-----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, V4sMxeX8YjcgKSg0zfpn3XkT0UBTlYcM3mYuCYa7+XuahTOLcKoD5JxQcQThwj8J EUB0+Kpt5Ki8S6IRV/aFmg== 0000927016-97-000921.txt : 19970401 0000927016-97-000921.hdr.sgml : 19970401 ACCESSION NUMBER: 0000927016-97-000921 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-27734 FILM NUMBER: 97568380 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-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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 ---------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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
- -------- * 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. 8 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 (THIS PAGE INTENTIONALLY LEFT BLANK) 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 EX-10.24 2 THIRD LOAN MODIFICATION AGREEMENT Exhibit 10.24 THIRD LOAN MODIFICATION AGREEMENT --------------------------------- This Third Loan Modification Agreement ("this Agreement") is made as of December 31, 1996 between Individual, Inc., a Delaware corporation (the "Borrower") and Fleet National Bank (successor by merger to Fleet Bank of Massachusetts, N.A.) (the "Bank"). For good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank act and agree as follows: 1. Reference is made to: (i) that certain letter agreement dated September 22, 1994 between the Borrower and Fleet Bank of Massachusetts, N.A. (the Bank having succeeded by merger to the rights of Fleet Bank of Massachusetts, N.A. thereunder), as amended by Consent and Loan Modification Agreement dated as of November 29, 1995 and by Second Loan Modification Agreement dated as of December 29, 1995 (as so amended, the "Letter Agreement"); (ii) that certain $3,500,000 face principal amount promissory note dated September 22, 1994 (the "Revolving Note") made by the Borrower and payable to the order of Fleet Bank of Massachusetts, N.A. (the Bank having succeeded by merger to the rights of Fleet Bank of Massachusetts, N.A. thereunder); (iii) that certain $1,000,000 face principal amount promissory note dated September 22, 1994 (the "Facility One Term Note") made by Borrower and payable to the order of Fleet Bank of Massachusetts, N.A. (the Bank having succeeded by merger to the rights of Fleet Bank of Massachusetts, N.A. thereunder); (iv) that certain $1,000,000 face principal amount promissory note dated December 29, 1995 (the "Facility Two Term Note") made by the Borrower and payable to the order of Fleet Bank of Massachusetts, N.A. (the Bank having succeeded by merger to the rights of Fleet Bank of Massachusetts, N.A. thereunder); (v) that certain Inventory and Accounts Receivable Security Agreement dated September 22, 1994 (the "IAR Security Agreement") given by the Borrower to Fleet Bank of Massachusetts, N.A. (the Bank having succeeded by merger to the rights of Fleet Bank of Massachusetts, N.A. thereunder); (vi) that certain Supplementary Security Agreement - Security Interest in Goods and Chattels dated September 22, 1994 (the "Supplementary Security Agreement") given by the Borrower to Fleet Bank of Massachusetts, N.A. (the Bank having succeeded by merger to the rights of Fleet Bank of Massachusetts, N.A. thereunder); and (vii) that certain $2,000,000 face principal amount promissory note of even date herewith (the "Facility Three Term Note") made by the Borrower and payable to the order of the Bank. The Letter Agreement, the Revolving Note, the Facility One Term Note, the Facility Two Term Note, the Facility Three Term Note, the IAR Security Agreement and the Supplementary Security Agreement are hereinafter collectively referred to as the "Financing Documents." The aforesaid December 29, 1995 Second Loan Modification Agreement is hereinafter referred to as the "Second Modification." 2. The Letter Agreement is hereby amended, effective as of the date hereof: a. By providing that all references therein to the "Bank" will be deemed to refer to Fleet National Bank. -2- b. By deleting the word "and" appearing immediately before clause (iv) of Section 1.1 of the Letter Agreement (as inserted by the Second Modification). c. By deleting the period at the end of Section 1.1 of the Letter Agreement (as amended by the Second Modification) and by substituting in its stead the following: ", and (v) that certain $2,000,000 principal amount promissory note (the 'Facility Three Term Note') dated December 31, 1996 made by the Borrower and payable to the order of the Bank." d. By inserting into the penultimate sentence of Section 1.2 of the Letter Agreement, immediately after the word "presumptive," the following: "(but not conclusive)" e. By inserting into the penultimate sentence of Section 1.4 of the Letter Agreement, immediately after the word "presumptive," the following: "(but not conclusive)" f. By inserting into the penultimate sentence of Section 1.5.1 of the Letter Agreement (said Section 1.5.1 having been inserted by the Second Modification), immediately after the word "presumptive," the following: "(but not conclusively)" g. By inserting into each of the first, third, fifth, seventh, ninth, eleventh, thirteenth, fifteenth and seventeenth sentences of Section 1.5.2 of the Letter Agreement (said Section 1.5.2 having been inserted by the Second Modification), immediately after the words "hereinafter referred to," in each such sentence the following: "in this Section 1.5.2" h. By inserting into Article I of the Letter Agreement, immediately after Sections 1.5.1 and 1.5.2 thereof (said Sections 1.5.1 and 1.5.2 having been inserted by the Second Modification), the following: "1.5.3. Facility Three Term Loans; Facility Three Term Note. --------------------------------------------------- Without limitation of the above-described provisions for Facility One Term Loans and Facility Two Term Loans, the Bank may also make one or more additional loans (the 'Facility Three Term Loans') to the Borrower in an aggregate principal amount up to $2,000,000. Subject to the terms of this letter agreement, Facility Three Term Loans shall be made, at the request of the Borrower, in order to finance costs of Qualifying Equipment acquired by the Borrower after October 1, 1996; provided that (i) no Facility Three Term Loan will be made after December 31, 1997; (ii) the -3- aggregate original principal amounts of all Facility Three Term Loans will not exceed $2,000,000; and (iii) no Facility Three Term Loan will be in an amount more than 80% of the invoiced actual costs of the tangible property constituting the items of Qualifying Equipment with respect to which such Facility Three Term Loan is made (excluding taxes, shipping, software, installation charges and other 'soft costs'). Prior to the making of each Facility Three Term Loan, and as a precondition thereto, the Borrower will provide the Bank with: (i) invoices supporting the costs of the relevant Qualifying Equipment; (ii) such evidence as the Bank may reasonably require showing that the Qualifying Equipment has been installed at the Borrower's Burlington, MA or San Francisco, CA premises, has become fully operational, has been paid for by the Borrower and is owned by the Borrower free of all liens and interests of any other Person (other than the security interest of the Bank pursuant to the Security Agreement); (iii) evidence satisfactory to the Bank that the Qualifying Equipment is fully insured against casualty loss, with insurance naming the Bank as secured party and first loss payee; and (iv) if not previously provided, Uniform Commercial Code Financing Statements