba and Yahoo!, among others. The
Company intends to continue to build its direct and indirect sales channels
and marketing and strategic relationships to reach broader domestic and
international markets.
Continue to Capitalize on the Internet Opportunity. The Company's NewsPage
Web-based service currently has over 380,000 registered users. The Company
believes that it is well positioned to continue to capitalize on the
opportunities presented by the widespread use of the Internet. These
opportunities include additional methods for acquiring new users, reduced
costs of delivering information, access to additional information sources,
increased interactivity with the Company's user base, the potential to
generate advertising revenue by targeting a well-defined user base, and more
direct linkages among knowledge workers, information providers, and
advertisers. The Company intends to continue to invest significant resources
to capitalize on these Internet opportunities.
Grow Advertising Revenue. The Company believes that the growing user base
for its Internet-based services presents the Company with significant
opportunities to attract advertisers. The Company offers "relevance-based"
advertising positions, enabling advertisers to reach a micro-targeted audience
of potential customers. By expanding the Company's revenue sources,
advertising enables the Company to lower the cost of information access to
users, thus making the Company's services affordable to a broader market. The
Company intends to continue to invest resources to grow advertising revenue.
Support Open Industry Standards. The Company is committed to distributing
its services through all generally available electronic distribution
technologies and platforms, including facsimile, electronic mail, groupware,
intranets and the Internet, including Web broadcasting. In addition, the
Company is committed to building to Internet standards that will allow any
corporate desktop with an industry standard internet browser to access the
Company's services. The Company intends to continue to take advantage of
emerging standards to offer richer content in its services and to meet the
evolving infrastructure needs of its customers.
5
PRODUCTS AND SERVICES
The Company offers a suite of customized information services targeted to
distinct market segments. The Company's enterprise services include First! and
Hoover, and its single-user services include HeadsUp and NewsPage. To deliver
these services, the Company utilizes the proprietary SMART text retrieval and
filtering technology, scaleable internal processing systems, editorial
knowledge bases and specialists, and quality assurance tools and analysts.
DELIVERY PLATFORMS
SERVICES DESCRIPTION TARGET USERS (INTRODUCTION DATE) PRICING
-------- ----------- ------------ ------------------- -------
ENTERPRISE
First! Daily, Management Fax (Q1 1990) Subscription-
comprehensive teams, corporate E-mail (Q1 1990) based pricing
full-text news workgroups, Lotus Notes (Q3 ranging from
service sales teams, 1992) SGML/HTML $5,000 to more
and/or (Q4 1994) than $200,000
enterprise-wide Intranet (Q3 annually,
distribution 1995) depending on
within large customer
organizations requirements
Hoover Real-time and Management Lotus Notes (Q3 Software license
archival news teams, corporate 1991) fees plus
service workgroups, subscriptions to
sales teams, content. Total
and/or fees vary
enterprise-wide depending on
distribution customer
within large requirements and
organizations information
sources
SINGLE-
USER
HeadsUp Daily news Individual Fax (Q2 1993) Subscription-
reports executives and E-mail (Q4 1993) based pricing of
including story managers within $360 and up
briefs and full- large and small annually, based
text fulfillment organizations upon fulfillment
options options*
NewsPage Internet news Knowledge Internet (Q2 Advertiser
site updated workers with 1995) E-mail (Q1 supported with
daily, including access to the 1996) variable
story briefs, Internet subscription
full-text fees and
fulfillment, and fulfillment
targeted costs*
advertising with
links to
advertisers' Web
sites
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* These services provide headlines and abstracts of news items; depending on
subscription plan, user requests for the full text of an article may be
subject to additional fulfillment charges.
Enterprise Services
First! provides comprehensive, full-text news and information delivered each
day to enterprises and workgroups that seek daily business intelligence
regarding their industry environment for use in areas such as sales,
marketing, product management, finance, purchasing, advertising, public
relations, and competitive analysis. First! offers customization at the
enterprise, workgroup, and single-user levels. The service is generally
delivered to enterprises through a two-tiered filtering process, with a
broader set of stories relevant to the enterprise delivered to a shared
groupware platform. Personalized profiles can then be defined to select the
subset of stories of highest relevance to each individual user.
First! articles are delivered each business day in full-text via facsimile,
electronic mail, or as an enterprise-wide feed to groupware platforms such as
Lotus Notes or to internal intranet servers. To encourage readership and
knowledge-sharing across the workgroup, First! is structured to facilitate
workgroup-wide redistribution and integration with comments from users. These
features enable First! to serve as a backbone for organization-wide knowledge
development.
The Company has also recently introduced First! Alert, an intra-day news
service which draws stories from major newswires, matches them to client
profiles and delivers them by e-mail to First! Alert customers as news becomes
available throughout the business day.
6
First! is generally sold to large enterprises on an annual subscription
basis. New enterprise customers typically make full subscription commitments
after a several-month paid service trial and one or more visits from the
Company's direct sales force.
Hoover is an intelligent software agent for organizations which integrates
and organizes news and information from internal and external news and
information sources. The Hoover agent provides a consolidated briefing report
that is organized based on a specified "context," such as a company or
industry. Reports are presented in Lotus Notes database format, and include
real-time intra-day alerting from newswire feeds, as well as extensive access
to archival databases. Hoover's comprehensive information relationships
include archival access for year-to-date information plus a two-year backfile.
Single-User Services
NewsPage is the Company's interactive news and information site on the Web
that provides timely and relevant information, updated each business day and
organized in a topic-based menu system. Users can navigate through menus,
explore news relating to more than 25 industry areas, and link directly to
pre-specified topics of interest. NewsPage leverages the Web's document-
linking structure by allowing users to view articles in brief or full-text
format and to connect directly to the Web sites of advertisers to obtain
additional product information or potentially to complete transactions online.
NewsPage was selected by Internet World as the "Best Online News Service" for
1995 and by PC Magazine as one of the "Top 100 Web Sites" in 1997. NewsPage
currently has over 380,000 registered users.
NewsPage includes advertising from leading companies seeking to participate
in "relevance-based advertising," the Company's model for linking sponsors to
micro-targeted readers. In contrast to traditional advertising, which is
challenged to attract the attention of appropriate readers in a mass-media
environment, the relevance-based model ensures a qualified audience through
reader-driven content selection. Users, while reading a news item on a subject
of interest to them, are presented with an advertising banner from a related
sponsoring company. The user can then immediately link to the Web site of the
advertiser to get detailed product information or potentially to conduct
business transactions directly over the Internet. Current and recent
advertisers from a range of industries include Microsoft, Bay Networks,
International Business Machines, American Telephone & Telegraph, The Wall
Street Journal and Digital Equipment Corporation.
NewsPage is primarily advertising supported, offering a basic level of
service to users at no charge, and a higher level of service, including full
text of stories from a broader set of sources, to users paying a monthly
subscription fee and fulfillment fees to view full-text articles from certain
sources. Advertising revenue is recognized ratably over the advertisement
period. NewsPage can be found on the Web at "http://www.newspage.com".
HeadsUp is a personalized, interactive daily business intelligence report
designed to meet the information needs of individual business professionals,
such as executives in small businesses, mobile business professionals, or
individual knowledge workers within larger organizations. HeadsUp is delivered
each business day by facsimile or electronic mail. News items are presented as
briefs, with full text available through the Company's interactive system
either by electronic mail or through the Company's telephone interactive voice
response system. Subscribers create their profiles by selecting topics from
the Company's Topic Selector, a library of more than 2,400 topic categories
and company names. Subscribers specify their targeted mix of topics and
prioritize their choices, and can update this profile over time to better meet
their changing information requirements. The Company has recently introduced
HeadsUp Alert, an intra-day financial news service which draws stories from
major newswires, matches them to client profiles and delivers them by e-mail
to HeadsUp Alert customers as news becomes available throughout the business
day. HeadsUp is offered through both monthly and annual subscriptions.
On June 28, 1996, the Company acquired all of the capital stock of
FreeLoader, Inc., a developer of agent-based software for the off-line
delivery of World Wide Web multi-media content, a market generally referred to
7
as "Web broadcasting" or "push" technology. On February 6, 1997, the Company
announced that it is planning to sell FreeLoader or seek a majority investor.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Knowledge Processing Architecture
Each of the Company's daily news and information services utilizes
proprietary technology and production systems which have been designed and
enhanced to enable the automated retrieval, compiling and distribution of news
items most relevant to each user. The Company continuously receives news and
information from its information providers via electronic news feeds. The
Company maintains a database of profiles characterizing the interests of each
of its customers. The Company's filtering and editorial systems match each
customer's profile with the most relevant set of incoming stories. The
Company's internal systems are designed to deliver its services by 8:00 a.m.
Eastern Time each business day to each of its customers over a conveniently
accessible delivery platform.
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INFORMATION SOURCES
The Company has directed substantial resources to develop relationships with
an extensive range of domestic and international information providers,
allowing it to access content from general news and vertical industry sources.
A partial listing of information providers that had contractual agreements with
the Company as of December 31, 1996, includes:
BROAD HORIZONTAL INFORMATION SOURCES
NEWSWIRES NEWSPAPERS AND MAGAZINES INTERNATIONAL
AFX Business Week Agence France Press
Associated Press Online Chicago Tribune Asian Review of Business
Knight-Ridder/Tribune Christian Science and Technology
Business News Monitor Business Times
Kyodo News International The Economist (Singapore)
ITAR/TASS Financial Times Economist Intelligence
Nikkei English News Forbes Unit
PR Newswire Knight-Ridder/Tribune Financial Times
Reuters (full span of Los Angeles Times FT McCarthy files
services) San Francisco Chronicle Jakarta Post
XINHUA San Jose Mercury News Korea Economic Daily
The Information Access South China Morning Post
Company
The Wall Street Journal
VERTICAL INDUSTRY INFORMATION SOURCES
HIGH TECHNOLOGY TELECOMMUNICATIONS ENERGY
Computerworld Broadcasting & Cable Energy Daily
Cowles/SIMBA Media Daily Cablevision Energy Economist
Datamation Communications Daily International Petroleum
EDN Mobile Communications Finance
Electronics Business Report Petroleum Finance Week
Today Multichannel News Petroleum Intelligence
Electronic Engineering Satellite News Weekly
Times Telephony Power Asia
Information Week Warren's Cable Power Europe
Interactive Video News Regulation 21st Century Fuels
Interactive Week UK Gas Report
Optical Memory News DEFENSE World Gas Intelligence
PC Week
Semiconductor C4I News FINANCE
International Defense Daily
DOD News Release American Banker/Bond
HEALTHCARE International Defense Buyer
Review
A.M. Best News
Bio World Today Jane's Despatches Bank Automation News
Embase Navy News & Undersea Bank Automation
Health News Daily Technology Corporate EFT
Infectious Disease Tactical Technology CFO Alert
Weekly Disclosure
Journal of the AMA OTHER BUSINESS First Call
Medline Investext
New England Journal of Advertising Age INVEST/NET Insider
Medicine Chemical Week Trading
PHARMA Japan Interactive PR Lloyd's List
Pharma Marketletter Micropatent OTC Derivatives Analyst
R&D Insight Technology Transfer Week Pensions & Investments
Scrip VARBusiness Private Placement Report
Variety The Banker
9
The Company initially focused on information providers in the high
technology sector and has subsequently added information sources in several
other vertical markets, including telecommunications, healthcare, finance,
energy, and defense. More recently, the Company has created an extensive set
of more than 20,000 company profiles, allowing news relating to a specific
company to be filtered and delivered to users.
The Company's agreements with its information providers generally grant the
Company the non-exclusive worldwide right to distribute through the Company's
services the content published by the information provider. These agreements
typically have an initial term of either two or three years, are automatically
renewable unless terminated by one of the parties upon prior notice, and
provide for termination upon a breach by a party which is not remedied within
the applicable cure period after notice from the other party. Each information
provider warrants that it has ownership of, or other sufficient rights in, the
content licensed to the Company but disclaims responsibility for any errors in
that content as well as other warranties. The Company typically pays its
information providers a fee which is either based upon the Company's revenue
attributable to the licensed content or a fixed monthly amount or both.
