-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TQg6Rz7Y+whIG4coHm2cyoBNt5LPB/CMIFdmFcf4gy1zRF11HaMdJeADKpGLBpHv cuKtaPWEcXCqdPJGX8E4vg== 0000927016-96-001759.txt : 19961118 0000927016-96-001759.hdr.sgml : 19961118 ACCESSION NUMBER: 0000927016-96-001759 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDIVIDUAL INC CENTRAL INDEX KEY: 0001002536 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 043036959 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27734 FILM NUMBER: 96665406 BUSINESS ADDRESS: STREET 1: 8 NEW ENGLAND EXECUTIVE PARK WEST CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 6172736000 MAIL ADDRESS: STREET 1: 8 NEW ENGLAND EXECUTIVE PK CITY: BURLINGTON STATE: MA ZIP: 01803 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 ---------------- Individual, Inc - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-303-6959 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8 New England Executive Park West, Burlington, MA 01803 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (617) 273-6000 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) 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. X Yes No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: As of September 30, 1996, 14,170,905 shares of Common Stock, $.01 par value per share, were outstanding. 1 Individual, Inc. Form 10-Q For the Quarter Ended September 30, 1996 Index
Page # ------ Facing Sheet 1 Index 2 PART I - UNAUDITED FINANCIAL INFORMATION - ---------------------------------------- Item 1. Consolidated Financial Statements Consolidated Balance Sheets September 30, 1996 (unaudited) and December 31, 1995 3 Consolidated Statements of Operations (unaudited) 4 Consolidated Statements of Cash Flows (unaudited) 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index 18 Exhibit 11 Computation of Loss Per Share 19 Financial Data Schedule 20
2 INDIVIDUAL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 27,205,515 $ 17,517,743 Investments in marketable securities 7,048,657 -- Accounts receivable, net 4,048,069 5,741,694 Prepaid expenses 380,881 115,094 ------------ ------------ Total current assets 38,683,122 23,374,531 Property and equipment, net 4,079,880 2,926,234 Other assets, net 316,275 501,740 ------------ ------------ Total assets $ 43,079,277 $ 26,802,505 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 2,624,245 $ 2,088,783 Accrued expenses 4,677,161 1,716,108 Deferred revenue 7,868,013 8,924,309 Bank loans for equipment financing 804,734 638,067 Current obligations under capital leases 105,289 138,017 ------------ ------------ Total current liabilities 16,079,442 13,505,284 Senior subordinated notes -- 10,000,000 Other long term liabilities 1,076,623 985,738 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, 14,203,770 and 1,870,596 shares issued in 1996 and 1995, respectively 143,038 18,706 Additional paid in capital 89,506,386 3,071,810 Cumulative dividends on redeemable preferred stock -- (6,234,366) Accumulated deficit (63,695,535) (18,544,708) ------------ ------------ 25,953,889 (21,682,445) Less 32,865 and 157,500 shares held in treasury (at cost), respectively (30,677) (5,085) ------------ ------------ Total stockholders' equity (deficit) 25,923,212 (21,687,530) ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 43,079,277 $ 26,802,505 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 INDIVIDUAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended For the nine months ended September 30, September 30, 1996 1995 1996 1995 -------------- ---------------- ------------------------------- Revenue $6,134,818 $4,424,354 $16,811,836 $12,025,226 Cost of revenue 2,977,252 2,087,588 7,872,092 5,470,783 -------------- ---------------- ------------------------------- Gross margin 3,157,566 2,336,766 8,939,744 6,554,443 Operating expenses: Sales and marketing 1,628,830 761,673 4,035,595 1,747,896 New subscriber acquisition 2,173,862 1,852,619 6,353,490 5,856,579 Product development 1,825,873 716,084 3,718,084 1,764,801 General and administrative 1,588,716 639,499 3,874,530 1,853,850 Purchased incomplete technology - - 35,563,750 - -------------- ---------------- ------------------------------- Total operating expenses 7,217,281 3,969,875 53,545,449 11,223,126 -------------- ---------------- ------------------------------- Loss from operations (4,059,715) (1,633,109) (44,605,705) (4,668,683) Interest income and other, net (200,579) 12,922 272,260 75,320 Interest expense (42,168) (62,270) (817,382) (129,294) ============== ================ =============================== Net loss ($4,302,462) ($1,682,457) ($45,150,827) ($4,722,657) ============== ================ =============================== Supplemental net loss per common share ($0.31) ($0.17) ($3.73) ($0.49) ============== ================ =============================== Supplemental weighted average common shares outstanding 14,088,645 9,645,865 12,119,213 9,641,133 ============== ================ ===============================