satisfactory to the Bank covering each location in which Qualifying Equipment is to be located. The Facility Three Term Loans will be evidenced by the Facility Three Term Note and interest on the Facility Three Term Loans will be payable at the times and at the rate provided for in the Facility Three Term Note. Overdue principal of any Facility Three Term Loan and, to the extent permitted by law, overdue interest shall bear interest at a fluctuating rate per annum which at all times shall be equal to the sum of (i) two (2%) percent per annum plus (ii) the per annum rate otherwise payable under the Facility Three Term Note (but in no event in excess of the maximum rate from time to their permitted by then applicable law), compounded monthly and payable on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause to be made, on a schedule attached to the Facility Three Term Note or on the books of the Bank, at or following the time of making each Facility Three Term Loan and of receiving any payment of principal thereof, an appropriate notation reflecting such transaction and the then aggregate unpaid principal balance of the Facility Three Term Loans. The amount so noted shall constitute presumptive (but not conclusive) evidence as to the amount owed by the Borrower with respect to principal of the Facility Three Term Loans. Failure of the Bank to make any such notation shall not, however, affect any obligation of the Borrower -4- or any right of the Bank hereunder or under the Facility Three Term Note. 1.5.4. Principal Repayment of Facility Three Term Loans. The ------------------------------------------------ Facility Three Term Loans made at any time through and including March 31, 1997 are hereinafter referred to in this Section 1.5.4 as the 'Tranche A Term Loans'. Principal of the Tranche A Term Loans shall be repaid by the Borrower to the Bank in 36 equal consecutive monthly installments (each in an amount equal to 1/36th of the aggregate principal amount of the Tranche A Term Loans outstanding at the close of business on March 31, 1997), such installments to commence April 1, 1997 and to continue thereafter on the first day of each month through and including March 1, 2000. The Facility Three Term Loans made at any time during the period beginning on April 1, 1997 and continuing through and including June 30, 1997 are hereinafter referred to in this Section 1.5.4 as the 'Tranche B Term Loans'. Principal of the Tranche B Term Loans shall be repaid by the Borrower to the Bank in 36 equal consecutive monthly installments (each in an amount equal to 1/36th of the aggregate principal amount of the Tranche B Term Loans outstanding at the close of business on June 30, 1997), such installments to commence July 1, 1997 and to continue thereafter through and including June 1, 2000. The Facility Three Term Loans made at any time during the period beginning on July 1, 1997 and continuing through and including September 30, 1997 are hereinafter referred to in this Section 1.5.4 as the 'Tranche C Term Loans'. Principal of the Tranche C Term Loans shall be repaid by the Borrower to the Bank in 36 equal consecutive monthly installments (each in an amount equal to 1/36th of the aggregate principal amount of the Tranche C Term Loans outstanding at the close of business on September 30, 1996), such installments to commence October 1, 1997 arid to continue on the first day of each month thereafter through and including September 1, 2000. The Facility Three Term Loans made at any time on or after October 1, 1997 are hereinafter referred to in this Section 1.5.4 as the 'Tranche D Term Loans'. Principal of the Tranche D Term Loans shall be repaid by the Borrower to the Bank in 36 equal consecutive monthly installments (each in an amount equal to 1/36th of the aggregate principal amount of the Tranche D Term Loans outstanding at the close of business on December 31, 1997), such installments to commence January 1, 1998 and to continue thereafter on the first day of each month through and including December 1, 2000. The Borrower may prepay, at any time or from time to time, without premium or penalty, the whole or any portion of the Facility Three Term Loans; provided that each such -5- principal prepayment shall be accompanied by payment of all interest under the Facility Three Term Note accrued but unpaid to the date of payment. Any partial prepayment of principal of the Facility Three Term Loans will be applied to installments of principal of the Facility Three Term Loans thereafter coming due, in inverse order of normal maturity. Amounts paid or prepaid on the Facility Three Term Loans will not be available for reborrowing." i. By deleting from the third sentence of the third paragraph of Section 1.6 of the Letter Agreement the words "at its Principal Office, in immediately available funds" and by substituting in their stead the following: ", in immediately available funds, at the offices of the Bank at 75 State Street, Boston, MA 02109, or at such other address as the Bank may from time to time designate" j. By deleting in its entirety clause (ii) of Section 3.6 of the Letter Agreement and by substituting in its stead the following: "(ii) within 45 days after the end of each fiscal quarter, a copy of the Borrower's Quarterly Report on Form 10-Q for such fiscal quarter. If, for any reason, the Borrower does not prepare a Quarterly Report on Form 10-Q for any fiscal quarter, then for such fiscal quarter the Borrower will provide to the Bank (within 45 days following the end of such fiscal quarter) consolidated (and, if required by the Bank, consolidating) balance sheets of the Borrower and its Subsidiaries and related consolidated (and, if required by the Bank, consolidating) statements of income and cash flow, unaudited but complete and accurate and prepared in accordance with generally accepted accounting principles fairly presenting the financial condition of the Borrower as at the dates thereof and for the periods covered thereby (except that such quarterly statements need not contain footnotes) and certified as accurate (subject to normal year-end audit adjustments, which shall not be material) by the chief financial officer of the Borrower, such balance sheets to be as at the end of each such fiscal quarter and such statements of income and cash flow to be for such fiscal quarter and for the year to date, in each case together with a comparison to budget." k. By deleting from clause (iii) of Section 3.6 of the Letter Agreement the word "monthly" and by substituting in its stead the following: "quarterly" -6- 1. By adding to clause (iii) of Section 3.6 of the Letter Agreement, at the end thereof, the following: "The Borrower will also provide to the Bank (A) within 45 days after the end of each fiscal quarter, an aging report as to Receivables on a form reasonably satisfactory to the Bank and (B) within 30 days after the end of each month, a monthly Earned Revenue analysis report on a form reasonably satisfactory to the Bank." m. By deleting from Section 3.7 of the Letter Agreement the words "not less than 1.25 to 1" and by substituting in their stead the following: "not less than 2.0 to 1" n. By deleting in their entireties Sections 3.8 and 3.9 of the Letter Agreement and by substituting in their stead the following: "3.8. Leverage Ratio. The Borrower will maintain, as at the end -------------- of each fiscal quarter (commencing December 31, 1996), a Leverage Ratio of not more than 1.0 to 1. As determined at any date, the 'Leverage Ratio' means the ratio of (x) all Indebtedness of the Borrower