MARKETS AND CUSTOMERS
At December 31, 1996, the Company had approximately 460,000 users of its
enterprise and single-user services. At that date, the Company had
approximately 700 enterprise customers deploying the First! and Hoover
services to users within their organizations. Representative enterprise
customers include:
HIGH TECHNOLOGY HEALTHCARE TELECOMMUNICATIONS
3Com Allergan Ameritech
Advanced Micro Devices Astra USA AT&T
Apple Computer Baxter Healthcare Bell Atlantic
Cisco Systems Becton Dickinson BellSouth
Dell Computer Blue Cross & Blue Shield Cellular One
Digital Equipment Corp. Glaxo Hughes Communications
Hewlett-Packard Hoffman-La Roche Nokia Mobile Phones
IBM Kaiser Permanente SBC Communications
Microsoft Merck Sprint
Motorola Smithkline Beecham
NEC OTHER CORPORATIONS
Oracle ENERGY
Tandem Computer Allen-Bradley
Unisys Amoco Corporation Corning
Mobil Oil Eastman Kodak
FINANCE Saudi Aramco Hitachi
Mercedes-Benz of North
Coopers & Lybrand America
Chase Manhattan Bank Polaroid
Ernst & Young Rockwell International
ITT Hartford Sony
Toshiba
Xerox
SALES AND MARKETING
The Company targets its sales and marketing programs to reach knowledge
workers within large enterprises, within small organizations, or who work
independently, and organizes these efforts into the Enterprise and Single User
Markets. In the Enterprise markets the Company markets and sells its services
in the United States and internationally through multiple sales channels,
including the Company's direct sales force and telesales. Sales and marketing
programs in the single user markets consist of a direct sales force for the
sale of advertising on NewsPage and development of users on NewsPage through
Web advertising and promotion, direct mail, strategic
10
relationships with leading Web sites, and marketing relationships with other
Web sites through the NewsPage Network. The Company's sales and marketing
staff consisted of 63 full-time employees at December 31, 1996, located in the
Company's headquarters in Burlington, Massachusetts, and in San Francisco,
California, New York City, and Tokyo. Principal elements of the Company's
sales and marketing strategy include:
Direct Sales. To date, the Company has utilized its direct sales force
primarily to pursue sales of its enterprise services, First! and Hoover, in
the United States. The Company generally targets its direct sales efforts to
large enterprises with potential readers in excess of 200. For enterprises
with less than 200 users the Company generally uses telesales. The Company
also has a separate direct sales force to sell advertising for NewsPage.
Telesales and Direct Mail. The Company's telesales force focuses principally
on sales of HeadsUp and First! for smaller businesses. The Company's telesales
efforts are complemented by a direct mail program designed to generate
prospects. The telesales force is also trained to recognize enterprise
prospects where the Company's First! for Notes and Intranet service would be
an appropriate solution and to forward these leads to the Company's direct
sales force.
Strategic Relationships. The Company has established strategic alliances
with leading firms to promote and sell its NewsPage service. The Company has
relationships with companies including NETCOM, Netscape, Microsoft, MSNBC,
Infoseek, Yahoo!, Intuit and others involving cooperative marketing and
distribution of the Company's services. These arrangements vary with each
partner and generally are intended to bring users to the NewsPage site or to
provide some level of direct NewsPage service to the partner's customer.
Depending on the agreement and the level of service the Company will pay the
partner or share in the advertising revenue derived from that user. The
Company has also entered into a distribution partnership with Digital
Equipment Corporation for the delivery of NewsPage as a feature of its client
support services product. The Company believes that this may serve as a model
for future relationships in which the Company's targeted, topical news
products can be an important building block for broader services offered by
its partners.
NewsPage Network. NewsPage Network allows Web sites to incorporate special
versions of NewsPage--along with the Company's advertising and subscription
offers--inside Web sites that register with the Company as affiliates. There
are more than 800 sites currently registered as NewsPage Network affiliates.
International Sales. The Company has begun to establish the direct and
indirect channels and the strategic relationships which it believes are
required to expand its international business. The Company has established a
dedicated exclusive agency relationship with a reseller in the United Kingdom.
In the fourth quarter of 1995, the Company incorporated a wholly-owned
subsidiary in Japan in order to expand its international business in the Far
East. In April 1996, the Company entered into a joint venture with Toshiba
Corporation to provide customized news and information from Japanese language
sources to corporate managers and executives across a variety of industries in
Japan. The Company also utilizes sales agents in several other countries. In
each of the three years ended December 31, 1996, 1995 and 1994, less than 10%
of the Company's sales revenue was generated from international customers.
Marketing. The Company's marketing activities are designed to build market
awareness and identify prospective users of its services. These marketing
efforts include participation in tradeshows, seminars, conference speaking
engagements, direct mail campaigns, print and online advertising, and efforts
to generate exposure in trade magazines and general interest magazines and
newspapers. The Company has received numerous industry awards, including the
1995 Information Industry Association's "Breakout Company of the Year" award,
Internet World's "Best Online News Service" award in 1995 and PC Magazine's
"Top 100 Web Sites" in 1997.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer service and support are critical to the
value of its services and in retaining and expanding its customer base. The
Company's customer support staff, which consisted of 14 people
11
at December 31, 1996, provides toll free telephone support, response to
customer requests to modify or update their profiles, pro-active calls to
customer accounts as appropriate, and support for questions with respect to
billing charges for a given period. The customer service and support
organization also provides feedback to other functions of the Company
regarding customer requirements and priorities for new features or new
information sources. The Company's editorial specialists also contribute to
the Company's customer support capability by assisting customers in the
definition and modification of their profiles. The Company does not charge its
customers for service and support.
EDITORIAL, OPERATIONS, AND PRODUCT DEVELOPMENT
The Company's knowledge processing systems have been designed and enhanced
to enable the automated retrieval of the news items most relevant to each
user's personal interest profile, while eliminating duplicative and irrelevant
items. The Company's proprietary systems and technology are built around the
SMART (System for Manipulation and Retrieval of Text) filtering technology.
The Company, since its inception, has directed substantial resources to
developing and enhancing its internal production systems, editorial
capabilities, quality assurance function, and product development expertise.
The Company believes that these integrated capabilities allow it to deliver
highly relevant, concise news reports to its users.
The SMART technology is an information filtering system developed through 20
years of research at Cornell University, for which the Company has an
exclusive license. See "Business--Licenses and Intellectual Property." The
SMART software analyzes incoming electronic information sources to identify
items matching each subscriber's customized profile, and delivers a news
report to the user each business day. In contrast to earlier-generation
keyword search algorithms, the SMART software relies on a complex, multi-
dimensional representation of each user's profile and employs advanced
techniques to retrieve items with the highest degree of relevance. Since a
major news item might be carried by a number of sources, the Company's
filtering engine eliminates redundant stories and identifies the particular
article that best covers the topic. The Company believes that its SMART
technology enables it to deliver services to its users with significantly
higher relevance than those generated by alternative approaches.
The Company's internal systems are deployed across a client-server network
of PCs and Unix workstations which can be expanded to meet increases in
production requirements. The Company believes that the components of its
production systems can be purchased from external vendors with minimal lead
times.
To support its production systems and to enhance the performance of the
SMART filtering engine, the Company employs a staff of editorial specialists
and domain experts. The role of these specialists is to refine, on an ongoing
basis, the knowledge base that defines the topics and filtering parameters in
each information domain. Through their in-depth vertical industry knowledge
and experience with the SMART codification techniques, the editorial
specialists build and refine a set of domain knowledge bases and thesauri of
industry terminology that enable SMART to identify the relevant news stories
for individual profiles and industry topics. The Company has also developed a
set of software tools that facilitate the creation and maintenance of these
domain knowledge bases. The Company believes that this editorial function is a
critical component of its ability to provide its users with extensive, yet
highly targeted, coverage of news items of interest. As of December 31, 1996,
the Company employed 19 full-time people in its editorial department.
The Company's quality assurance function monitors the quality and
consistency of its delivered services every day. The quality assurance
function also investigates transmission problems, which can occur as a result
of internal system difficulties or problems on the receiving end. To provide
its large enterprise customers with a high level of customer service, the
Company has developed internal systems and procedures to identify potential
delivery problems as early as possible in the overall daily production cycle.
The Company has also developed a set of automated tools used by the Company in
its internal production process, which operate together with the SMART
filtering systems to improve the efficiency and effectiveness of the Company's
quality assurance function.
12
The Company's product development efforts are focused on expanding and
enhancing the Company's suite of services, further developing the Company's
core retrieval and filtering technology, further developing the Company's
knowledge processing and delivery systems, and developing service capabilities
that leverage the interactive capabilities of the Internet. The Company's
product development efforts to expand and enhance the delivery of its services
include efforts to enhance the interactive capabilities of the Company's
Internet and intranet-based services, enhancing First! for Notes, and general
ongoing enhancements to its delivery capabilities. For the years ended
December 31, 1996, 1995, and 1994, the Company had $4.6 million, $2.6 million,
and $1.2 million of product development expenses, constituting 19%, 15%, and
13% of revenue, respectively. The Company expects that it will continue to
commit substantial resources to research and development for the foreseeable
future.
MICROSOFT RELATIONSHIP
In October 1995, the Company and Microsoft entered into a business
relationship for the development and marketing of customized information
services to be offered in conjunction with Microsoft products or services.
Microsoft, through its Microsoft Network ("MSN") online service and MSNBC
offers its users the ability to obtain customized information based on
Individual's NewsPage Web site technology. These Microsoft services
specifically highlight the Company's corporate name and service brand and link
users to the Company's Web site.
As part of its business relationship with the Company, in September 1995
Microsoft purchased shares of the Company's Series G Preferred Stock (all of
which were converted into shares of Common Stock upon the closing of the
Company's initial public offering). Daniel Rosen, a General Manager at
Microsoft, is a member of the Company's Board of Directors.
KNIGHT-RIDDER AND OTHER STRATEGIC RELATIONSHIPS
The Company has established strategic relationships with several other
leading corporations, including Knight-Ridder. These relationships are
designed to enable the Company to acquire new users more cost-effectively, to
offer additional capabilities to its existing users, expand its information
sources, or to leverage its systems expertise in conjunction with another
party to offer new services.
The Company is licensing content from Knight-Ridder. Also, Knight-Ridder
markets a service under the name Dialog Direct that utilizes proprietary
technology of the Company, for which the Company receives license fees. In
1993, Knight-Ridder purchased shares of the Company's Series F Preferred
Stock. Jeffery S. Galt, President of Knight-Ridder Information, Inc., is a
member of the Company's Board of Directors.
In March 1996, Individual entered into an agreement with the Internet
service provider NETCOM to provide NETCOM subscribers with a daily customized
news service called Personal NewsPage Direct. In April 1996, the Company and
Toshiba Corporation entered into a joint venture to form a Japanese
corporation to provide customized news and information services targeted to
the Japanese business information market.
The Company also has in place marketing alliances with Netscape
Communications, Infoseek, Yahoo!, Intuit and Verity, among others. Many of
these companies offer the potential for broader distribution and reduced
subscriber acquisition costs for the Company. See "Business--Sales and
Marketing."
COMPETITION
The market for information services is intensely competitive and rapidly
changing. The Company competes, or may in the future compete, directly or
indirectly for users, information providers and/or advertisers with the
following categories of companies: (i) large, well-established news and
information providers such as Dow Jones, Knight-Ridder, Lexis/Nexis, Pearson,
Reuters and Thomson; (ii) traditional print media companies that
13
are increasingly searching for opportunities for online provision of news,
including through the establishment of Web sites on the Internet; (iii)
providers of network-based software systems such as Lotus and Microsoft, which
could, in the future, ally with competing news and information providers; (iv)
third party providers of software that allows customers to aggregate and
filter a variety of news feeds, such as Desktop Data; (v) consumer online
services such as CompuServe, America Online and The Microsoft Network; (vi)
Internet-based news distributors such as ClariNet and search engine providers
such as Digital Equipment, Infoseek, Lycos, Verity, and Yahoo!; and (vii)
Companies that offer space for advertising on the Web, including content sites
such as c|net, ESPNet, GNN, HotWired, Pathfinder, and USA Today. The Company
presently has strategic relationships with certain of its competitors or
potential competitors (including Knight-Ridder and Microsoft) and licenses
content from others.
The Company believes that the principal competitive factors in selling its
products and services to knowledge workers include information relevance,
depth and breadth of information sources, ease of use, timeliness, delivery
platform capabilities, service quality, and cost. The Company believes that
the principal competitive factors in attracting information providers include
the ability to generate incremental fees, the ability to promote brand name
recognition, the potential to acquire new subscribers, and the degree of
delivery differentiation. The Company believes that the principal competitive
factors in attracting advertisers include the number of users or audience
size, demographics of user base or audience, the ability to micro-target
advertising, the capability to interact with customers, and overall cost-
effectiveness of advertising. The Company believes that it competes favorably
with respect to these factors, but there can be no assurance that it will
continue to do so.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition, and a larger installed customer base than
the Company. In addition, any of these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
and to devote greater resources to the development, promotion and sale of
their services than the Company. There can be no assurance that the Company's
current or potential competitors will not develop products and services
comparable or superior to those developed by the Company or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
customer requirements. Increased competition could result in price reductions,
reduced margins, or loss of market share, any of which would materially and
adversely affect the Company's business, results of operations, or financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, or that competitive
pressures faced by the Company will not have a material adverse effect on its
business, results of operations, and financial condition. If the Company is
unable to compete successfully against current and future competitors, the
Company's business, results of operations, and financial condition will be
materially adversely affected. See "Factors Affecting Future Performance".