The accompanying notes are an integral part of the consolidated financial statements. 4 INDIVIDUAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 1996 1995 ---------------- --------------- Cash flows from operating activities: Net loss ($45,150,827) ($4,722,657) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 907,479 458,263 Loss on disposal of property and equipment 45,926 - Provision for doubtful accounts 48,632 19,382 Compensation recognized under employee stock plans 27,981 - Loss on joint venture 1,945,966 - Purchased incomplete technology 35,563,750 - Changes in operating assets and liabilities: Decrease in accounts receivable 1,644,993 1,023,258 Increase in prepaid expenses (253,510) (149,645) Increase in other assets (82,464) (2,046) Increase in accounts payable and accrued expenses 405,942 2,079,316 Increase in other long term liabilities 333,335 - Decrease in deferred revenue (1,056,294) (112,031) ---------------- --------------- Net cash used in operating activities: (5,619,091) (1,406,160) ---------------- --------------- Cash flows from investing activites: Additions to property and equipment (1,620,218) (1,102,169) Investment in joint venture (1,883,417) Cash acquired from/(paid for) acquisition 1,010,354 (178,817) (Investments in)/proceeds from sale of marketable securities (6,992,450) 1,000,000 ---------------- --------------- Net cash used in investing activities: (9,485,731) (280,986) ---------------- --------------- Cash flows from financing activities: Principal repayments under lease obligations (91,649) (151,749) (Decrease)/ Increase in equipment loan, net (20,220) 1,701,528 Proceeds from issuance of common stock, net of related expenses 34,890,022 7,690 Payment on senior subordinated notes (10,000,000) - ---------------- --------------- Net cash provided by financing activities 24,778,153 1,557,469 ---------------- --------------- Effect of exchange rate on cash 14,441 1,411 ---------------- --------------- Net increase (decrease) in cash and cash equivalents 9,687,772 (128,266) Cash and cash equivalents at the beginning of period 17,517,743 639,870 ---------------- --------------- Cash and cash equivalents at the end of period $27,205,515 $511,604 ================ =============== Supplemental cash flow information: Interest paid $770,302 $108,322 ================ =============== Non cash transactions: Equipment acquired under capital lease obligation $22,859 - ================ =============== Net liabilities assumed in exchange for stock $1,643,019 - ================ =============== Conversion of redeemable preferred stock in to common stock $2,999,013 - ================ ===============
The accompanying notes are an integral part of the financial statements. 5 INDIVIDUAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The unaudited consolidated financial statements of Individual, Inc. (the "Company") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1995 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. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries. Quarterly operating results are not necessarily indicative of the results which would be expected for the full year. 1. 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. 3. Cash and Cash Equivalents and Marketable Securities At September 30, 1996, cash and cash equivalents included $9,725,958 in commercial paper, $692,588 in money market investments, $15,324,042 in U. S. Government Agency securities, and $1,462,927 cash on deposit. In addition, the Company held $7,048,657 in U. S. Government Agency securities classified as marketable securities. All marketable securities are held to maturity and therefore carried at amortized cost. At December 31, 1995, cash and cash equivalents included cash on deposit and investments in money market type mutual funds. 4. 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 $29,100,000. 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 $4,700,000. 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. 6 INDIVIDUAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Per Share Computations 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 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 three months ended September 30, 1996 1995 ------ ------ Net loss ($4,302,462) ($1,682,457) Accretion of dividends on redeemable preferred stock - 371,720 ------------- ------------ Net loss to common stockholders ($4,302,462) ($2,054,177) ============= ============ Net loss per common share $ (.31) $ (1.02) ============= ============ Weighted average number of common and common equivalent shares outstanding 14,088,645 2,020,655 ============= ============ For the nine months ended September 30, 1996 1995 ------------- ------------ Net loss ($45,150,827) ($4,722,657) Accretion of dividends on redeemable preferred stock 462,706 1,115,160 ------------- ------------ Net loss to common stockholders ($45,613,533) ($5,837,817) ============= ============ Net loss per common share $ (4.61) $ (2.90) ============= ============ Weighted average number of common and common equivalent shares outstanding 9,884,719 2,015,923 ============= ============
7 INDIVIDUAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. Changes in Stockholders' Equity (Deficit) The following table sets forth the changes in stockholders' equity (deficit) for the nine months ended September 30, 1996: Balance at December 31, 1995 ($21,687,530) Net proceeds from initial public offering 29,070,994 Conversion of all redeemable preferred stock to common stock 23,999,013 Net proceeds from exercise of over-allotment option 4,738,243 Stock issued in acquisition of FreeLoader 33,981,085 Exercise of stock options and warrants 762,539 Repurchase of treasury shares (28,067) Issuance of treasury shares 237,762 Net loss (45,150,827) ------------- Balance at September 30, 1996 $ 25,923,212 =============