and/or any of its Subsidiaries then outstanding (other than any such Indebtedness which constitutes Deferred Revenue or which has been expressly subordinated to the Bank's Loans by instruments satisfactory in form and substance to the Bank) to (y) the Adjusted Tangible Net Worth of the Borrower and Subsidiaries at such date. 3.9 Net Worth. The Borrower will maintain, as at the end of --------- each fiscal quarter, an Adjusted Tangible Net Worth which shall not be less than the following: as at December 31, 1996 - not less than $15,000,000; and as at March 31, 1997 and as at each fiscal quarter-end thereafter - not less than $5,000,000." o. By deleting from clause (b) of Section 5.2 of the Letter Agreement the words "Term Loan Facilities" (such words having been inserted by the Second Modification) and by substituting in their stead the following: "the facilities for Term Loans" p. By deleting from clause (c) of Section 5.2 of the Letter Agreement the words "under either or both of the Term Notes" (such words having been inserted by the Second Modification) and by substituting in their stead the following: "under any or all of the Term Loans" -7- q. By deleting from the Borrower's notice address in Section 6.6 of the Letter Agreement the words "Bruce D. Glabe, Vice President and Chief Financial Officer" and by substituting in their stead the following: "Chief Financial Officer" r. By deleting from Section 6.6 of the Letter Agreement the words "Fleet Bank of Massachusetts, N.A." and by substituting in their stead the following: "Fleet National Bank" s. By inserting into the definition of "Principal Office" appearing, in Section 7.1 of the Letter Agreement, immediately after the words "of the Bank," the following: "in Boston, MA" t. By inserting into the definition of "Qualifying Equipment" appearing in Section 7.1 of the Letter Agreement, immediately after the words "October 1, 1995" (such words having been inserted by the Second Modification), the following: "and except that items of Qualifying Equipment supporting Facility Three Term Loans must have been purchased on or after October 1, 1996" u. By deleting from Section 7.1 of the Letter Agreement the definitions of "Term Loans" and "Term Notes" (inserted into Section 7.1 of the Letter Agreement by the Second Modification) and by substituting in their stead the following: "'Term Loans' - Collectively, the Facility One Term Loans, the Facility Two Term Loans and the Facility Three Term Loans. 'Term Notes' - Collectively, the Facility One Term Note, the Facility Two Term Note and the Facility Three Term Note." 3. Each of IAR Security Agreement, the Supplementary Security Agreement, the Revolving Note, the Facility One Term Note and the Facility Two Term Note is hereby modified by providing that all references therein to the "Bank" or to "Fleet Bank of Massachusetts, N.A." will be deemed to refer to Fleet National Bank. 4. The Revolving Note is hereby amended by inserting into the last sentence of the fifth paragraph thereof, immediately after the word "presumptive," the following: "(but not conclusive)" 5. The Facility One Term Note is hereby amended by inserting into the last sentence of the fourteenth paragraph thereof, immediately after the word "presumptive," the following: -8- "(but not conclusive)" 6. The Facility Two Term Note is hereby amended by inserting into the last sentence of the fourteenth paragraph thereof, immediately after the word "presumptive," the following: "(but not conclusive)" 7. Whenever in any Financing Document, or in any certificate or opinion to be delivered therewith, reference is made to a "letter agreement" or to the "Letter Agreement," from and after the date hereof same will be deemed to refer to the Letter Agreement, as hereby amended. Whenever in any Financing Document, or in any certificate or opinion to be delivered therewith, reference is made to a "Term Note," from and after the date hereof same will be deemed to refer to each of the Facility One Term Note, the Facility Two Term Note and the Facility Three Term Note. 8. Simultaneously with the execution and delivery of this Agreement, the Borrower is paying to the Bank a non-refundable closing fee of $15,000. The fee described in this Section 5 is in addition to all interest, fees and other charges and payments heretofore paid by the Borrower and is not to be credited against, nor reduced by, any other fees (nor any interest, charges or other payments) now or hereafter payable by the Borrower. 9. In order to induce the Bank to enter into this Agreement, the Borrower further represents and warrants as follows: a. The execution, delivery and performance of this Agreement and the Facility Three Term Note have been duly authorized by the Borrower by all necessary corporate and other action, will not require the consent of any third party and will not conflict with, violate the provisions of, or cause a default or constitute an event which, with the passage of time or the giving of notice or both, could cause a default on the part of the Borrower under its charter documents or by-laws or under any contract, agreement, law, rule, order, ordinance, franchise, instrument or other document, or result in the imposition of any lien or encumbrance on any property or assets of the Borrower (except liens in favor of the Bank). b. The Borrower has duly executed and delivered each of this Agreement and the Facility Three Term Note. c. Each of this Agreement and the Facility Three Term Note is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms. d. The statements, representations and warranties made in the Letter Agreement, in the IAR Security Agreement and/or in the Supplementary Security Agreement continue to be correct as of the date hereof; except as amended, updated and/or supplemented by the attached Supplemental Disclosure Schedule. -9- e. Giving effect to the amendments set forth above, the covenants and agreements of the Borrower contained in the Letter Agreement, in the IAR Security Agreement and/or in the Supplementary Security Agreement have been complied with on and as of the date hereof. f. Giving effect to the amendments set forth above, no event which constitutes or which, with notice of lapse of time, or both, could constitute, an Event of Default (as defined in the Letter Agreement) has occurred and is continuing. g. No material adverse change has occurred in the financial condition of the Borrower from that disclosed in the annual financial statements of the Borrower dated December 31, 1995, except as heretofore disclosed in writing to the Bank. 10. Except as expressly affected hereby, the Letter Agreement and each of the other Financing Documents remain in full force and effect as heretofore. 