LICENSES AND INTELLECTUAL PROPERTY
The Company's success is dependent to a significant degree on its
proprietary technology. The Company relies on a combination of trade secret,
copyright, and trademark laws and on non-disclosure agreements and contractual
provisions to establish and protect its proprietary rights. The Company has
received two patents and has not to date registered any of its copyrights or
trademarks. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's services or
to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or 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 has licensed the proprietary SMART filtering software, which is
used as the filtering engine for all of its products and services, from
Cornell University. Under the terms of the license agreement with Cornell
University, the Company has exclusive worldwide rights until February 1999 to
design, develop, market,
14
and sell systems and services based on the SMART software for the retrieval
and dissemination of data from recent and continually changing data sources.
Provided that the Company is not then in default of the license agreement, at
the end of the initial term of the agreement the Company will retain a
continuing worldwide, non-exclusive, perpetual royalty-free right to use the
SMART software, as well as the exclusive rights to all enhancements it has
made to the software. There can be no assurance, however, that Cornell
University will not license the SMART software to a third party, including a
competitor of the Company, once the Company's exclusive rights have lapsed. In
addition, Cornell University may terminate the license agreement if the
Company has materially breached the agreement and such breach remains uncured
60 days after written notice of such breach has been given. If the license
agreement were to terminate, the Company would be required to develop or
acquire a replacement filtering technology, and there can be no assurance that
such technology could be developed or acquired, on a timely basis or at all,
and on favorable terms to the Company. Consequently, any termination of the
Company's license agreement with Cornell University would have a material
adverse effect on the Company's business, results of operations, and financial
condition.
There has been substantial litigation in the information services industry
involving intellectual property rights. Although the Company does not believe
that it is 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 or
licensed content. Although the Company obtains representations as to the
origins and ownership of such licensed informational content and 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, financial
condition, and results of operations.
EMPLOYEES
The Company had 176 full-time employees at December 31, 1996, excluding 38
working for FreeLoader. Of the 176 total employees, 59 were in editorial and
operations, 63 were in sales and marketing, 39 were in product development,
and 15 were in finance and administration. The Company's future success
depends in significant part upon the continued service of its key technical,
editorial, sales, product development and senior management personnel and on
its ability to attract and retain highly qualified employees. There is no
assurance that the Company will continue to attract and retain high-caliber
employees, as competition for such personnel is intense. The Company's
employees are not represented by any collective bargaining organization, and
the Company has never experienced a work stoppage and considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Burlington,
Massachusetts. The Company leases approximately 37,400 square feet under a
lease expiring December 31, 1999, with options to expand into adjacent space
on or before the termination of the lease. The Company leases 15,300 square
feet under a lease expiring October 31, 2001 in San Francisco, California and
leases additional facilities and offices for development, sales and support
personnel in San Jose, California, Washington D.C., and Tokyo. The Company
believes that its existing facilities are adequate for its current
requirements and that additional space can be obtained to meet its future
requirements. The Company owns substantially all equipment used in its
facilities.
15
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in a putative federal securities
class action lawsuit filed on November 13, 1996 in the United States District
Court for the District of Massachusetts. The lawsuit was filed on behalf of an
alleged class of purchasers of the Company's common stock during the period
from March 15, 1996 through July 24, 1996. The complaint filed in the lawsuit
also names as defendants, among others, certain of the Company's current and
former directors and officers, including Joseph A. Amram, the Company's former
Chief Executive Officer, as well as the three co-managing underwriters of the
Company's initial public offering (the "IPO").
The complaint alleges, among other things, that the defendants made
misstatements, or failed to make statements, to the investing public in the
IPO Prospectus and Registration Statement, as well as in subsequent public
disclosures, relating to the alleged existence of disputes between Joseph A.
Amram and the Company. The plaintiffs seek damages, including costs and
expenses, in an unspecified amount, among other relief. The Company believes
that the allegations contained in the complaint are without merit and intends
to defend vigorously against all such claims. However, the lawsuit is in its
earliest stages, and no estimate of possible loss, if any, can currently be
made. There can be no assurance that this litigation will not have a material
adverse effect on the Company.
The Company is not currently a party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's results of operations or financial
position. From time to time, the Company may be involved in litigation
relating to claims arising out of its operations in the normal course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "INDV". Public trading of the Common Stock commenced on March 15, 1996.
Prior to that time, there was no public market for the Company's Common Stock.
The following table sets forth the high and low sale prices for the Common
Stock as reported by Nasdaq for the periods indicated.
HIGH LOW
------- -------
1996:
First quarter (from March 15)............................... $16 5/8 $14
Second quarter.............................................. 24 1/2 14
Third quarter............................................... 17 3/4 3 7/8
Fourth quarter.............................................. 6 3/4 4 3/8
On March 21, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $5 7/8 per share. As of March 21, 1997, there were
approximately 166 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company for the years ended December
31, 1996, 1995, 1994, 1993 and 1992. The information
16
set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included as
Item 7 and the consolidated financial statements and related footnotes
included as Item 8 in this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue......................... $ 24,145 $16,733 $ 9,127 $ 4,105 $ 1,901
Cost of revenue................. 11,867 7,783 4,077 2,169 1,083
-------- ------- ------- ------- -------
Gross margin.................... 12,278 8,950 5,050 1,936 818
Operating expenses:
Sales and marketing........... 5,666 2,785 1,183 867 367
New subscriber acquisition.... 9,030 7,387 5,953 2,666 1,063
Product development........... 4,599 2,587 1,153 772 359
General and administrative.... 4,460 2,423 923 815 758
Mergers, disposition and other
charges...................... 39,422 -- -- -- --
-------- ------- ------- ------- -------
Total operating expenses.... 63,177 15,182 9,212 5,120 2,547
-------- ------- ------- ------- -------
Loss from operations............ (50,899) (6,232) (4,162) (3,184) (1,729)
Interest and other income
(expense), net................. (118) (211) (94) 164 (11)
-------- ------- ------- ------- -------
Net loss........................ $(51,017) $(6,443) $(4,256) $(3,020) $(1,740)
======== ======= ======= ======= =======
Supplemental net loss per common
share.......................... $ (4.03) $ (0.67) $ (0.44) $ (0.31) $ (0.18)
======== ======= ======= ======= =======
Supplemental weighted average
common shares outstanding...... 12,673 9,619 9,607 9,604 9,602
======== ======= ======= ======= =======
DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
investments in marketable
securities..................... $30,335 $ 17,518 $ 1,640 $ 4,461 $ 3,695
Working capital (deficit)....... 16,948 9,869 (2,751) 2,347 2,733
Total assets.................... 46,929 26,803 7,289 7,115 4,813
Other long-term obligations..... 1,411 986 565 377 176
Senior subordinated notes....... -- 10,000 -- -- --
Redeemable preferred stock...... -- 23,999 12,246 10,759 9,272
Stockholder's equity (deficit).. 20,587 (21,688) (13,618) (7,876) (6,369)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Individual offers a suite of customized information services that provide
knowledge workers with relevant current awareness reports each day while
offering information providers and advertisers new ways to reach targeted
audiences. The Company commenced delivery of its initial service in early
1990, and has subsequently introduced additional services targeted at multiple
market segments.
The Company's revenue consists principally of subscription and advertising
revenue derived from two classes of services: enterprise services and single-
user services. Revenue for the Company's principal enterprise service, First!
(introduced in the second quarter of 1990), consists of subscription fees from
organizations. In addition, in October 1996, the Company acquired the Hoover
business intelligence unit ("Hoover"), from the
17
Information Access Company (IAC), a unit of the Thomson Corporation. Hoover is
an intelligent software agent that integrates and organizes information from
internal and external news and information sources. Hoover provides real-time
and archival electronic news and information services to organizations.
Revenue from the Hoover service consists of subscription fees for content, and
software license and maintenance fees. The Company purchased the Hoover
assets, which consisted primarily of accounts receivable and fixed assets, for
approximately $1.7 million in cash and future payments. Hoover did not
materially contribute to 1996 revenues.
The Company's principal single-user service is the World Wide Web-based
service NewsPage, introduced in the second quarter of 1995. NewsPage base
service is generally available for no charge to users. Revenue consists of
advertising fees from companies placing advertisements through this service
and from subscription fees for premium levels of service and fees for the
fulfillment of certain user requests for additional information. Advertising
revenue is impacted by the number of users and their frequency of use of the
service. At December 31, 1996, NewsPage had approximately 380,000 registered
users, up from 38,000 at December 31, 1995 and 270,000 at September 30, 1996.
For 1996, advertising was not material to total revenue but advertising
revenues are expected to increase as the number of users continues to grow and
the Company increases its ability to sell advertising. Generally, the users of
NewsPage are obtained from advertising on other Web sites and from
distribution partnerships with other Web services that provide NewsPage as a
service to their subscribers.
Another single-user service of the Company is HeadsUp, which was introduced
in the second quarter of 1993. HeadsUp revenue consists of subscription fees
and fees for the fulfillment of certain user requests for additional
information. HeadsUp is a fax and email-based service and was not promoted
actively in 1996, primarily due to the Company's belief that users are moving
to Web-based information services, such as NewsPage. As a result of this user
migration, revenue from HeadsUp declined throughout the year and is expected
to continue to decline in future periods. BookWire, an internet site featuring
book reviews, discussion forums, and the ability to purchase books online, was
acquired by the Company in the third quarter of 1995 and sold to Cahners
Publishing in November of 1996 for approximately $1.0 million in cash.
BookWire did not have a material impact on operating results.
The Company recognizes subscription revenues ratably over the subscription
period. The Company's subscription contracts are typically billed in advance,
and amounts attributed to services not yet delivered are recorded in deferred
revenue. Customers of the Company's services may, under certain circumstances,
terminate their subscriptions. Historically, the level of subscription
cancellations prior to the termination of the subscription period has not been
material and has had no impact on revenue previously recognized. Fulfillment
fees are recognized as revenue at the time stories are provided. Advertising
revenue is recognized ratably over the advertisement period. Costs incurred in
acquiring the subscription contract are expensed as incurred.
On June 28, 1996, the Company acquired all of the capital stock of
FreeLoader, Inc., a developer of agent-based software for the off-line
delivery of World Wide Web multi-media content, a market generally referred to
as "Web broadcasting" or "push" technology. The Company issued approximately
1,874,489 shares of its Common Stock in the FreeLoader acquisition including
up to 360,180 shares of Common Stock which are reserved for issuance upon
exercise of outstanding FreeLoader stock options assumed by Individual in the
acquisition, for an aggregate purchase price of approximately $36 million. The
FreeLoader acquisition has been accounted for as a purchase. Approximately
$35,600,000 of the purchase price has been allocated to purchased incomplete
technology determined to be in-process and, accordingly, expensed at
consummation. On February 6, 1997, the Company announced that it is planning
to sell FreeLoader or seek a majority investor. This decision was based on the
rapid changes in the market for Web broadcasting which have occurred since the
closing of the FreeLoader acquisition, including the significant increase in
the number of vendors offering products based on "push" technologies and the
desire for the Company to offer its services on a wide range of Web
broadcasting platforms, as well as the future need to invest heavily in
FreeLoader in order to maintain the competitiveness of its product offerings.
In order to maintain the viability and value of FreeLoader, the Company is
maintaining its current level of investment in the FreeLoader operations as it
pursues a sale or outside investment. However, there can be no assurance that
the Company will be successful in completing such a transaction, which may
require the Company to cease operations of FreeLoader.
18
The Company had 214 full-time employees on December 31, 1996, up from 157
and 96 on December 31, 1995 and 1994, respectively. The number of employees at
year end 1996 includes 38 employees working at FreeLoader. The majority of the
Company's operating expenses, before mergers, disposition and other charges,
consists of salary, related costs, and fees to information providers.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total revenues:
PERCENTAGE OF TOTAL REVENUES
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
Revenue............................... 100.0% 100.0% 100.0%
Cost of revenue....................... 49.1 46.5 44.7
---------- --------- ---------
Gross Margin.......................... 50.9 53.5 55.3
Operating expenses:
Sales and marketing................. 23.5 16.6 13.0
New subscriber acquisition.......... 37.4 44.1 65.2
Product development................. 19.0 15.5 12.6
General and administrative.......... 18.5 14.5 10.1
Mergers, disposition and other
charges............................ 163.3 -- --
---------- --------- ---------
Total operating expenses.......... 261.7 90.7 100.9
---------- --------- ---------
Loss from operations.................. (210.8) (37.2) (45.6)
Interest and other income (expense),
net.................................. (0.5) (1.3) (1.0)
---------- --------- ---------
Net loss.............................. (211.3)% (38.5)% (46.6)%
========== ========= =========
Revenue
Revenue was $24.1 million in 1996, $16.7 million in 1995, and $9.1 million
in 1994, representing an increase of 44% in 1996 and 83% in 1995. Growth in
the Company's enterprise services and single-user services each contributed to
these increases. The number of registered and authorized users of the
Company's enterprise and single-user services increased by over 400% during
1996 to 462,000. Sales revenue from international sources was less than 10% in
1996, 1995 and 1994. Domestic revenue is expected to grow faster than
international revenue in 1997.