8 INDIVIDUAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. Acquisition of FreeLoader 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 $34,931,000 is based on the fair market value of Individual, Inc. Common Stock and options as of May 30, 1996 and includes estimated accrued transaction costs of approximately $950,000. The transaction was accounted for as a purchase. Approximately $633,000 of the purchase price has been allocated to the net identifiable liabilities assumed and approximately $35,564,000 has been allocated to purchased technology determined to be in-process and accordingly, expensed at consummation. This nonrecurring charge is reflected in the consolidated statement of operations. The Company has guaranteed the value of certain shares issued in the transaction, which will be measured during the period January 1 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 September 30, 1996, the fair value of stock below the guaranteed price approximates $3,500,000. Any payments will be treated as adjustments to shareholder's equity. The following condensed pro forma results of operations for the nine months ended September 30, 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 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 $35,564,000 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 have not been presented because FreeLoader did not commence operations until November 13, 1995.
September 30, 1996 Pro Forma --------------- Revenue $16,811,836 =========== Net loss (48,787,662) =========== Pro forma net loss per common share ($3.72) ====== Pro forma weighted average common shares outstanding 13,117,658 ==========
9 INDIVIDUAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. 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 $713,000 for the quarter ended September 30, 1996, which is included in interest income and other, net. The Company's investment in the joint venture has been reduced to zero as of September 30, 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, received in May 1996, and continuing royalties based on revenue of the joint venture over a twenty year period. The license includes the transfer of certain technology from the Company to the joint venture, which is expected to be completed by the end of 1996. The initial lump sum royalty has been deferred and is being recognized as revenue over the term of the technology transfer. 9. Subsequent Events 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 The Thomson Corporation (Toronto, Canada). Hoover is an intelligent software that provides real-time and archival electronic news and information services. The acquisition, financed through cash and installment payments, will be accounted for as a purchase. The purchase price of the acquisition has been estimated at $1,833,000. Additionally, the Company will pay IAC approximately $500,000 for consulting costs provided by IAC over the fourth quarter. On November 1, 1996, the Company completed the sale of its Bookwire business for approximately $1,000,000. The sale will not have a significant effect on reported sales or earnings from normal operations in the future. 10 10 Q - 3rd quarter 1996 Item 2. 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 the quarter ended March 31, 1990, and has subsequently introduced additional services targeted at multiple market segments. The Company's revenue is derived from two classes of services: enterprise services and single-user services. Revenue for the Company's enterprise service, First! (introduced in the first quarter of 1990) consists of subscription fees from organizations. Single-user services include HeadsUp (introduced in the second quarter of 1993), NewsPage (introduced in the second quarter of 1995), and FreeLoader (acquired by the Company in June 1996). Revenue for single-user services consists of both subscription fees and fees for the fulfillment of certain user requests for additional information, as well as advertising fees from companies placing advertisements through these services. The Company recognizes subscription revenue ratably over the subscription period. The Company's subscription contracts are typically billed in advance, and amounts attributable to services not yet delivered are recorded in deferred revenue. Customers of the Company's services may terminate their subscriptions at any time and receive a credit in the form of a cash refund for the unused portion. 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. The Company had 208 full-time employees on September 30, 1996, up from 157 on December 31, 1995, and up from 96 and 66 on December 31, 1994 and 1993, respectively. The majority of the Company's operating expenses consists of salaries and related costs. The Company incurs significant expenses to acquire new customers, reported as new subscriber acquisition expenses. The Company may also incur expenses in the process of soliciting a subscription renewal, which are included in sales and marketing expenses. The cost of soliciting subscription renewals is substantially less than the cost of acquiring new subscriptions. General Risk Factors Affecting Quarterly Results - ------------------------------------------------ This Form 10-Q contains forward-looking statements, the achievement of which involves 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 under "Risk Factors" in the Company's Registration Statement