11. Nothing contained herein will be deemed to constitute a waiver or release of any provision of any of the Financing Documents. Nothing contained herein will in any event be deemed to constitute an agreement to give a waiver or release or agree to any amendment or modification of any provision of any of the Financing Documents on any other or future occasion. Executed, as an instrument under seal, as of the day and date first above written. INDIVIDUAL, INC. By: /s/ Robert L. Lentz ----------------------------------- Name: Robert L. Lentz Title: Vice President Accepted and agreed: FLEET NATIONAL BANK By: /s/ Kimberly Martone ----------------------------- Name: Kimberly Martone Title: Vice President EX-10.25 3 EMPLOYMENT AGREEMENT Exhibit 10.25 EMPLOYMENT AGREEMENT AGREEMENT made as of this 3rd day of September, 1996, by and between Michael E. Kolowich (the "Employee") and Individual, Inc., a Delaware corporation with a principal place of business at Burlington, Massachusetts (the "Company"). WHEREAS, the Company believes it to be to its advantage to employ the Employee to render services to the Company as hereinafter provided; and WHEREAS, the Employee desires to accept employment with the Company in a senior executive capacity as hereinafter provided; and NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and obligations herein contained, the parties hereto agree as follows: 1. Position and Responsibilities. ----------------------------- (A) President and Chief Executive Officer. During the term of this ------------------------------------- Agreement, the Company agrees to employ the Employee, and the Employee agrees to serve, as President and Chief Executive Officer of the Company. The Employee shall at all times report to, and his activities shall at all times be subject to the direction and control of, the Board of Directors of the Company (the "Board", which term shall include, for purposes of this Agreement, any committee to which the Board may have delegated its authority with respect to matters covered by this Agreement); and the Employee shall exercise such powers and comply with and perform, faithfully and to the best of his ability and according to his honest business judgment, such directions and duties in relation to the business and affairs of the Company as may from time to time be vested in or requested of him by the Board. The Employee agrees to devote substantially all of his business time, attention and services to the diligent, faithful and competent discharge of such duties for the successful operation of the Company's business. Any business activity that the Employee wishes to engage in on his own time can be undertaken only with the approval of the Board, but in no event may such an activity conflict or compete with any interest of the Company or interfere with the Employee's performance of his duties hereunder. During the term hereof, Employee will not have any managerial or operational responsibility, other than service on a board of directors, in any enterprise, firm, corporation, trust or other business entity other than the Company; provided, however, that nothing herein shall prevent the ownership by the Employee of an equity interest in any business entity, provided that such ownership does not involve any managerial or operational responsibility other than serving on the board of directors. Any directorships of corporations other than the Company must be approved in writing by the Board in advance, with the exception of directorships or similar positions with charitable and professional organizations or family-owned trusts or businesses (provided that such activities do not interfere with Employee's performance of his duties hereunder). A list of directorships and similar positions presently held by the Employee is set forth on Annex A hereto. ------- (B) Director Nomination. The Board shall nominate and appoint the ------------------- Employee as a director of the Company; and not later than December 31, 1996 the Board will consider Employee's election as Chairman of the Board. Thereafter, during the term of this Agreement, the 2 Board shall designate and nominate the Employee as a director of the Company and, if elected by the stockholders of the Company, the Employee shall accept such position and diligently perform the duties arising from such position. 2. Compensation: Salary, Bonuses, Equity Participation and Other Benefits. ---------------------------------------------------------------------- During the term of this Agreement, the Company shall pay the Employee the following compensation, including the following salary, bonus and other fringe benefits: (A) Salary. In consideration of the services to be rendered by the ------ Employee to the Company, the Company initially will pay to the Employee an annual salary of $170,000 (the Employee's "base rate"). Such salary shall be payable in conformity with the Company's customary practices for executive compensation as such practices shall be established or modified from time to time. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. Commencing September 1, 1997 and on or about each anniversary of such date thereafter while this Agreement is in effect, the Board and the Employee shall in good faith review the performance by, and the compensation to, the Employee for the prior 12-month period and the proposed performance by, and compensation to, the Employee for the forthcoming 12-month period. Based on such review, the Board may, in its discretion, adjust the base rate, provided, however, that Employee's base rate shall not be lower than $170,000. The Employee will be entitled to four weeks of paid vacation each year, to be taken in accordance with the Company's customary vacation policies applicable to executive employees. (B) Fringe Benefits. The Employee will be entitled to be reimbursed for --------------- all of his business-related travel and other business-related expenses in accordance with the Company's policies from time to time in effect and will also be furnished by the Company with a cellular telephone and service, at the Company's expense. The Employee will also be entitled to participate on the same basis with all other management employees of the Company in the Company's standard benefits package generally available for all other officers and employees of the Company, with respect to group health, disability and life insurance programs. The Company will reimburse the Employee for professional services (in an amount not to exceed $15,000 for the first year of this Agreement and $7,500 per year thereafter) in connection with: tax planning and tax return preparation; financial and estate planning; and legal services relating to Employee's employment with the Company, including services in connection with entering into this Agreement (including those incurred prior to the execution of this Agreement) and any amendments thereto (but in no event for legal services related to any employment-related or other dispute with the Company). (C) Incentive Bonus. During the term of this Agreement, in addition --------------- to the amounts payable under Section 2(A) above, the Employee shall be eligible to receive a target bonus of $80,000 for the period from January 1, 1997 to December 31, 1997 (the "1997 Target Bonus") and a target bonus in an amount to be agreed upon by the Employee and the Board for each successive twelve-month period thereafter ("Year End"), provided the Employee continues to be employed by the Company on each such Year End. Of the 1997 Target Bonus, up to $30,000 shall be payable at the discretion of the Board. In addition, $50,000 of the 1997 Target Bonus shall be based on the Company's achievement of the financial goals and objectives for the Company that shall be set by the mutual agreement of Board and the Employee for such fiscal year, based upon measurement of revenue growth. The financial goals and objectives for 1998 and thereafter shall be based, among other matters, upon agreed upon measurements of profitability or return on investment. The amount of the incentive bonus plan for any fiscal year shall provide that the Employee may earn a bonus greater than the target bonus if he exceeds the annual goals and objectives. For the partial fiscal year ending December 31, 1996, the Employee will be eligible to receive a bonus of up to $26,700 3 payable at the discretion of the Board. The amount of bonus