Revenue from enterprise services was $16.4 million in 1996, $11.1 million in
1995, and $7.0 million in 1994, representing an increase of 47% in 1996 and
59% in 1995. These increases result primarily from subscription fees of new
First! customers, primarily distributed through Lotus Notes (First! Notes) and
intranets (First! Intranet), which was first introduced in 1995, and upgrades
of existing contracts, offset by a decrease in revenue from First! fax and e-
mail. The First! Notes and First! Intranet products generally have a higher
contract value and serve a larger number of users than the First! fax and e-
mail products.
Revenue from single-user services was $7.7 million in 1996, $5.6 million in
1995, and $2.1 million in 1994, representing an increase of 37% in 1996 and
167% in 1995. The increase in 1996 consists of both subscription and
advertising revenues from NewsPage, the Company's Web service introduced in
the second quarter of 1995, and is partially offset by the decline in revenue
from its non-Web subscription services, HeadsUp and Physician's NewsScan. The
increase in 1995 was primarily due to the growth of HeadsUp and Physician's
NewsScan, which were not actively promoted in 1996, as users are moving to the
Web to receive information.
19
Cost of revenue
The principal elements of the Company's cost of revenue are fees paid to
information providers, payroll and related expenses for its editorial and
operations staff, as well as telecommunication and computer related costs for
the support and delivery of the Company's services. Cost of revenue was $11.9
million, $7.8 million, and $4.1 million, and gross margins were 50.9%, 53.5%,
and 55.3%, in 1996, 1995, and 1994, respectively. The increase in cost of
revenue for each period primarily reflects costs incurred to provide service
to an increased number of users, including costs relating to expanding the
number of information sources available to users. Total cost of revenue in
1996 was also impacted by costs related to increasing production capacity for
NewsPage, the cost of information content, and from a change in estimated
depreciable lives on equipment from 5 years to 3 years, which resulted in an
increase of depreciation expense of approximately $481,000. The decrease in
gross margin as a percentage of revenue was primarily due to the following
factors: 1) Minimum royalty commitments paid on information sources have
increased the percentage of revenue paid to information providers. This
expense as a percentage of revenue is expected to decline in future periods as
the minimum commitments can support a higher level of revenue; and 2) NewsPage
capacity has expanded in anticipation of revenue growth and the margins
realized from NewsPage are not at the level of the margins realized on the
non-Web services, which NewsPage is primarily replacing. The Company believes
that gross margins will be favorably impacted by increases in revenues which
will help spread current fixed costs attributable to anticipated capacity,
minimum royalty commitments, and certain editorial costs which generally
increase if the company expands the number of topics and industries it
targets. Gross margin will continue to be negatively impacted by the growth of
Hoover revenues in future periods, as low margin information fees represent a
large portion of Hoover revenues. These lower gross margins are expected to be
offset by certain efficiencies as Hoover becomes integrated with the First!
offering. There can be no assurance, however, that advertising and
subscription fees will increase in future periods, or that the integration of
the different product lines will result in increased operating margins.
Sales and marketing
Sales and marketing expenses consist principally of salaries, commissions,
and associated costs for Company personnel engaged in the general marketing of
all of the Company's services, activities related to renewing existing
customer contracts, and, beginning in 1995, costs of selling advertising.
Sales and marketing expenses were $5.7 million in 1996, $2.8 million in 1995,
and $1.2 million in 1994, representing an increase of 103% in 1996 and 135% in
1995. The principal reasons for the increases were growth in the Company's
sales and marketing staff, the increased level of activity necessary to renew
subscriptions from a larger customer base, and expansion of general
promotional activities. In addition, sales expenses increased as a percentage
of revenue in the later part of 1995 and in 1996 due to the creation of a
direct sales force and other related expenditures to sell advertising and an
increase in general marketing expenses to attract new advertisers on the
NewsPage service. Sales and marketing expenses can be expected to continue to
increase primarily due to the addition of personnel to sell advertising and
renew and upgrade existing enterprise customers.
New subscriber acquisition costs
New subscriber acquisition costs consist primarily of the direct sales,
promotion and telesales expenses directly related to obtaining new subscribers
and, beginning primarily in 1996, advertising costs paid to other Web sites
and fees paid to distribution partners for attracting new subscribers for
NewsPage. New subscriber acquisition costs were $9.0 million in 1996, $7.4
million in 1995, and $6.0 million in 1994, representing an increase of 22% in
1996 and 24% in 1995. The dollar increases are due to the addition of
personnel selling First! to new customers and promotional expenses to attract
new users to NewsPage. As a percentage of revenue, new subscriber acquisition
expenses declined due to the larger First! customer base and overall increased
revenue. In addition, in 1996, the Company decreased its promotional efforts
of non-Web single user services. The Company expects to continue to increase
its expenditures on new subscriber acquisition but expects these expenses to
decline as a percentage of revenue.
20
Product development
Product development expenses consist primarily of salary and related
expenses for engineering and technical personnel associated with developing
new services and enhancing existing services. To date all the Company's costs
for product development have been expensed as incurred. Product development
expenses were $4.6 million in 1996, $2.6 million in 1995, and $1.2 million in
1994, representing an increase of 78% in 1996 and 124% in 1995. The increases
are primarily due to the addition of personnel and increased contracting
expenses for enhancements of First!, including expanding the number of
delivery platforms supported by the Company, as well as the development of
NewsPage, introduced in the second quarter of 1995. Additional expenses were
incurred in recent years to enhance the scalability and reliability of the
Company's production system. The level of product development expenses will
continue to increase as the Company continues to enhance its products and
integrate its various service offerings, but should decline as a percentage of
sales, as revenues are expected to grow faster than development expenditures.
General and administrative
General and administrative expenses consist of salary and related costs for
certain executive officers, finance and administrative personnel, professional
fees, and other general corporate expenses. General and administrative
expenses were $4.5 million in 1996, $2.4 million in 1995, and $923,000 in
1994, representing an increase of 84% in 1996 and 163% in 1995. Reasons for
the 1996 increase include severance expense related to executive terminations;
legal fees related to acquisitions, a dispute with the Company's founder and
former CEO, and a shareholder suit; fees incurred in hiring of new personnel;
and professional fees related to new requirements as a public company.
Mergers, disposition and other charges
Mergers, disposition, and other charges were $39.4 million in 1996, of which
$35.6 million was a non-cash charge incurred in June 1996, based on an
assessment of purchased FreeLoader technology which did not meet definitions
of "completed technology", and thus was expensed upon consummation of the
acquisition in accordance with generally accepted accounting principles. Other
items included in these charges were all operating costs of FreeLoader
incurred since the acquisition, principally research and development related,
goodwill amortization and other costs related to the acquisition of Hoover in
October 1996, and the gain on the sale of BookWire in November 1996.
Interest income and other, net; interest expense
Interest income and other, net, was $743,000 in 1996, $231,000 in 1995, and
($18,000) in 1994. The increase is due to interest income on the proceeds of
the Company's IPO offset by the Company's share of operating losses of its
joint venture in Japan with Toshiba Corp. and Mitsui & Co., Ltd. The proceeds
of the Company's IPO were invested in United States government securities,
money market accounts, and other investment-grade securities. The Company's
investment in the joint venture has been reduced to zero and its future
operating results will have no impact in the foreseeable future. Interest
expense was $862,000 in 1996, $442,000 in 1995, and $76,000 in 1994. The
increase was primarily due to interest on senior subordinated notes incurred
in December 1995 and in the first quarter of 1996. The notes were paid in full
in March 1996 from the proceeds of the IPO. Other interest charges include
financing charges related to equipment leases and bank installment loans used
to finance certain purchases of equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments balance was $30.3
million at December 31, 1996 and $17.5 million at December 31, 1995. The 1996
increase resulted primarily from the completion of the Company's IPO in March
1996 and the exercise of the over-allotment in the second quarter of 1996,
which
21
together generated net proceeds of approximately $34.0 million. This increase
was offset by the repayment of senior subordinated notes, the net cash used by
operations and investing activities during 1996. The Company has also used
equipment leases and debt instruments to finance the majority of its purchases
of capital equipment, and at December 31, 1996 had approximately $1,327,000
outstanding in connection with these obligations and had an additional
$2,095,000 available under established credit arrangements. In addition, the
Company has $3,500,000 available under a working capital line.
The Company's operations used $8.8 million, $2.8 million, and $1.8 million
of cash in 1996, 1995, and 1994, respectively. The use of cash in operations
was primarily for the Company's operating losses. The Company's investing
activities used $11.5 million, $916,000, and $1.4 million in 1996, 1995, and
1994, respectively. In 1996, this net use of cash was primarily made for
investments in marketable securities of $8.3 million, investments in
equipment, investments in the Japanese joint venture and partially offset by
the proceeds from the sale of BookWire.
At December 31, 1996, the Company had $30.3 million in cash and marketable
securities. The Company believes that cash and marketable securities will be
sufficient to fund its operations and meet its capital requirements at least
for the next twelve months. The rate of use by the Company of its cash
resources will depend, however, on numerous factors, including the rate of
expansion for current products and services, the development of new services,
and potential acquisitions, dispositions, or strategic investments. In
addition, in connection with its acquisition of FreeLoader, the Company has
guaranteed the value of certain shares issued in the transaction, which will
be measured during the period January 1, 1997 through May 31, 1997. If the
fair value of the stock is less than the guaranteed value, then the Company
will pay out the difference in cash. At December 31, 1996, the fair value of
stock below the guaranteed price would have been approximately $3.3 million.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128 ("SFAS
128"), "Earnings per Share", which modifies the way in which earnings per
share (EPS) is calculated and disclosed. Upon adoption of this standard for
the fiscal period ending December 31, 1997, the Company will disclose basic
and diluted EPS and will restate all prior period EPS data presented. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS, similar to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Management believes the adoption of SFAS 128 will not have a material impact
on reported earnings per share.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
In view of the Company's revenue growth in recent years and its limited
operating history, period-to-period comparisons of its financial results are
not necessarily meaningful and should not be relied upon as any indication of
future performance. The Company's quarterly results of operations have
fluctuated significantly in the past and will likely fluctuate in the future
due to, among other factors, demand for its services and changes in service
mix, the size and timing of new and renewal subscriptions from corporate
customers, advertising revenue levels, the effects of new service
announcements by the Company and its competitors, the ability of the Company
to develop, market and introduce new and enhanced versions of its services on
a timely basis and the level of product and price competition. A substantial
portion of the Company's cost of revenue, which consists principally of fees
payable to information providers, telecommunications costs and personnel
expenses, is relatively fixed in nature. The Company's operating expense
levels are based, in significant part, on the Company's expectations of future
revenue. If quarterly revenues are below management's expectations, both gross
margins and results of operations would be adversely affected because a
relatively small amount of the
22
Company's costs and expenses varies with its revenue in the short-term. The
Company has incurred operating losses since inception and expects to continue
to incur operating losses on both a quarterly and annual basis for the
foreseeable future. There can be no assurance that the Company will sustain
revenue growth or achieve profitability.
The market for the Company's services has only recently begun to develop, is
rapidly evolving and is characterized by increasing competition from a variety
of companies, ranging from traditional news and media companies to Internet-
based information services and including companies that may have significantly
more resources. Although this market is growing at a substantial rate, the
Company's ability to increase its revenue will depend upon its ability to
expand its sales force, to sell larger subscription contracts with a broader
solution set for its customers, and to integrate a full spectrum of product
offerings under a single brand. In addition, continued growth of the Company's
enterprise services will depend to a significant extent upon its ability to
achieve high contract renewal rates, while continuing to migrate customers
from fax and e-mail platforms to Lotus Notes and intranet-based services with
larger reader bases. Although the Company has recently taken steps to enhance
its service offerings to enterprise customers, including establishing a
content provider relationship with Dow Jones and Company and acquiring real-
time alerting and archival capabilities with Hoover, there can be no assurance
that it will be able to increase its enterprise customer base or achieve
renewal rates that meet its objectives.