on Form S-1 filed on July 19, 1996 (File No. 333-8511), as amended. On June 28, 1996, the Company acquired FreeLoader, a developer of agent-based software for the offline delivery of World Wide Web multi-media content. The FreeLoader acquisition was effected through the merger of FL Merger Corp., a wholly-owned subsidiary of the Company, with and into FreeLoader, with FreeLoader continuing as the surviving corporation and a wholly-owned subsidiary of the Company. The Company issued approximately 1,874,489 shares of its Common Stock in the FreeLoader acquisition in exchange for the outstanding securities of FreeLoader, including up to 360,180 shares of Individual Common Stock which are reserved for issuance upon exercise of outstanding FreeLoader stock options assumed by Individual in the FreeLoader acquisition. The FreeLoader acquisition has been accounted for as a purchase. Approximately $633,000 of the purchase price has been allocated to the net identifiable liabilities assumed and approximately $35,564,000 has been allocated to purchased technology determined to be in-process and accordingly, expensed at consummation. The Company expects to sell advertising on the FreeLoader service; however, no material revenue is expected through the end of 1996. 11 On October 17, 1996, the Company acquired 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 integrates and organizes information from internal and external news and information sources. Hoover provides real-time and archival electronic news and information services. The acquisition, financed through cash and installment payments, will be accounted for as a purchase. The total purchase price of the acquisition is estimated at $1,883,000. Additionally, the Company will pay IAC approximately $500,000 for consulting costs provided by IAC over the fourth quarter of fiscal 1996. In addition to the FreeLoader and Hoover acquisitions, management may in future periods consider other acquisitions that it believes may enable Individual to acquire complementary skills and capabilities, offer new products and services, expand its customer base, or obtain other competitive advantages. There can be no assurance that Individual will be able to successfully identify suitable acquisition candidates or complete future acquisitions, or that any future acquisitions will not have a material adverse effect on Individual's business and results of operations. In September 1996, the Company hired Michael E. Kolowich as the Company's new President and Chief Executive Officer. Mr. Kolowich replaced Joseph A. Amram, a founder and former President and Chief Executive Officer of the Company whose employment was terminated in August 1996. Additionally, the Company hired Michael F. Kraley in September 1996 to replace Jeffrey V. Sutherland as the Company's new Vice President of Engineering and Chief Technology Officer. There can be no assurance that Mr. Kolowich and other new management personnel will be able to effectively manage the Company, and that these management changes will not have a material adverse affect on the Company's business, results of operations and financial condition, as well as on perceptions of the Company by current and prospective investors. In view of the Company's revenue growth in recent years, management believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance. The limited operating history of the Company makes the prediction of future operating results difficult or impossible and therefore there can be no assurance that the Company will sustain revenue growth or achieve profitability. Revenues to be generated from advertising on the Company's FreeLoader service will be highly dependent on the successful development of the FreeLoader service, the integration of FreeLoader with Individual's services, and the ability of the Company to attract advertising sponsorship on FreeLoader. The Company expects to spend approximately $2 million in the fourth quarter in 1996 on FreeLoader development and marketing, and this level of expense may increase in the future. No material revenue from FreeLoader is expected in 1996. On July 22, 1996, the Company announced the Release 2.0 of Alert, the Company's intra-day alerting service delivered via e-mail, which gives customers news access to any company tracked by the Company's Tracker Database. On September 30 1996, FreeLoader released Version 2.0, which allows user-defined, custom channels, "premium" branded channels of content from popular Web sources, and an enhanced, easier-to-use interface. Also, the Company launched a new version of NewsPage, which allows users to set profiles of their information interests and then immediately view their own, individualized daily issues of NewsPage. The frames-based, individualized issues now allow the user to also create custom "saved searches" and stock portfolios. The ability of the Company to market these new releases effectively will impact revenue growth in future quarters. 12 Results of Operations - --------------------- The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:
Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Revenue 100% 100% 100% 100% Cost of Revenue 48% 47% 47% 45% ---- ---- ---- ---- Gross Margin 52% 53% 53% 55% Operating expenses: Sales and marketing 27% 17% 24% 15% New subscriber acquisition 35% 42% 38% 49% Product development 30% 16% 22% 15% General and administrative 26% 15% 23% 15% Purchased incomplete technology - - 212% - ---- ---- ----- ---- Total operating expense 118% 90% 319% 94% Loss from operations (66)% (37)% (266)% (39)% Interest and other income (expense), net (4)% (1)% (3)% 0% ---- ---- ----- ---- Net loss (70)% (38)% (269)% (39)% ==== ==== ===== ====