payments payable to the Employee under this Section 2(C) and the satisfaction of the goals and objectives established by the Board shall be determined promptly and reasonably by the Board, and, if achieved, such bonus payments shall be paid within 100 days after each Year End. All such bonus payments shall be made in the form of Common Stock of the Company, which shall be valued for such purpose at the fair market value thereof on the first day of the applicable fiscal year (or partial fiscal year) for which the bonus has been achieved. Such bonus payments shall be subject to all applicable federal, state and local withholding, payroll and other taxes, as required by law. (D) Long-Term Disability Insurance. In addition to any disability ------------------------------ insurance provided by the Company pursuant to Section 2(B), the Company shall use reasonable commercial efforts to obtain and to provide the Employee with long-term disability insurance to the extent necessary (together with the disability insurance provided pursuant to Section 2(B), if any) to replace three-quarters of the Employee's base rate of salary and targeted incentive bonuses set forth in Sections 2(A) and Section 2(C). Such long-term disability insurance shall be provided under a policy selected by the Employee offered on a generally available basis by a top-rated national insurance carrier, which policy shall be reasonably acceptable to the Board. The Company shall pay the cost of all premiums associated with such disability insurance. If any such insurance imposes a waiting period prior to the commencement of benefit payments, the Company will continue to pay the Employee's base rate of salary and targeted incentive bonuses (to the extent achieved) for up to three (3) months during such waiting period. To the extent that any such disability insurance obtained by the Company fails to provide the amount of coverage described in the first sentence of this Section 2(D), or imposes a waiting period in excess of three (3) months, in the event the Employee suffers a disability during the term of his employment, the Company will pay directly to the Employee as additional disability benefits for a period of three years beginning with the event of disability the difference between the benefits actually paid under such policy and the amount of the coverage required by this Section 2 (D). 3. Equity Participation. The Employee shall be entitled to purchase shares -------------------- of the Company's Common Stock (the "Equity Interest") as set forth herein. The Equity Interest shall be divided into two parts consisting of (i) the sale and purchase of 100,000 shares of the Company's Common Stock (the "Purchased Shares"), and (ii) the grant of options to purchase 1,000,000 shares of the Company's Common Stock (the "Option Shares"). The Board and the Employee will review the Employee's stock option holdings annually to determine whether it is appropriate to grant additional options to the Employee, taking into account such factors, among others, as the Employee's percentage ownership of the Company's outstanding Common Stock. It is the present intention of the parties that Employee's ownership of the Company's Common Stock through Company-granted options and other equity awards, including those described in clauses (i) and (ii) of Section 3(B) below (but without taking into account the Purchased Shares or options described in clause (iii) of Section 3(B) or any shares purchased by the Employee in the open market or in other transactions not involving the Company) remain at a level in excess of 5% of the outstanding Common Stock; however, the award of any additional options or other equity participation shall at all times remain in the sole discretion of the Board. (A) The Purchased Shares. The Company will sell, and the Employee will -------------------- purchase, the Purchased Shares for $6.00 per share (such purchase price constituting the reported last sale price of the Common Stock on the Nasdaq National Market on August 30, 1996). The Employee shall purchase and pay for the Purchased Shares, in cash, within 15 days of the date of execution of this Agreement. 4 (B) The Option Shares. The Employee shall be granted, effective the date ----------------- of this Agreement, incentive and non-qualified stock options to purchase the Option Shares pursuant to stock option agreements under the Company's 1989 Stock Option Incentive Plan in the following amounts: (i) 66,664 Option Shares as incentive stock options; (ii) 833,336 Option Shares as non- qualified stock options; and (iii) an additional 100,000 Option Shares as non-qualified options subject to the additional terms set forth in clause (v) of Section 3(C) below. The exercise price for all such options shall be $6.00 per share (such exercise price constituting the reported last sale price of the Common Stock on the Nasdaq National Market on August 30, 1996). (C) Option Terms. The incentive and non-qualified options covering the ------------ Option Shares shall be issued under the Company's Amended and Restated 1989 Stock Plan, pursuant to the Company's standard incentive and non-qualified stock option agreements thereunder, copies of which are incorporated herein by reference, subject to the following additional terms: (i) all options shall be for a term of ten (10) years; (ii) all options will vest in 48 equal consecutive monthly installments; (iii) all options will become automatically exercisable in full upon a change of control of the Company, subject only to restrictions applicable under pooling-of-interests accounting rules if applicable; (iv) the options described in clauses (i) and (ii) of Section 3(B) above will become automatically exercisable for 25% of the total number of Option Shares subject thereto (in addition to the Option Shares for which such options may already be exercisable) in the event that the Employee's employment with the Company terminates pursuant to clause (i) of Section 4 or Section 5 (C); and (v) the options described in clause (iii) of Section 3(B) above will become automatically exercisable in full in the event that the Employee's employment with the Company terminates pursuant to clause (i) of Section 4 or Section 5 (C), or if such employment terminates pursuant to Section 5(A) at any time after September 3, 1997. 4. Term. The term of this Agreement shall commence on the date first above ---- written and shall terminate on the earlier to occur of (i) the death or disability of the Employee, or (ii) the occurrence of any of the circumstances described in Section 5 hereof (the "Expiration Date"). For the purposes of this Agreement, "disability" shall have the meaning contained in the long-term disability policy described in Section 2(D) above. 