The Company's financial results will also depend to a significant extent
upon advertising revenues generated by NewsPage, its Web-based single-user
service. Such revenues will depend, among other matters, on the acceptance of
the Internet as a viable advertising medium, as well as on the Company's
ability to generate a high level of pageviews through increased NewsPage
readership and user activity, to build a direct sales force to sell
advertising, to attract and retain information providers, and to develop a
user base of a sufficient size and with appropriate demographics to attract
advertisers. The Company relies in part on distribution alliances to increase
readership of NewsPage and, in the fourth quarter of 1996, introduced the
NewsPage Network, which is intended to enable the Company to supply daily news
content to Web services sponsored by third parties, thereby extending the
reach of its advertisers and expanding NewsPage readership, at a low cost of
subscriber acquisition. Because the NewsPage Network has only recently been
introduced, however, there can be no assurance that it will be successful in
acquiring additional new users of NewsPage. If the Company is unable to
attract and increase paid advertising sponsorship of NewsPage, the Company's
business and results of operations will be materially and adversely affected.
The Company hired Michael E. Kolowich as its President and Chief Executive
Officer in September 1996. In addition to Mr. Kolowich, the Company's entire
senior management team has joined the Company since January 1, 1996. The
Company also depends, in significant part, upon the continued services of its
key technical, editorial, sales and product development personnel, most of
whom are not bound by employment agreements, and only certain of whom are
bound by noncompetition agreements. There can be no assurance that
Mr. Kolowich and the other new management personnel will be able to
effectively manage the Company or that the Company will be able to retain its
key personnel.
The Company's services currently offer approximately 600 news and
information sources from more than 60 information providers. Termination of
one or more significant information provider agreements would decrease the
news and information which the Company offers its customers and could have a
material adverse effect on the Company's business and results of operations.
Also, an increase in the fees required to be paid by the Company to its
information providers would have an adverse effect on the Company's gross
margins and results of operations. Because the Company licenses the
informational content included in its services from third parties, its
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.
23
Management may from time to time consider acquisitions of assets or
businesses that it believes may enable the Company to obtain complementary
skills and capabilities, offer new products, expand its customer base or
obtain other competitive advantages. Such acquisitions, including the
Company's acquisition of Hoover in November 1996, involve potential risks,
including difficulties in assimilating the acquired company's operations,
technology, products and personnel, completing and integrating acquired in-
process technology, diverting management's resources, uncertainties associated
with operating in new markets and working with new employees and customers,
and the potential loss of the acquired company's key employees.
The Company's future success will depend on its ability to enhance its
existing services, to develop new products and services that address the needs
of its customers and to respond to technological advances and emerging
industry standards and practices, each on a timely basis. Services as complex
as those offered by the Company entail significant technical risks, often
encounter development delays and may result in service failures when first
introduced or as new versions are released. Any such delays in development or
failures that occur after commercial introduction of new or enhanced services
may result in loss of or delay in market acceptance, which could have a
material adverse effect upon the Company's business and results of operations.
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. The Company's principal computer
and telecommunications equipment, including its processing operations, is
located at its headquarters facility in Burlington, Massachusetts. 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 feeds and computer downloads from its
information providers, whether on account of system failure of the information
providers, the public network or otherwise, could disrupt the Company's
operations.
The Company's success is dependent to a significant degree on its
proprietary technology. The Company relies on a combination of trade secret,
copyright and trademark laws, non-disclosure agreements with employees and
third parties, and contractual provisions to establish and protect its
proprietary rights. Despite these efforts, unauthorized parties may attempt to
copy aspects of the Company's services or to obtain and use information that
the Company regards as proprietary. There can be no assurance that the
protective measures taken by the Company will be adequate or that the
competitors will not independently develop technologies that are substantially
equivalent or superior to those of the Company. The Company may also be
subject to litigation to defend against claimed infringement of the
intellectual property rights of others. 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 and results of operations.
The Company has entered into certain cooperative marketing agreements and
informal arrangements with software vendors, Web site sponsors and operators
of on-line networks, including Microsoft, Netscape, Infoseek and NETCOM. These
companies do not 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 may be materially and adversely affected.
A key component of the Company's strategy is its planned expansion into
international markets. To date, the Company has only limited experience in
marketing, selling, and delivering its products and services internationally.
There can be no assurance that the Company will be able to successfully
market, sell, and deliver its products and services in international markets.
24
A class action shareholder suit has been filed against 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 the IPO Prospectus and Registration
Statement, as well as in subsequent public disclosures, relating to the
alleged existence of disputes between Joseph A. Amram and the Company. The
Company believes that the allegations contained in the complaint are without
merit and intends to defend vigorously against the claims. However, the
lawsuit is in its earliest stages, and no estimate of possible loss, if any,
can currently be made. There can be no assurance that this litigation will
ultimately be resolved on terms that are favorable to the Company and that the
resolution of this litigation will not have a material adverse effect on the
Company.
Due to all of the foregoing factors, it is possible that in some future
quarter the Company's results of operations 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are filed as part of this
report:
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
25
INDIVIDUAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 21,886,219 $ 17,517,743
Investments in marketable securities.............. 8,448,306 --
Accounts receivable, net.......................... 11,088,046 5,741,694
Prepaid expenses.................................. 456,823 115,094
------------ ------------
Total current assets............................ 41,879,394 23,374,531
Property and equipment, net......................... 4,102,709 2,926,234
Other assets, net................................... 947,213 501,740
------------ ------------
Total assets.................................... $ 46,929,316 $ 26,802,505
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 4,718,695 $ 2,088,783
Accrued royalties................................. 1,610,829 582,929
Accrued expenses.................................. 3,821,505 1,133,179
Deferred revenue.................................. 13,706,132 8,924,309
Equipment financing loans and notes payable....... 1,074,055 776,084
------------ ------------
Total current liabilities....................... 24,931,216 13,505,284
Senior subordinated notes........................... -- 10,000,000
Other long term liabilities......................... 1,410,625 985,738
Commitments and contingencies (note 13)
Redeemable preferred stock.......................... -- 23,999,013
Stockholders' equity (deficit):
Preferred stock, $0.01 par value.................. -- 6,113
Common stock, $0.01 par value; 25,000,000 shares
authorized, 14,413,988 and 1,870,596 shares
issued in 1996 and 1995, respectively 144,140 18,706
Additional paid in capital........................ 89,840,455 3,066,699
Cumulative dividends on redeemable preferred
stock............................................ -- (6,234,366)
Cumulative translation adjustment................. 70,149 5,111
Unrealized gains on marketable securities......... 125,475 --
Accumulated deficit............................... (69,562,067) (18,544,708)
Less 32,865 and 157,500 shares held in treasury
(at cost) in 1996 and 1995, respectively......... (30,677) (5,085)
------------ ------------
Total stockholders' equity (deficit)............ 20,587,475 (21,687,530)
------------ ------------
Total liabilities and stockholders' equity
(deficit).................................... $ 46,929,316 $ 26,802,505
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
26
INDIVIDUAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
Revenue............................ $ 24,144,780 $ 16,732,749 $ 9,126,641
Cost of revenue.................... 11,866,768 7,782,945 4,076,230
------------- ------------ ------------
Gross margin....................... 12,278,012 8,949,804 5,050,411
Operating expenses:
Sales and marketing.............. 5,665,557 2,784,393 1,183,373
New subscriber acquisition....... 9,030,375 7,387,187 5,953,139
Product development.............. 4,598,560 2,586,741 1,153,218
General and administrative....... 4,460,543 2,423,132 922,527
Mergers, disposition and other
charges......................... 39,422,186 -- --
------------- ------------ ------------
Total operating expenses....... 63,177,221 15,181,453 9,212,257
------------- ------------ ------------
Loss from operations............... (50,899,209) (6,231,649) (4,161,846)
Interest income and other, net..... 743,460 230,742 (17,618)
Interest expense................... (861,610) (441,901) (76,438)
------------- ------------ ------------
Net loss........................... $ (51,017,359) $ (6,442,808) $ (4,255,902)
============= ============ ============
Supplemental net loss per common
share............................. $ (4.03) $ (0.67) $ (0.44)
============= ============ ============
Supplemental weighted average
common shares outstanding......... 12,672,982 9,619,374 9,606,511
============= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
27
INDIVIDUAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
Cash flows from operating activities:
Net loss.............................. $(51,017,359) $(6,442,808) $(4,255,902)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 1,967,273 746,936 388,131
Gain on sale of BookWire business... (766,207) -- --
Loss on disposal of property and
equipment.......................... 27,198 29,857 32,090
Provision for doubtful accounts..... 197,621 24,382 33,678
Compensation recognized under
employee stock plans............... 377,981 -- --
Loss on joint venture............... 1,883,417 -- --
Purchased incomplete technology..... 35,563,750 -- --
Changes in operating assets and
liabilities:
Increase in accounts receivable... (4,610,859) (2,067,556) (2,014,281)
Increase in prepaid expenses...... (217,760) (107,932) (2,253)
Decrease (Increase) in other
assets........................... 26,056 (14,505) (9,658)
Increase in accounts payable and
accrued expenses................. 3,037,860 2,599,605 662,621
Increase in other long term
liabilities...................... 500,003 -- --
Increase in deferred revenue...... 4,240,014 2,406,766 3,404,565
------------ ----------- -----------
Net cash used in operating activities: (8,791,012) (2,825,255) (1,761,009)
------------ ----------- -----------
Cash flows from investing activities:
Additions to property and
equipment.......................... (2,262,650) (1,737,394) (1,398,864)
Investment in joint venture......... (1,883,417) -- --
Cash acquired from/(paid for)
acquisition........................ 928,354 (178,817) --
Investments in marketable
securities......................... (11,287,450) -- --
Maturity of marketable securities... 3,000,000 1,000,000 --
------------ ----------- -----------
Net cash used in investing activities: (11,505,163) (916,211) (1,398,864)
------------ ----------- -----------
Cash flows from financing activities:
Principal repayments under lease
obligations........................ (345,133) 822,873 338,042
Proceeds from issuance of common
stock, net of related expenses..... 34,944,746 10,121,890 490
Deferred financing costs............ -- (330,535) --
(Payment) issuance of senior
subordinated notes................. (10,000,000) 10,000,000 --
------------ ----------- -----------
Net cash provided by financing
activities........................... 24,599,613 20,614,228 338,532
------------ ----------- -----------
Effect of exchange rate on cash....... 65,038 5,111 --
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents..................... 4,368,476 16,877,873 (2,821,341)
Cash and cash equivalents at the
beginning of period.................. 17,517,743 639,870 3,461,211
------------ ----------- -----------
Cash and cash equivalents at the end
of period............................ $ 21,886,219 $17,517,743 $ 639,870
============ =========== ===========
Supplemental cash flow information:
Interest paid....................... $ 795,078 $ 153,361 $ 74,823
============ =========== ===========
Non cash transactions:
Equipment acquired under capital
lease obligation................... $ 22,859 -- --
============ =========== ===========
Conversion of redeemable preferred
stock to common stock.............. $ 23,999,013 -- --
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
28
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29
INDIVIDUAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY (DEFICIT) FOR THE YEAR ENDED
DECEMBER 31, 1994, 1995, AND 1996
PREFERRED STOCK COMMON STOCK
------------------ ------------------- ADDITIONAL
NUMBER OF PAR NUMBER OF PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
--------- ------- ---------- -------- -----------
Balance at December 31,
1993..................... 611,335 $ 6,113 1,820,225 $ 18,202 $ 3,056,094
Exercise of options....... -- -- 3,277 33 457
Accretion of redeemable
preferred stock
dividends................ -- -- -- -- --
Net loss.................. -- -- -- -- --
-------- ------- ---------- -------- -----------
Balance at December 31,
1994..................... 611,335 6,113 1,823,502 18,235 3,056,551
Exercise of options....... -- -- 47,094 471 10,148
Accretion of redeemable
preferred stock
dividends................ -- -- -- -- --
Cumulative translation
adjustment............... -- -- -- -- --
Net loss.................. -- -- -- -- --
-------- ------- ---------- -------- -----------
Balance at December 31,
1995..................... 611,335 6,113 1,870,596 18,706 3,066,699
Conversion of all
redeemable preferred
stock to common stock.... (611,335) (6,113) 7,625,210 76,252 17,694,508
Net proceeds from IPO and
exercise of
over-allotment option.... -- -- 2,675,000 26,750 33,782,487
Stock issued in
acquisition of
FreeLoader............... -- -- 1,514,314 15,143 33,965,942
Exercise of options,
warrants, ESPP and common
stock.................... -- -- 728,868 7,289 952,838
Employee stock
compensation............. -- -- -- -- 377,981
Cumulative translation
adjustment............... -- -- -- -- --
Unrealized gains on
marketable securities.... -- -- -- -- --
Net loss.................. -- -- -- -- --
-------- ------- ---------- -------- -----------
Balance at December 31,
1996..................... -- -- 14,413,988 $144,140 $89,840,455
======== ======= ========== ======== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
30
TREASURY STOCK
CUMULATIVE DIVIDENDS ON ------------------- TOTAL
TRANSLATION REDEEMABLE UNREALIZED GAINS ON ACCUMULATED NUMBER OF STOCKHOLDER'S
ADJUSTMENT PREFERRED STOCK MARKETABLE SECURITIES DEFICIT SHARES COST EQUITY (DEFICIT)
- ----------- --------------- --------------------- ------------ --------- -------- ----------------
-- $(3,105,264) -- $ (7,845,998) 157,500 $ (5,085) $ (7,875,938)
-- -- -- -- -- -- 490
-- (1,486,880) -- -- -- -- (1,486,880)
-- -- -- (4,255,902) -- -- (4,255,902)
------- ----------- -------- ------------ -------- -------- ------------
-- (4,592,144) (12,101,900) 157,500 (5,085) (13,618,230)
-- -- -- -- -- -- 10,619
-- (1,642,222) -- -- -- -- (1,642,222)
$ 5,111 -- -- -- -- 5,111
-- -- -- (6,442,808) -- -- (6,442,808)
------- ----------- -------- ------------ -------- -------- ------------
5,111 (6,234,366) (18,544,708) 157,500 (5,085) (21,687,530)
-- 6,234,366 -- -- -- -- 23,999,013
-- -- -- -- -- -- 33,809,237
-- -- -- -- -- -- 33,981,085
-- -- -- -- (124,635) (25,592) 934,535
-- -- -- -- -- -- 377,981
65,038 -- -- -- -- -- 65,038
$125,475 125,475
-- -- -- (51,017,359) -- -- (51,017,359)
------- ----------- -------- ------------ -------- -------- ------------
$70,149 -- $125,475 $(69,562,067) 32,865 $(30,677) $ 20,587,475
======= =========== ======== ============ ======== ======== ============
31
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Individual, Inc. (the "Company") develops and markets a suite of customized
information services that provide knowledge workers with daily personalized
current awareness reports, while offering information providers and
advertisers new ways to reach targeted audiences. The Company's proprietary
systems filter incoming information, prepare for each user a highly relevant
daily news briefing, and deliver its services across a range of delivery
platforms, including facsimile, electronic mail, groupware, intranets, and the
Internet.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company's services are sold on a subscription basis which may vary in
term from one month to a year. A subscription contract entitles the customer
to a specified level of service for the subscription period. Proceeds from
subscriptions are deferred at the time of sale and revenue is recognized
ratably over the term of the subscription period. Revenue for story
fulfillments in excess of the specified level of service is recognized as the
stories are provided. Advertising revenue is recognized ratably over the
advertising period.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts
have been eliminated.