Three months and nine months ended September 30, 1996 and 1995 - -------------------------------------------------------------- Revenue. Revenue increased 39%, from $4,424,000 for the three months ended September 30, 1995 to $6,135,000 for the three months ended September 30, 1996. In the third quarter of fiscal 1996, revenue from enterprise services was $4,218,000, up from $2,951,000 for the same period in 1995. This increase of 43% in revenue from enterprise services resulted primarily from new and upgrade sales of First! for Intranet and First! For Notes and groupware platforms. Revenues increased 40%, from $12,025,000 to $16,812,000 in the nine months ended September 30, 1995 and 1996 respectively. The percentage increase from enterprise revenues for the nine months ended September 30, 1996 was approximately 42%, as revenues grew to $11,394,000, up from $8,052,000 for the same period in 1995. Additionally, the number of registered and authorized users increased to more than 425,000 at September 30, 1996 (including 93,000 users of the FreeLoader service), over six times the number of users at September 30, 1995. In the third quarter of fiscal 1996, revenue from single user services grew by 30% to $1,917,000, up from $1,473,000 for the same period in 1995. For the nine months ended September 30, 1996, single user services revenue grew by 36% to $5,386,000, up from $3,973,000 for the same period in 1995. The growth was attributable to the Company's NewsPage service on the World Wide Web, which was introduced in the second quarter of 1995. The increase in revenue from Web single-user services was partially offset by the declining revenues of non-Web single user services, which have not been heavily promoted in 1996. The Company expects this trend to continue in the future. FreeLoader contributed minimal revenues in the third quarter, and is not expected to have a material impact on revenues in the fourth quarter of 1996. Cost of revenue. Cost of revenue was $2,977,000 for the three months ended September 30, 1996, as compared to $2,088,000 for the same period in 1995, or an increase of 43%. Cost of revenue was $7,872,000 for the nine months ended September 30, 1996, as compared to $5,471,000 for the same period in 1995, or an increase of 44%. The increase was mainly the result of higher information provider costs and the change in product mix in favor of Web services. The number of information providers 13 increased to over 600 at September 30, 1996, up from 500 at September 30, 1995. In addition, the royalties payable to information providers on NewsPage revenue as a percentage of sales is higher than for enterprise revenues, as this is a new service and revenue is still ramping up. To the extent that NewsPage revenue increases, the Company may be able to achieve better gross margins on NewsPage revenues due to economies of scale. Sales and marketing. Sales and marketing expenses increased 114% to $1,629,000 for the three months ended September 30, 1996, up from $762,000 for the same period of 1995. Sales and marketing expenses increased by 131% to $4,036,000 for the nine months ended September 30, 1996, up from $1,748,000 for the same period of 1995. These increases were primarily due to hiring additional personnel in marketing and advertising sales for NewsPage, which was launched in the second quarter of 1995, and to sales and marketing expenses related to Freeloader, acquired in June 1996. Additionally, there was an increase in expenses related to renewal subscription sales, due to the larger customer base. New subscriber acquisition. New subscriber acquisition expenses increased 17% from $1,853,000 to $2,174,000 for the three months ended September 30, 1995 and September 30, 1996 respectively. New subscriber acquisition expenses increased 8% from $5,857,000 to $6,353,000 for the nine months ended September 30, 1995 and September 30, 1996 respectively. The increase in new subscriber acquisition expenses in the third quarter of 1996 was the result of the continued expansion of the enterprise sales staff and advertising expenses to acquire NewsPage readers, which was partially offset by a reduction of non-Web single user services promotion expenses. Product development. Product development increased 155% to $1,826,000 for the three months ended September 30, 1996, up from $716,000 for the same period in 1995. Product development increased 111% to $3,718,000 for the nine months ended September 30, 1996, up from $1,765,000 for the same period in 1995. This increase was primarily the result of development expenses related to Freeloader, acquired in June 1996, as well as the continued development of new enhancements and new delivery platforms for both the NewsPage and First! services. General and administrative. General and administrative expenses increased 149% to $1,589,000 for the three months ended September 30, 1996, up from $639,000 for the same period of 1995. General and administrative expenses increased 109% to $3,875,000 for the nine months ended September 30, 1996, up from $1,854,000 for the same period of 1995. The reasons for this increase included the