5. Termination. The Employee's term of employment under this Agreement may ----------- be terminated pursuant to clause (ii) of the first sentence of Section 4 as follows: (A) At the Employee's Option: The Employee may terminate his ------------------------ employment, with or without cause, at any time upon at least thirty (30) days' advance written notice to the Company. (B) At the Election of the Company for Cause. The Company may, ---------------------------------------- immediately and unilaterally, terminate the Employee's employment hereunder "for cause" at any time during the term of this Agreement without any prior written notice to the Employee. Termination of the Employee's employment by the Company shall constitute a termination "for cause" under this Section 5 (B) if such termination is for one or more of the following reasons, as determined by the Board by a resolution duly adopted by a majority of its members, excluding the Employee: (i) the substantial and continuing gross and willful breach by the Employee of his obligations under this Agreement or the Employee Noncompetition, Nondisclosure and Developments Agreement described in Section 6 hereof, such breach not having been cured within 30 days after the Employee's receipt of notice thereof from the Board, which notice shall set forth in reasonable detail the nature of such breach; provided, however, that this subparagraph 5 shall not apply to acts or omissions by the Employee in the exercise of his honest business judgment; (ii) the commission by the Employee of an act of fraud, embezzlement, or substantial and material breach of fiduciary duty; or (iii) the conviction of the Employee of any felony or of any misdemeanor involving moral turpitude or misappropriation of Company property. In the event of a termination "for cause" pursuant to the provisions of clauses (i) through (iii) above, inclusive, the Employee shall be entitled to no severance or other termination benefits except as required by law. In the event of any such termination of employment, no further vesting of the Option Shares shall occur from the date of termination. (C) At the Election of the Company for Reasons Other than for Cause. The --------------------------------------------------------------- Company may, immediately and unilaterally, terminate the Employee's employment hereunder at any time during the term of this Agreement without cause by giving thirty (30) days' advance written notice to the Employee of the Company's election to terminate. During such thirty-day period, the Employee will be available on a full-time basis for the benefit of the Company to assist the Company in making the transition to a new, successor officer of the Company. In the event the Company exercises its right to terminate the Employee under this Section 5(C), the Employee's stock options will be accelerated in accordance with Section 3(C). Except as expressly set forth in this Section 5(C) or in Section 3(C), the Company shall not have any further obligations to the Employee in the event of Employee's termination under this Section 5(C), except such further obligations as may be imposed by law. 6. Noncompetition, Nondisclosure and Developments Agreement. In connection -------------------------------------------------------- with his employment by the Company pursuant to the terms of this Agreement, the Employee shall execute simultaneously herewith the Employee Noncompetition, Nondisclosure and Developments Agreement attached hereto as Annex B, the terms ------- and conditions of which are incorporated herein by reference. 7. Consent and Waiver by Third Parties. The Employee hereby represents and ----------------------------------- warrants that he has obtained all waivers and/or consents from third parties which are necessary to enable him to enjoy employment with the Company on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligation or understanding with any such third party. The Employee represents that he is not bound by any agreement or any other existing or previous business relationship which conflicts with, or may conflict with, the performance of his obligations hereunder or prevent the full performance of his duties and obligations hereunder. 8. Governing Law. This Agreement, the employment relationship contemplated ------------- herein and any claim arising from such relationship, whether or not arising under this Agreement, shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts, and this Agreement shall be deemed to be performable in Massachusetts. 9. Severability. In case any one or more of the provisions contained in ------------ this Agreement or the other agreements executed in connection with the transactions contemplated hereby for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or such other agreements, but this Agreement or such other agreements, as the case may be, shall be construed and reformed to the maximum extent permitted by law. 6 10. Waivers and Modifications. This Agreement may be modified, and the ------------------------- rights, remedies and obligations contained in any provision hereof may be waived, only in accordance with this Section 10. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all of the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. No modification or waiver by the Company shall be effective without the consent of at least a majority of the members of the Board excluding the Employee then in office at the time of such modification or waiver. 11. Assignment. The Employee acknowledges that the services to be rendered ---------- by him hereunder are unique and personal in nature. Accordingly, the Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. 12. Acknowledgments. The Employee hereby acknowledges and recognizes that --------------- the enforcement of any of the provisions in this Agreement and the Employee Noncompetition, Nondisclosure and Developments Agreement executed herewith may potentially interfere with the Employee's ability to pursue a proper livelihood. The Employee represents that he or she is knowledgeable about the business of the Company and further represents that he or she is capable of pursuing a career in other industries to earn a proper livelihood. The Employee recognizes and agrees that the enforcement of the Employee Noncompetition, Nondisclosure and Developments Agreement is necessary to ensure the preservation, protection and continuity of the business, trade secrets and goodwill of the Company. The Employee agrees that, due to the proprietary nature of the Company's business, the restrictions set forth in the Employee Noncompetition, Nondisclosure and Developments Agreement are reasonable as to time and scope. The foregoing shall not prohibit the Employee from employment with any company by which the Employee has been employed in the past so long as his activities with any such company do not otherwise constitute a breach of the Employee Noncompetition, Nondisclosure and Developments Agreement. 13. Entire Agreement. This Agreement constitutes the entire understanding of ---------------- the parties relating to the subject matter hereof and supersedes and cancels all agreements, written or oral, made prior to the date hereof between the Employee and the Company relating to employment, salary, bonus, or other compensation of any description, equity participation, pension, post-retirement benefits, severance or other remuneration. 7 14. Notices. All notices hereunder shall be in writing and shall be ------- delivered in person or mailed by certified or registered mail, return receipt requested, addressed as follows: If to the Company, to: Individual, Inc. 8 New England Executive Park West Burlington, MA 01803 Attention: Board of Directors With a copy to: William B. Asher, Jr., Esq. Testa, Hurwitz & Thibeault High Street Tower 125 High Street Boston, MA 02110; and If to the Employee, at the Employee's address set forth on the signature page hereto. With a copy to: Richard L. Medverd, Esq. Medverd & Simmons, P.C. 175 Federal Street Boston, MA 02110 15. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 16. Section Headings. The descriptive section headings herein have been ---------------- inserted for convenience only and shall not be deemed to define, limit, or otherwise affect the construction of any provision hereof. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the datefirst above written as an instrument under seal. INDIVIDUAL, INC. EMPLOYEE: By: /s/ William A. Devereaux /s/ Michael E. Kolowich ------------------------------------ ------------------------------ William A. Devereaux Michael E. Kolowich Chairman of the Board of Directors 116 Monument Street ------------------------------ Street Address Concord, MA 01742 ------------------------------ City State Zip Code 9 ANNEX A ------- Current Directorship and Similar Positions ------------------------------------------ 1. Director and 4% stockholder of Avantos Performance Systems, producers of management performance software products. 2. Trustee, The Fenn School, Concord Massachusetts. 3. Board of Overseers, Museum of Science, Boston, Massachusetts. 4. Trustee, Massachusetts Software Council. 5. Director, Kolo Corporation, a family owned real estate and investment company. ANNEX B ------- EMPLOYEE NONCOMPETITION, ------------------------ NONDISCLOSURE AND DEVELOPMENTS AGREEMENT ---------------------------------------- In consideration and as a condition of my employment by Individual, Inc. (the "Company"), I hereby agree with the Company as follows: 1. During the period of my employment by the Company, I will devote my full time and best efforts to the business of the Company. Further, during the period of my employment by the Company and for one year thereafter, I agree that I will not, directly or indirectly, alone or as a partner, officer, director, employee or stockholder, or consultant to, of any entity, (a) engage in any business activity which is in competition in the United States with the products or services being developed, manufactured or sold by the Company or (b) solicit, interfere with or endeavor to entice away any employee of the Company; provided however, that this Agreement does not prohibit me from holding up to five percent (5%) of the publicly traded shares of a public company. 2. I will not at any time, whether during or after the termination of my employment, reveal to any person or entity any of the trade secrets or confidential information concerning the organization, business or finances of the Company or of any third party which the Company is under an obligation to keep confidential (including but not limited to trade secrets or confidential information respecting inventions, products, designs, methods, know-how, techniques, systems, processes, software programs, works of authorship, customer lists, projects, plans and proposals), except as may be required in the ordinary course of performing my duties as an employee of the Company; and I shall keep secret all matters entrusted to me and shall not use or attempt to use any such information in any manner which may injure or cause loss or may be calculated to injure or cause loss whether directly or indirectly to the Company (it being understood that any use of such information in the exercise of honest business judgment in connection with my performance of services for the Company shall not constitute a violation of this clause). Further, I agree that during my employment I shall not make, use or permit to be used any notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials of any nature relating to any matter within the scope of the business of the Company or concerning any of its dealings or affairs otherwise than for the benefit of the Company. I further agree that I shall not, after the termination of my employment, use or permit to be used any such notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials, it being agreed that all of the foregoing shall be and remain the sole and exclusive property of the Company and that immediately upon the termination of my employment I shall deliver all of the foregoing, and all copies thereof, to the Company, at its main office. 3. If at any time or times during my employment, I shall (either alone or with others) make, conceive, discover or reduce to practice any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, secret or intellectual property right whatsoever or any interest therein (whether or not patentable or registrable under copyright or similar statutes or subject to analogous protection) (herein called "Developments") that (a) relates to the business of the Company or any of the products or services 2 being developed, manufactured or sold by the Company or which may be used in relation therewith or (b) results from tasks assigned me by the Company, such Developments and the benefits thereof shall immediately become the sole and absolute property of the Company and its assigns, and I shall promptly disclose to the Company (or any persons designated by it) each such Development and hereby assign any rights I may have or acquire in the Developments and benefits and/or rights resulting therefrom to the Company and its assigns without further compensation and shall communicate, without cost or delay, and without publishing the same, all available information relating thereto (with all necessary plans and models) to the Company. Upon disclosure of each Development to the Company, I will, during my employment and at any time thereafter, at the request and cost of the Company, sign, execute, make and do all such deeds, documents, acts and things as the Company and its duly authorized agents may reasonably require: (a) to apply for, obtain and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same; and (b) to defend any opposition proceedings in respect of such applications and any opposition proceedings or petitions or applications for revocation of such letters patent, copyright or other analogous protection. In the event the Company is unable, after reasonable effort, to secure my signature on any letters patent, copyright or other analogous protection relating to a development, whether because my physical or mental incapacity or for any other reason whatsoever, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in- fact, to act for and in my behalf and stead to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyright or other analogous protection thereon with the same legal force and effect as if executed by me. 4. I agree that any breach of this Agreement by me will cause irreparable damage to the Company and that in the event of such breach the Company shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of my obligations hereunder. 5. I understand that this Agreement does not create an obligation on the Company or any other person or entity to continue my employment. 6. I represent that Exhibit A attached hereto constitutes a complete --------- list of all agreements that I have entered into over the past five years regarding noncompetition and confidentiality of proprietary information. I further represent that my performance of all of the terms of this Agreement, the Employment Agreement dated this date between myself and the Company and my service as an employee and a director of the Company does not and will not breach any agreement listed in Exhibit A hereto or any agreement to --------- keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment with the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 3 7. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision hereof. 8. I hereby agree that each provision herein shall be treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses herein. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law as it shall then appear. 9. My obligations under this Agreement shall survive the termination of my employment regardless of the manner of such termination and shall be binding upon my heirs, executors, administrators and legal representatives. 