Subscriber Acquisition Costs
New subscriber acquisition costs, which are expensed as incurred, relate
directly to new customer solicitations and include the Company's direct costs
of acquiring new customers, including the cost of providing trial
subscriptions free of charge. Costs associated with renewal of current
customers are included in sales and marketing and are expensed as incurred.
Product Development
Costs incurred in the plan, design or improvement of new or existing systems
which support content and delivery of the Company's services are expensed as
incurred and are included in product development. Such costs include the
conceptual formulation, testing of alternatives, and development of working
models. Development costs incurred subsequent to the establishment of
technological feasibility, which would be eligible for capitalization, have
been insignificant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Estimates and assumptions in these financial statements relate to, among other
items, valuation of deferred tax assets, the allowance for doubtful accounts
and accrued liabilities.
Reclassification of Amounts
Certain amounts in the financial statements for the year ended December 31,
1995 have been reclassified to conform to the presentation for the year ended
December 31, 1996.
32
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
At December 31, 1996, cash and cash equivalents included $7,795,662 in
commercial paper, $2,053,446 in money market investments, $10,334,539 in U. S.
Government Agency securities, and $1,702,572 cash on deposit. At December 31,
1995, cash and cash equivalents included cash on deposit and investments in
money market type mutual funds. The Company considers investments with
maturities of 90 days or less at the time of acquisition or money market type
investments to be cash equivalents. Presently, the Company carries all cash
equivalents at cost, which approximates fair value. The Company is party to a
letter of credit totaling $207,000 at December 31, 1996, for which various
short term investments are held as collateral. In the Company's past
experience, no claims have been made against this financial instrument.
Management does not expect any material losses to result from this letter of
credit because performance is not expected to be required.
Marketable Securities
The Company held $8,448,306 in U. S. Government Agency securities classified
as marketable securities. $2,333,965 mature in one year, and $6,114,341 mature
within five years. The Company accounts for investments in marketable
securities using the provisions of Financial Accounting Standard Statement No.
115 "Accounting for Certain Investments in Debt and Equity Securities." All
marketable securities are classified as available-for-sale and are carried at
fair value. The Company may use the proceeds from the sale of marketable
securities for general working capital requirements. Unrealized holding gains
of $125,475 are carried as a separate component of stockholders' equity. No
marketable securities have been sold in 1996, and therefore no gains or losses
on the sale of marketable securities have been recognized.
Risks and Uncertainties
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of money market funds and
accounts receivable. The Company maintains substantially all of its money
market funds with one registered investment company. The Company believes the
credit risk associated with accounts receivable is minimal due to the number
of customers and their dispersion over different industries and geographical
locations. The Company's foreign operations were not material to the Company's
consolidated financial position or results of operations.
Supplemental Net Loss Per Common Share
The supplemental net loss per common share is computed based upon the
weighted average number of common shares outstanding. Common equivalent shares
are not included in the per share calculations since the effect of their
inclusion would be antidilutive. Common equivalent shares result from the
assumed exercise of outstanding stock options and warrants. The computation of
supplemental earnings per share gives effect to the conversion of all shares
of Series B, C, D, E and G Redeemable Preferred Stock and Series A and F
Preferred Stock and does not include the dividends on Redeemable Preferred
Stock as an increase in net loss. Pursuant to the requirements of the
Securities and Exchange Commission, common shares and common equivalent shares
issued at prices below the IPO price of $14.00 per share during the twelve
months immediately preceding the date of the initial filing of the
Registration Statement have been included in the calculation of common shares
and common share equivalents, using the treasury stock method, as if they were
outstanding for all periods prior to the IPO. Presentation herein is
consistent with the pro forma calculations included in the Company's
Registration Statement on Form S-1 (No. 333-00792) filed on January 31, 1996,
as amended, and the Registration Statement on Form S-1 (No. 333-8511) filed on
September 9, 1996, as amended.
Historical Net Loss Per Common Share
Net loss per common share on a historical basis is computed in the same
manner as supplemental net loss per common share, except that Series B, C, D,
E and G Redeemable Preferred Stock and Series A and F Preferred
33
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock are not assumed to be converted prior to the IPO. In the computation of
net loss per common share, accretion of redeemable preferred stock dividend
amounts is included as an increase to net loss attributable to common
stockholders. Net loss per common share on a historical basis is calculated as
follows:
FOR THE YEAR ENDED,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
Net loss.............................. $(51,017,359) $(6,442,808) $(4,255,902)
Accretion of dividends on redeemable
preferred stock...................... (462,706) (1,642,222) (1,486,880)
------------ ----------- -----------
Net loss to common stockholders....... $(51,480,065) $(8,085,030) $(5,742,782)
============ =========== ===========
Net loss per common share............. $ (4.68) $ (4.05) $ (2.90)
============ =========== ===========
Weighted average number of common and
common equivalent shares
outstanding.......................... 10,997,112 1,994,164 1,981,301
============ =========== ===========
Fully diluted net loss per common share is the same as primary net loss per
common share.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are charged to operations and are expensed as
incurred. Furniture and fixtures are depreciated over seven years. In 1996,
the Company changed the period over which equipment, which is primarily
comprised of computer hardware and software, is depreciated from five years to
three years. Management believes that three years more closely approximates
the actual useful life of the equipment. The change in estimate resulted in an
increase in depreciation expense of $480,569, which has been reflected in the
accompanying financial statements as of and for the year ended December 31,
1996.
The Company leases certain equipment, furniture and fixtures. The present
value of lease payments for property and equipment leases meeting the
requirements for capitalization are included as capitalized leased assets and
are amortized on a straight-line basis over the shorter of the equipment's
useful life or the term of the leases.
Upon retirement or sale, the cost of the assets disposed and the related
accumulated depreciation and amortization are removed from the accounts and
any resulting gain or loss is included in the determination of net income.
Goodwill
Goodwill is being amortized using the straight-line method over two years.
The Company evaluates whether changes have occurred that would require
revision of the remaining estimated useful life of the assigned goodwill or
rendered the goodwill not recoverable.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
34
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts receivable
Accounts receivable are presented net of allowance for doubtful accounts
which were $265,681 and $68,060 as of December 31, 1996 and 1995 respectively.
3. INITIAL PUBLIC OFFERING
On March 20, 1996, the Company completed an initial public offering (the
"IPO") of 2,500,000 shares of Common Stock at $14.00 per share, of which
2,300,000 shares were sold by the Company and 200,000 shares were sold by
selling stockholders. The proceeds to the Company, net of underwriting
discounts, commissions and offering expenses were approximately $29 million.
In April 1996, the Underwriters exercised their over-allotment option to
purchase an additional 375,000 shares of Common Stock from the Company, for
net proceeds of approximately $4.9 million.
Upon the closing of the IPO, all series of Preferred Stock were converted
into an aggregate of 7,625,210 shares of Common Stock. Upon conversion of the
Preferred Stock to Common Stock, all cumulative dividends associated with the
Redeemable Preferred Stock expired and were no longer payable.
4. MERGERS, DISPOSITION, AND OTHER CHARGES
On June 28, 1996, Individual completed the acquisition of FreeLoader, Inc.
("FreeLoader") by a subsidiary merger pursuant to the terms of the Agreement
and Plan of Reorganization dated as of May 30, 1996 among Individual, FL
Merger Corp., a wholly-owned subsidiary of Individual, FreeLoader, and certain
stockholders of FreeLoader (the "Merger Agreement"). As a result of the
merger, FreeLoader became a wholly-owned subsidiary of Individual.
Pursuant to the Merger Agreement, Individual issued approximately 1,874,489
shares of its Common Stock to the stockholders of FreeLoader as consideration
for the merger (including up to 360,180 shares of Common Stock reserved for
issuance upon exercise of outstanding FreeLoader stock options assumed by
Individual in the merger). The aggregate estimated purchase price of
approximately $36 million was based on the fair market value of Individual
Common Stock and options at the date of purchase and includes estimated
accrued transaction costs of approximately $950,000 and the net identifiable
liabilities assumed of approximately $633,000. The transaction was accounted
for as a purchase. Approximately $35,600,000 of the purchase price has been
allocated to purchased technology. This charge for purchased technology,
determined to be in-process, in addition to all operating expenses of
FreeLoader of approximately $2.6 million, which are predominantly product
development expenses, are reflected in mergers, disposition and other charges.
The value of the purchase technology was derived at the time of purchase using
the net present value of estimated future free cash flows to be generated by
the resulting technology when completed. Under the merger agreement, the
Company is required to pay a balloon payment of $2,000,000 to the two founders
of Freeloader, payable upon the successful completion of three years of
employment with the Company. The Company has been accruing this charge ratably
over the three year period. The Company has also guaranteed the value of
certain shares issued to the two founders in the transaction, which will be
measured during the period January 1, 1997 through May 31, 1997. If the fair
value of the stock is less than the guaranteed value, then the Company will
pay out the difference in cash. At December 31, 1996, the fair value of stock
is approximately $3,300,000 below the guaranteed price. Any payments, if made,
will be reflected as a reduction to shareholder's equity.
The following condensed pro forma results of operations for the twelve
months ended December 31, 1996 have been presented to disclose the acquisition
of FreeLoader as if it had occurred as of the beginning of fiscal year 1996.
The computation of pro forma net loss per common share assumes the 1,514,309
shares issued in the acquisition of FreeLoader to be outstanding from January
1, 1996. The computation also gives effect to the
35
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
conversion of all shares of Series B, C, D, E, and G redeemable preferred
stock and Series A and F preferred stock as of January 1, 1996, and excludes
the dividends on redeemable preferred stock as an increase to net loss. In
addition, the one time charge of $35,600,000 for the purchase of incomplete
technology has been included in the net loss computation. The condensed pro
forma results of operations for the corresponding period of the prior year are
insignificant.
DECEMBER 31, 1996
-----------------
PRO FORMA
Revenue.................................................... $ 24,144,780
============
Net loss................................................... (54,654,196)
============
Pro forma net loss per common share........................ ($4.07)
============
Pro forma weighted average common shares outstanding....... 13,418,391
============
On February 6, 1997, the Company announced that it is planning to sell
FreeLoader or seek a majority investor.
The Company sold its Bookwire business on November 1, 1996 for approximately
$1,000,000 in cash. The sale resulted in a pretax gain of $766,000, which was
included in mergers, disposition and other charges. The results of BookWire
were not significant to the consolidated results of the Company in 1996.