hiring of additional management and administrative personnel, recruiting fees, legal fees related to acquisitions and the departure of the former CEO, and deferred compensation charges related to the FreeLoader acquisition. Purchased incomplete technology. The one-time non-cash charge of $35,564,000 incurred in June 1996 was based on an assessment of purchased FreeLoader technology which did not meet definitions of "completed technology", and thus was expensed upon consummation of the merger in accordance with Generally Accepted Accounting Principles. Interest income and other, net. Interest income and other, net decreased to expense of $201,000 for the three months ended September 30, 1996, down from income of $13,000 for the same period of 1995. Interest income and other, net, for the nine months ended September 30, 1996 was $272,000, as compared to $75,000 for the same period in 1995. The third quarter 1996 decline was primarily attributable to losses incurred by the Japanese joint venture with Toshiba Corp. and Mitsui & Co., Ltd. The Company's investment in the joint venture has been reduced to zero as of September 30, 1996. The overall increase for the nine month period is due to interest revenue on invested cash and marketable securities, primarily from proceeds of the IPO in March 1996. 14 Interest expense. Interest expense decreased to $42,000 for the three months ended September 30, 1996 from $62,000 for the same period of 1995. Interest expense increased to $817,000 for the nine months ended September 30, 1996 from $129,000 for the same period in 1995. The year to date changes over last years levels are due to the interest charges on senior subordinated notes incurred in the first quarter of 1996. The senior subordinated notes were paid in full in March 1996. Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents balance at September 30, 1996 was $27,206,000, as compared to $34,118,000 at June 30, 1996 and $17,518,000 at December 31, 1995. Net cash used in operations was $(5,619,000) for the nine months ended September 30, 1996, as compared with $(1,406,000) for the same period in 1995. The change was mainly attributable to the increased operating expenses of the first three quarters of 1996, interest payments of $638,000 made on senior subordinated debt in the first quarter of 1996, and a decrease of $1,056,000 in deferred revenue over the nine month period ended September 30, 1996. Net cash used in investing activities was $(9,486,000) in the nine months ended September 30, 1996 as compared with $(281,000) for the same period of 1995. In the first three quarters of 1996, $6,992,000 was used to purchase marketable securities, primarily from U.S. Government Agencies. Cash of $1,010,000 was acquired in the FreeLoader acquisition in the second quarter of 1996. Net cash provided by financing activities was $24,778,000 for the nine months ended September 1996, as compared to $1,557,000 in the same period of 1995. This increase resulted primarily from the completion of the Company's IPO in March of 1996 and the exercise of the over-allotment option in the second quarter of 1996, which together generated net proceeds of approximately $33,809,000. In addition, the Company used $10,000,000 of the offering proceeds for repayment of the principal on the senior subordinated notes. The Company has also used equipment leases and debt instruments to finance the majority of its purchases of capital equipment. At September 30, 1996, the Company had approximately $1,653,000 outstanding in connection with these obligations and had an additional $81,000 available under established credit arrangements. In addition, the Company has a revolving line of credit with a commercial bank providing for a maximum credit of $3,500,000 subject to certain covenants. At September 30, 1996, no amounts were outstanding under this line. Management believes that cash and marketable securities and cash flow from operations will be sufficient to fund its operations at least for the next twelve months. This may depend on numerous factors, including the rate of expansion for current products and services, the development of new products and services, and potential acquisitions or strategic investments. 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits 11 Computation of Weighted Average Shares Used in Computing Loss Per Share Amounts Financial Data Schedule (b) Reports on Form 8-K On July 12, 1996, the Company filed a Current Report on Form 8-K with the Securities Exchange Commission, disclosing under Item 2 the acquisition of FreeLoader, Inc. by a subsidiary merger on June 28, 1996. As a result of the merger, FreeLoader became a wholly-owned subsidiary of Individual. On August 8, 1996, the Company filed a Current Report on Form 8-K with the Securities Exchange Commission disclosing under Item 5 the termination of employment of Joseph A. Amram, a founder and former president and Chief Executive Officer of the Company. 16 SIGNATURES Pursuant to the requirements 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. Date: November 14, 1996 By: /s/Bruce D. Glabe ----------------- Bruce D. Glabe Executive Vice President (a Principal Executive Officer) By: /s/Robert L. Lentz ------------------ Robert L. Lentz Vice President, Finance and Chief Financial Officer (a Principal Executive Officer and the Principal Financial and Accounting Officer) 17 EXHIBIT INDEX INDIVIDUAL, INC.