On October 17, 1996, the Company acquired certain assets and liabilities of
the Hoover Business Intelligence Services unit from the Information Access
Company (IAC), a unit of The Thomson Corporation (Toronto, Canada). Hoover is
an intelligent software agent that provides real-time and archival electronic
news and information services. The acquisition, financed through cash and
installment payments, was accounted for as a purchase. The purchase price was
$1,650,000, including $500,000 in acquisition related costs, of which
$1,085,000 was paid in cash, and $565,000 in notes payable over 36 months.
Approximately $672,000 of the purchase price has been allocated to the net
identifiable assets acquired, and approximately $978,000 of the purchase price
has been allocated to goodwill. Goodwill is being amortized over a period of
two years. At December 31, 1996 goodwill was $814,880, net of accumulated
amortization of $163,000 which was included in mergers, disposition and other
charges.
5. JOINT VENTURE
On May 31, 1996 the Company acquired for approximately $1,883,000 in cash
44% of the shares of NewsWatch, Inc. ("NewsWatch"), a joint venture
established by the Company, Toshiba Corporation and Mitsui & Co. Ltd. The
joint venture was established to provide customized electronic information
services in Japan. The investment is being accounted for using the equity
method of accounting. The Company's share of undistributed losses of NewsWatch
is included in interest income and other, net. The Company's investment in the
joint venture has been reduced to zero as of December 31, 1996.
The Company has entered into certain software and know-how license
agreements with the joint venture in exchange for an initial lump sum royalty
payment to the Company of approximately $1,032,000 net of intercompany
profits, received in May 1996, and continuing royalties based on revenue of
the joint venture over a twenty-year period.
36
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1996 1995
----------- -----------
Equipment.......................................... $ 5,166,188 $ 2,777,280
Furniture and fixtures............................. 671,414 579,884
Leased equipment................................... 708,700 639,577
----------- -----------
6,546,302 3,996,741
Accumulated depreciation........................... (2,443,593) (1,070,507)
----------- -----------
$ 4,102,709 $ 2,926,234
=========== ===========
Depreciation and amortization expense amounted to $1,967,273, $746,936, and
$388,131 for the years ended December 31, 1996, 1995, and 1994, respectively.
Accumulated amortization on capital leases, net of disposals, amounted to
$397,256, and $444,493 as of December 31, 1996 and 1995 respectively.
7. FEDERAL AND STATE INCOME TAXES
Due principally to operating losses from inception, the Company has not
incurred any income tax expense. The Company's deferred income taxes as of
December 31, were as follows:
1996 1995 1994
------------ ----------- -----------
Deferred income tax assets:
Research tax credits............. $ 200,000 $ 200,000 $ 115,000
Net loss carryforwards........... 13,881,440 7,051,322 4,664,400
Other............................ 86,778 153,574 131,197
------------ ----------- -----------
Total deferred income tax
assets........................ 14,168,218 7,404,896 4,910,597
Deferred income tax liabilities.... 368,711 330,502 131,498
Valuation allowance................ (13,799,507) (7,074,394) (4,779,099)
------------ ----------- -----------
Net deferred income tax assets..... -- -- --
============ =========== ===========
Losses generated from the acquisition of incomplete technology of
$35,600,000 are not deductible for tax purposes and accordingly are not
included in the deferred tax asset.
A valuation reserve against net deferred assets has been established based
upon weighted available evidence that it is more likely than not that some or
all of the deferred tax assets will not be realized. A full valuation
allowance has been recognized due to the uncertainty of realizing the future
benefit from net deferred tax assets.
Deferred tax assets result from net operating loss carryforwards and
estimated future tax effects attributable to differences between tax and
financial reporting bases of certain assets and liabilities, including certain
accruals, reserves, and fixed assets.
For federal income tax purposes, as of December 31, 1996, the Company has
regular tax net operating loss carryforwards of $32,000,000 which may be used
to offset future taxable income. The utilization of the net operating loss
carryforwards and credit carryforwards for income tax purposes may be
restricted due to limitations which arise because of a change of ownership.
These net operating losses expire beginning in 2004.
37
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMON STOCK
During 1996, the stockholders authorized an increase in the number of
authorized shares of Common Stock from 12,500,000 to 25,000,000. Common
stockholders are entitled to one vote for each share held.
At December 31, 1996, the Company has reserved shares of Common Stock as
follows:
Exercise of Common Stock warrants.................................. 2,174,528
Options under stock option plans (see note 12)..................... 6,230,381
---------
8,404,909
=========
9. REDEEMABLE PREFERRED STOCK:
At December 31, 1995, Redeemable Preferred stock consisted of the following:
AGGREGATE
SHARES ISSUED CUMULATIVE LIQUIDATION
SERIES PAR VALUE SHARES AUTHORIZED AND OUTSTANDING DIVIDENDS PREFERENCE
------ --------- ----------------- --------------- ---------- -----------
B....................... $.01 866,003 866,003 $ 986,273 $ 2,025,477
C....................... .01 1,436,804 1,422,221 2,534,750 5,094,748
D....................... .01 226,666 222,222 381,368 881,368
E....................... .01 1,240,000 1,159,677 2,176,633 5,771,632
G....................... .01 1,050,000 700,000 155,342 10,655,342
---------- -----------
6,234,366 24,428,567
Less Unamortized
Issuance Costs......... -- (429,554)
---------- -----------
$6,234,366 $23,999,013
========== ===========
Each share of Series B, C, D, E, and G Redeemable Preferred Stock was
convertible into 1.5 shares of Common Stock, all at the option of the
stockholder. All series of Preferred Stock were converted into an aggregate of
7,625,210 shares of Common Stock upon the closing of the IPO (see note 3).
Series G Redeemable Preferred was issued in 1995, and all other Series were
issued prior to 1994.
10. PREFERRED STOCK:
At December 31, 1995, Preferred Stock consisted of the following:
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
------ ---------- --------------- -----------
A..................................... 16,335 11,335 $ 68,010
F..................................... 700,000 600,000 $3,000,000
Each share of Series A and F Preferred Stock was convertible into 15 and 1.5
shares, respectively, of Common Stock. All series of Preferred Stock were
converted into an aggregate of 7,625,210 shares of Common Stock upon the
closing of the IPO (see note 3).
38
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMON STOCK PURCHASE WARRANTS
Common Stock Purchase Warrants outstanding at December 31, 1996 were as
follows:
NUMBER OF WARRANT
NUMBER OF SHARES PRICE PER
WARRANTS EXERCISABLE SHARE
--------- ----------- ------------
Common Stock.............................. 2,174,528 2,174,528 $3.33-$12.00
The warrants to purchase shares of Common Stock issued principally to
employees in 1989 and 1991, generally expire in ten years, or sooner under
certain conditions, and were granted at an exercise price in excess of the
fair value of the Common Stock as determined by the Board of Directors. The
aggregate exercise price of the outstanding Common Stock warrants is
$18,903,694.
12. EMPLOYEE BENEFIT PLANS
Stock Compensation Plans
At December 31, 1996, the Company had four stock-based compensation plans,
which are described below. In October 1995, the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 is effective for periods
beginning after December 15, 1995 and requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS 123 in 1996 and has applied APB
Opinion 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock options
plans under SFAS 123. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
as calculated in accordance with SFAS 123, the Company's net loss and loss per
share for the years ended December 31, 1996 and 1995 would have been increased
to the pro forma amounts indicated below:
1996 1995
------------ -----------
Net Loss
As reported..................................... $(51,017,359) $(6,442,808)
Pro forma....................................... $(53,498,957) $(6,777,002)
Net loss per share
As reported..................................... $(4.03) $(.67)
Pro forma....................................... $(4.22) $(.70)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 4 years, expected volatility of 80% for post
IPO grants, and no volatility (minimum value method) for pre IPO grants, and a
risk free interest rate of 6.33% and 6.12% for 1996 and 1995 respectively.
During 1996, the Company recognized expense of approximately $378,000 for
stock-based compensation.
Stock Option Plans
The Company has four fixed option plans which are administered by the Board
of Directors. During 1996, the Board of Directors approved an increase in the
number of authorized shares under the Amended and Restated
39
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1989 Stock Option Plan to 5,000,000, of which 1,500,000 is subject to
ratification by the stockholders at the next Annual Stockholders Meeting. The
1996 Employee Stock Purchase Plan provides for the issuance of a maximum of
500,000 shares of Common Stock. The 1996 Non-Employee Director Stock Option
Plan provides for the grant of options to purchase a maximum of 500,000 shares
of Common Stock. The Company had 230,381 shares issued and outstanding under
the Amended and Restated 1996 Stock Plan, which was assumed by the Company
pursuant to the Freeloader acquisition, and no additional options will be
issued under this Freeloader, Inc. Plan.
As of December 31, 1996, all stock options have been granted with an
exercise price equivalent to, or in excess of, the fair value of the common
stock as quoted on NASDAQ. In no event shall the aggregate fair market value
of common stock underlying ISOs granted to any employee, which are exercisable
for the first time by such employee during any calendar year, exceed $100,000.
Stock options become exercisable in varying installments as determined by the
Board of Directors at the time of grant. Options expire at various dates not
to exceed 10 years from date of grant.
A summary of the status of the Company's stock option plans as of December
31, 1996, 1995, and 1994 and changes during the years ending on those dates is
presented below (shares in thousands):
1996 1995 1994
WTD. AVG. WTD. AVG. WTD. AVG.
------------------- ------------------- -------------------
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
------ ----------- ------ ----------- ------ -----------
Outstanding at beginning
of year................ 2,118 $4.20 1,417 $2.23 663 $ .19
Granted................. 2,701 7.42 796 7.48 772 1.91
Exercised............... (629) .34 (47) .23 (3) .15
Canceled................ (929) 8.37 (48) .41 (15) .37
----- ----- ----- ----- ----- -----
Outstanding at end of
year................... 3,261 4.93 2,118 4.19 1,417 $2.23
===== ===== ===== =====
Options exercisable at
year end............... 722 824 498
===== ===== =====
Weighted average fair
value of options
granted during the
year................... $4.69 $6.86
===== =====
The following table summarizes information about stock options outstanding
at December, 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WTD. AVG. WTD. AVG. NUMBER WTD. AVG.
RANGE OF NUMBER REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES OUTSTANDING CONTR. LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
$ .13 to .17 68,183 7.1 $ .14 68,183 $ .14
.20 to .27 94,923 10.3 .26 91,961 .26
.42 to .43 488,477 10.0 .43 198,212 .43
.83 110,956 8.6 .83 29,061 .83
5.33 to 8.00 2,343,630 9.6 5.96 267,799 6.18
10.80 to 12.00 154,342 9.0 11.50 66,896 11.59
- --------------- --------- -------
$ .13 to 12.00 3,260,511 722,112
=============== ========= =======
During 1996, certain options were repriced to $6.25, which was equal to or
greater than the market value of the Company's Common Stock on the date of the
repricing.
40
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all employees meeting
certain eligibility criteria. Under the 1996 Employee Stock Purchase Plan,
employees may purchase shares of the Company's common stock, subject to
certain limitations, at not less than 85 percent of the lower of the beginning
or ending withholding period fair market value as defined in the plan. A total
of 500,000 shares of common stock have been reserved for issuance under the
plan. There are two six month withholding periods during each year, and the
first withholding period occurred in 1996. In fiscal year 1996, shares
totaling 47,540 were issued at $4.46 per share. At December 31, 1996, 452,460
shares were available for future issuance under the plan. The fair value of
the employees' purchase rights was estimated using the Black-Scholes model
with the following assumptions for 1996: an expected life of six months;
expected volatility of 80 percent; and risk-free interest rate of 6.33%. The
weighted average fair value of those purchase rights granted in 1996 was
$4.42.
401(k) Plan
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
All employees of the Company are eligible to participate in the 401(k) Plan.
The 401(k) Plan provides that each participant may contribute up to 15% of his
or her pre-tax gross compensation (but not greater than a statutorily
prescribed annual limit). The percentage elected by certain highly compensated
participants may be required to be lower. The 401(k) Plan permits, but does
not require, additional contributions to the 401(k) Plan by the Company. All
amounts contributed by employee participants in conformance with plan
requirements and earnings on such contributions are fully vested at all times.
The Company's matching contributions to the 401(k) Plan were approximately
$178,000, $99,000, and $63,000 in 1996, 1995, and 1994, respectively.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under two leases which expire on December
31, 1999 and October 31, 2001. The Company also leases certain computer
equipment under capital leases. Rental expense for the years ended December
31, 1996, 1995, and 1994 was approximately $759,145, $539,468, and $200,000
respectively, as a result of the Company entering into various leases.
Aggregate future minimum lease commitments for all leases at December 31,
1996 are as follows:
CAPITALIZED OPERATING
LEASES LEASES TOTAL
----------- ---------- ----------
1997..................................... $79,775 $1,104,922 $1,184,697
1998..................................... 10,550 1,120,107 1,130,657
1999..................................... 2,988 1,072,377 1,075,365
2000..................................... -- 299,037 299,037
2001..................................... -- 257,462 257,462
------- ---------- ----------
Total minimum lease commitments.......... 93,313 $3,853,905 $3,947,218
------- ========== ==========
Less interest............................ 3,661
-------
Capitalized lease obligations at December
31, 1996................................ $89,652
=======
Legal Actions
The Company has been named as a defendant in a putative federal securities
class action lawsuit filed on November 13, 1996 in the United States District
Court for the District of Massachusetts. The lawsuit was filed on behalf of an
alleged class of purchasers of the Company's common stock during the period
from March 15,
41
INDIVIDUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996 through July 24, 1996. The complaint filed in the lawsuit also names as
defendants, among others, certain of the Company's current and former
directors and officers, including Joseph A. Amram, the Company's former Chief
Executive Officer, as well as the three co-managing underwriters of the
Company's IPO.
The complaint alleges, among other things, that the defendants made
misstatements, or failed to make statements, to the investing public in the
IPO Prospectus and Registration Statement, as well as in subsequent public
disclosures, relating to the alleged existence of disputes between Joseph A.
Amram and the Company. The plaintiffs seek damages, including costs and
expenses, in an unspecified amount, among other relief. The Company believes
that the allegations contained in the complaint are without merit and intends
to defend vigorously against all such claims. The ultimate claims payable
under these actions, if any, are neither probable nor estimable.
Total amounts included in general and administrative costs related to this
action were $500,000 for the year ended December 31, 1996.
14. BANK FINANCING
At December 31, 1996 bank financing consisted of the following:
OUTSTANDING
STATED EFFECTIVE BALANCE AS OF AVAILABLE
DESCRIPTION INTEREST RATE INTEREST RATE EXPIRATION DECEMBER 31, 1996 PORTION
----------- ------------- ------------- ---------- ----------------- ----------
$500,000 equipment
line................... Prime + 2.0% 10.25% 11/1/97 $133,329 --
$1,000,000 equipment
line................... Prime + 1.5% 9.75% 9/1/99 497,408 $ 13,878
$1,000,000 equipment
line................... Prime + 1.5% 9.75% 12/1/00 696,000 81,000
$2,000,000 equipment
line................... Prime + 1.0% 9.25% 12/1/00 -- 2,000,000
$3,500,000 revolving
line................... Prime + 1.0% 9.25% 9/1/97 -- 3,500,000
---------
1,326,737
Less current portion.... 804,734
---------
Long term portion....... $ 522,003
=========
Borrowings under these lines are secured by substantially all the assets of
the Company.
The Company's long-term debt and credit arrangements contain financial
covenants, including capital base, quick ratio and a leverage ratio. At
December 31, 1996, the Company was in compliance with these arrangements.
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors andStockholders of Individual, Inc.:
We have audited the accompanying consolidated balance sheets of Individual,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the each of
the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Individual, Inc. as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
Febuary 15, 1997
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information required by this item concerning the directors of the
Company is incorporated herein by reference to the information contained under
the heading "Election of Directors" in the Company's definitive proxy
statement for the Company's 1997 Annual Meeting of Stockholders to be held on
May 22, 1997, which will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the Company's fiscal year ended
December 31, 1996 (the "Definitive Proxy Statement.")
Certain information required by this item concerning the directors and
executive officers of the Company is incorporated herein by reference to the
information contained under the heading "Occupations of Directors and
Executive Officers" in the Definitive Proxy Statement.
The information required by this item concerning the compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by
reference to the information contained under the heading "Section 16
Reporting" in the Definitive Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item concerning executive compensation is
incorporated herein by reference to the information contained under the
heading "Compensation and Other Information Concerning Directors and Officers"
in the Definitive Proxy Statement.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item concerning executive compensation is
incorporated herein by reference to the information contained under the
heading "Securities Ownership of Certain Beneficial Owners and Management" in
the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item concerning executive compensation is
incorporated herein by reference to the information contained under the
heading "Certain Relationships and Related Transactions" in the Definitive
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(A) Consolidated Financial Statements
The following consolidated financial statements and supplemental financial
data are included in Part II Item 8 filed as part of this Form 10-K:
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
44
(a) (2) Financial Statement Schedules.
Schedules to the Financial Statements have been omitted because the
information required to be set forth therein is not applicable or is shown in
the accompanying Financial Statements or notes thereto.
(a) (3) List of Exhibits.
The following exhibits are filed as part of, and are incorporated by
reference into, this Annual Report on Form 10-K:
2.1 --Agreement and Plan of Reorganization dated as of May 30, 1996 among
the Company, FL Merger Corp., FreeLoader, Inc., Mark Pincus and Sunil
Paul (filed as Exhibit 2.1 to the Company's Current Report on Form 8-
K (the "Form 8-K") filed on July 12, 1996 and incorporated herein by
reference thereto).
3.3 --Third Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.3 to the Company's Registration Statement on Form S-1, as
amended (File No. 333-00792) (the "Registration Statement on Form S-
1") and incorporated herein by reference thereto).
3.5 --Amended and Restated By-laws of the Company (filed as Exhibit 3.5 to
the Registration Statement on Form S-1 and incorporated herein by
reference thereto).
4.1 --Specimen certificate representing the Common Stock (filed as Exhibit
4.1 to the Registration Statement on Form S-1 and incorporated herein
by reference thereto).
10.1 --Amended and Restated 1989 Stock Option Plan (filed as Exhibit 10.1
to the Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.2 --1996 Non-Employee Director Stock Option Plan (filed as Exhibit 10.2
to the Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.3 --1996 Employee Stock Purchase Plan (filed as Exhibit 10.3 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.4 --Form of Common Stock Purchase Warrant (filed as Exhibit 10.4 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.5 --Series F Preferred Stock Purchase Agreement dated as of September
13, 1993 (filed as Exhibit 10.5 to the Registration Statement on Form
S-1 and incorporated herein by reference thereto).
10.6 --Letter Agreement dated as of October 12, 1993 between the Company
and Dialog Information Services, Inc. (filed as Exhibit 10.6 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.7 --Agreement dated 1993 between the Company and Knight-Ridder
Information, Inc., as amended (filed as Exhibit 10.7 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.8 --License Agreement dated as of January 21, 1992 between the Company
and Knight-Ridder/Tribune Business News (filed as Exhibit 10.8 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.9 --Series G Preferred Stock Purchase Agreement dated as of October 3,
1995 (filed as Exhibit 10.9 to the Registration Statement on Form S-1
and incorporated herein by reference thereto).
10.10 --Independent Content Provider Agreement dated as of September 25,
1995 between the Company and The Microsoft Network, L.L.C. (filed as
Exhibit 10.10 to the Registration Statement on Form S-1 and
incorporated herein by reference thereto).
10.11 --Stockholders' Agreement dated as of September 13, 1993 (filed as
Exhibit 10.11 to the Registration Statement on Form S-1 and
incorporated herein by reference thereto).
45
10.12 --Series G Stockholders' Agreement dated as of October 3, 1995 (filed
as Exhibit 10.12 to the Registration Statement on Form S-1 and
incorporated herein by reference thereto).
10.13 --Second Amended and Restated Investors' Rights Agreement dated as of
October 3, 1995 (filed as Exhibit 10.13 to the Registration
Statement on Form S-1 and incorporated herein by reference thereto).
10.14 --Licensing Agreement with Cornell Research Foundation, Inc. dated as
of March 22, 1989 (filed as Exhibit 10.14 to the Registration
Statement on Form S-1 and incorporated herein by reference thereto).
10.15 --Letter agreement dated as of July 2, 1992 between the Company and
Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.15 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.16 --Letter agreement dated as of September 22, 1994 between the Company
and Fleet Bank of Massachusetts, N.A. (filed as Exhibit 10.16 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.17 --Consent and Loan Modification Agreement dated as of November 29,
1995 between the Company and Fleet Bank of Massachusetts, N.A.
(filed as Exhibit 10.17 to the Registration Statement on Form S-1
and incorporated herein by reference thereto).
10.18 --Second Loan Modification Agreement dated as of December 29, 1995
between the Company and Fleet Bank of Massachusetts, N.A. filed as
Exhibit 10.18 to the Registration Statement on Form S-1 and
incorporated herein by reference thereto).
10.19 --Lease dated as of August 25, 1994 between the Company and Trustees
of New England Executive Park Trust, 40 Spaulding Investment
Company, Inc. (filed as Exhibit 10.19 to the Registration Statement
on Form S-1 and incorporated hereinby reference thereto).
10.20 --Reseller Agreement dated as of February 8, 1996 between the Company
and Knight-Ridder Information, Inc. (filed as Exhibit 10.20 to the
Registration Statement on Form S-1 and incorporated herein by
reference thereto).
10.21 --Escrow Agreement dated as of June 28, 1996 among the Company,
FreeLoader, Inc., the securityholders of FreeLoader, Inc., Fleet
National Bank, and Frederick Wilson, as representative of the
securityholders of FreeLoader, Inc. (filed as Exhibit 99.2 to the
Form 8-K and incorporated herein by reference thereto).
10.22 --Registration Rights Agreement dated as of June 28, 1996 among the
Company and certain stockholders of FreeLoader, Inc. (filed as
Exhibit 99.1 to the Form 8-K and incorporated herein by reference
thereto).
10.23 --Intentionally omitted.
*10.24 --Third Loan Modification Agreement dated as of December 31, 1996
between the Company and Fleet National Bank.
*10.25 --Employment Agreement dated as of September 3, 1996 between Michael
E. Kolowich and the Company.
*10.26 --Agreement and Release dated as of December 17, 1996 between Joseph
A. Amram and the Company.
*10.27 --Lease dated as of September 3, 1996 between the Company and Hamm's
Building Associates.
*11.1 --Computation of Earnings Per Share.
*21.1 --Subsidiaries of the Company.
*23.1 --Consent of Coopers & Lybrand L.L.P.
*24.1 --Power of Attorney (included on page 48).
*27.1 --Financial Data Schedule.
- --------
* Filed herewith.
46
(b) Reports of Form 8-K:
On October 31, 1996, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission, disclosing under Item 5 the Asset Purchase
Agreement with Information Access Company ("IAC"), a division of The Thomson
Company, pursuant to which Individual acquired from IAC substantially all of
the assets of IAC's Hoover Business Intelligence Services unit.
On November 25, 1996, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission, disclosing under Item 5 an Asset
Purchase Agreement with Cahner's Publishing Co. ("Cahner's"), a division of
Reed Elsevier, Inc., pursuant to which Individual sold to Cahner's
substantially all of the assets of Individual's BookWire division.
On December 5, 1996, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission, disclosing under Item 5 that the Company
has been named as a defendant in a putative federal securities class action
lawsuit filed on November 13, 1996 in the United States District Court for the
District of Massachusetts. The lawsuit was filed on behalf of an alleged class
of purchasers of the Company's common stock during the period March 15, 1996
through July 24, 1996.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) above.
47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Individual, Inc.
/s/ Michael E. Kolowich
Date: March 31, 1997 By: _________________________________
MICHAEL E. KOLOWICH CHAIRMAN OF
THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Individual, Inc., hereby
severally constitute and appoint Michael E. Kolowich and Robert L. Lentz, and
each of them singly, our true and lawful attorneys, with full power to both of
them and each of them singly, to sign for us and in our names in the
capacities indicated below, any amendments to this Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities
to enable Individual, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
and Exchange Commission.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT, IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE(S) DATE
/s/ Michael E. Kolowich Chairman of the March 31, 1997
- ------------------------------------- Board, President,
MICHAEL E. KOLOWICH Chief Executive
Officer and
Director (Principal
Executive Officer)
/s/ Robert L. Lentz Senior Vice March 31, 1997
- ------------------------------------- President, Finance
ROBERT L. LENTZ and Administration,
Chief Financial
Officer, Treasurer
and Secretary
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Joseph A. Amram Director March 31, 1997
- -------------------------------------
JOSEPH A. AMRAM
/S/ James D. Daniell Director March 31, 1997
- -------------------------------------
JAMES D. DANIELL
48
SIGNATURE TITLE(S) DATE
/s/ William A. Devereaux Director March 31, 1997
- -------------------------------------
WILLIAM A. DEVEREAUX
/s/ Jeffery S. Galt Director March 31, 1997
- -------------------------------------
JEFFERY S. GALT
/s/ Elon Kohlberg Director March 31, 1997
- -------------------------------------
ELON KOHLBERG
/s/ Marino R. Polestra Director March 31, 1997
- -------------------------------------
MARINO R. POLESTRA
/s/ Daniel Rosen Director March 31, 1997
- -------------------------------------
DANIEL ROSEN
49