Exhibit Number Description Page - -------------- ----------- ---- 11 Computation of Weighted Average Shares 19 Used in Computing Loss Per Share Amounts Financial Data Schedule 20
18 EX-11 2 COMPUTATION OF WEIGHTED AVERAGE SHARES INDIVIDUAL, INC. EXHIBIT 11 COMPUTATION OF WEIGHTED AVERAGE SHARES USED IN COMPUTING LOSS PER SHARE AMOUNTS (UNAUDITED)
Primary Fully Diluted Supplemental Type of Security Shares Shares Shares (1) - ----------------------------------------------------------------- ----------- ----------- ------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995: Common stock less shares held in treasury, beginning of period 1,669,289 1,669,289 1,669,289 Cheap stock outstanding during the period (2) 346,210 346,210 346,210 Weighted average common stock issued during the period 5,156 5,156 5,156 Conversion of preferred stock and redeemable preferred stock into common stock (1) -- -- 7,625,210 ----------- ----------- ----------- Weighted average shares of common stock outstanding 2,020,655 2,020,655 9,645,865 =========== =========== =========== Net loss per common share ($ 1.02) ($ 1.02) ($ 0.17) =========== =========== =========== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996: Common stock less shares held in treasury, beginning of period 14,027,581 14,027,581 14,027,581 Weighted average common stock issued during the period 61,064 61,064 61,064 =========== =========== =========== Weighted average shares of common stock outstanding 14,088,645 14,088,645 14,088,645 =========== =========== =========== Net loss per common share ($ 0.31) ($ 0.31) ($ 0.31) =========== =========== =========== Primary Fully Diluted Supplemental Type of Security Shares Shares Shares (1) - ------------------------------------------------------------------- ----------- ----------- ----------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995: Common stock less shares held in treasury, beginning of period 1,666,002 1,666,002 1,666,002 Cheap stock outstanding during the period (2) 346,210 346,210 346,210 Weighted average common stock issued during the period 3,711 3,711 3,711 Conversion of preferred stock and redeemable preferred stock into common stock (1) -- -- 7,625,210 ----------- ----------- ----------- Weighted average shares of common stock outstanding 2,015,923 2,015,923 9,641,133 =========== =========== =========== Net loss per common share ($ 2.90) ($ 2.90) ($ 0.49) =========== =========== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996: Common stock less shares held in treasury, beginning of period 1,713,096 1,713,096 1,713,096 Common stock outstanding during the period 2,781,996 2,781,996 2,781,996 Weighted average treasury stock repurchased during the period (1,089) (1,089) (1,089) Weighted average conversion of preferred stock and redeemable preferred stock into common stock (1) 5,390,716 5,390,716 7,625,210 =========== =========== =========== Weighted average shares of common stock outstanding 9,884,719 9,884,719 12,119,213 =========== =========== =========== Net loss per common share ($ 4.61) ($ 4.61) ($ 3.73) =========== =========== ===========
(1) Upon completion of the public offering on March 20, 1996, the redeemable preferred stock and preferred stock converted to 7,625,210 shares of common stock. Accordingly, the supplemental earnings per share calculation has assumed the conversion of all shares of redeemable preferred stock and preferred stock, effected for the 3-for-2 split, at the beginning of each period presented. (2) In accordance with the Securities and Exchange Commission, issuances of common stock and common stock equivalents, within one year to the initial filing of the registration statement, at share prices below the assumed initial public offering price of $14.00 per share (cheap stock), are considered to have been made in anticipation of the contemplated public offering. Accordingly, these stock issuances are treated as if issued and outstanding, using the treasury stock method, since the inception of the Company. EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 JUL-01-1996 JAN-01-1996 SEP-30-1996 SEP-30-1996 0 27,205,515 0 7,048,657 0 4,048,069 0 0 0 0 0 380,881 0 4,079,880 0 316,275 0 43,079,277 0 16,079,442 0 0 0 0 0 0 0 143,038 0 25,780,174 0 43,079,277 0 0 6,134,818 16,811,836 2,977,252 7,872,092 7,217,281 53,545,449 (200,579) 272,260 0 0 42,168 817,382 (4,302,462) (45,150,827) 0 0 0 0 0 0 0 0 0 0 (4,302,462) (45,150,827) (.31) (3.737) 0 0
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