10. The term "Company" shall include Individual, Inc. and any of its subsidiaries, subdivisions or affiliates. The Company shall have the right to assign this Agreement to its successors and assigns, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by said successors or assigns. 11. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the undersigned has executed this Agreement as a sealed instrument as of the 3rd day of September, 1996. /s/ Michael E. Kolowich ------------------------------------------------- Michael E. Kolowich EXHIBIT A --------- The following is a complete list of all agreements I have entered within the past five years regarding noncompetition and nondisclosure of proprietary information. 1. Separation Agreement and General Release dated June 30, 1996 between Michael E. Kolowich and AT&T (the terms of which agreement are required to kept confidential by the parties and, accordingly, have not been furnished to the Company or its counsel) /s/ Michael E. Kolowich --------------------------------------- Michael E. Kolowich EX-10.26 4 AGREEMENT AND RELEASE Exhibit 10.26 AGREEMENT AND RELEASE AGREEMENT and RELEASE dated this 13th day of December, 1996, by and between Joseph A. Amram ("Mr. Amram") and Individual, Inc. ("the Company"). (Mr. Amram and the Company may be referred to jointly as "the parties.") WHEREAS, Mr. Amram previously served as the Company's President and Chief Executive Officer, and Chairman of the Company's Board of Directors; and WHEREAS, various disputes have arisen between the parties concerning severance pay and other matters pertaining to Mr. Amram's cessation of employment with the Company on August 7, 1996; and WHEREAS, Mr. Amram and the Company wish to resolve amicably, for their mutual benefit, all matters regarding Mr. Amram's cessation of employment and other disputes with the Company. NOW, THEREFORE, for good and valuable consideration as more fully described below, the sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Payments. -------- a. The Company agrees to pay Mr. Amram a total gross sum of $480,000 (the equivalent of two years' compensation) according to the schedule set forth below: i. The Company will pay Mr. Amram a gross lump sum payment of $100,000 upon execution of this Agreement and Release. ii. Starting on January 1, 1997 and continuing until July 31, 1998, the Company shall pay Mr. Amram compensation continuation payments at the rate of $20,000 per month. Said compensation continuation payments shall be made according to the Company's regular payroll cycle pertaining to its executive employees. b. Payments made to Mr. Amram as specified in Paragraph 1 shall be subject to applicable tax withholdings, if any, as required by law. Mr. Amram has directed the Company to make the minimum withholdings as allowed by law with respect to all payments and stock issuance to be made pursuant to this Agreement. c. The Company shall grant to Mr. Amram, subject to the terms and conditions of the Company's Stock Option Plan, its standard non-employee director stock options, effective as if he had first been elected to the Board of Directors as an outside director as of the date of this Agreement. Said grant shall occur at the first meeting of the Board of Directors held after the execution of this Agreement and Release and the -2- price of the options shall be the closing price of the Company's stock that day on the NASDAQ. d. The Company shall transfer to Mr. Amram the two personal computers that Mr. Amram used prior to his cessation of employment. The parties agree that the value of the computers is $3,000. Mr. Amram hereby authorizes the Company to deduct any tax withholdings applicable to such transfer from the payment by the Company specified in Paragraph 1(a)(i) above. All risk of damage or loss with respect to such personal computers shall rest with Mr. Amram. The computers are transferred to Mr. Amram "as is," with no representations or warranties, express or implied, being made to Mr. Amram (including warranties of merchantability or fitness for a particular purpose) and, without limiting the generality of the foregoing in any way, in no event shall the Company be liable for any consequential, special, punitive, or other damages in connection with this computer transfer. 2. Noncompetition, Nondisclosure and Developments. Mr. Amram confirms the ---------------------------------------------- existence and continued validity of his Employee Noncompetition, Nondisclosure and Developments Agreement with the Company dated January 24, 1989, a true and correct copy of which is attached hereto as Exhibit A. The post-employment --------- noncompetition period commenced on August 7, 1996. 3. Releases. -------- (a) In exchange for the benefits and undertakings described herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mr. Amram on behalf of himself as well as those members of his family who are stockholders of the Company and who Mr. Amram controls, and his and their fiduciaries, representatives, agents, estates, trusts, attorneys, executors, administrators, beneficiaries, successors and assigns, absolutely and unconditionally to release and forever discharge the Company and/or its successors and assigns, parent, subsidiary and/or affiliate companies, as well as all of their past and present directors, investors (including without limitation Microsoft and Knight-Ridder), officers, attorneys (including without limitation Testa, Hurwitz & Thibeault, LLP and each of its partners and employees), employees, insurers, representatives and agents, both individually and in any of their official capacities with the Company (the "Releasees"), from any and all actions or causes of action, suits, claims, complaints, contracts, liabilities, agreements, promises, debts, judgments and damages, in law or equity, whether existing or contingent, known or unknown, matured or immatured, including without limitation: claims arising out of Mr. Amram's employment with and/or cessation of employment with the Company; claims arising from or as a consequence of any actions or omissions to act of the Company's Board of Directors or individual directors of the Company; and claims arising from or as a consequence of any actions or omissions to act of the Releasees. This release is intended by Mr. Amram to be all encompassing and to act as a full and total release of any claims that Mr. Amram has, may have in the future, or has had against any or all of the Releasees resulting or arising from, relative to, or based on facts, events or -3- occurrences, since the Beginning of the World through the date of this Agreement and Release, including without limitation all claims of breach of fiduciary duty; all claims arising from or concerning Mr. Amram's status as a director, corporate officer, employee or stockholder of the Company; all claims for compensation (such as severance payments; bonus payments; benefits; accrued vacation pay; sick pay; reimbursable expenses; expense vouchers; obligations or commitments to grant stock options or to issue stock and all other rights to acquire stock, if any such obligations, commitments and/or rights are claimed to exist; performance bonuses; business-related expenses; and all other payments, commissions, compensations or reimbursements of every kind and description); all claims involving any federal or state securities laws; all claims involving any federal or state law or regulation relating to employment or employment discrimination (such as those laws or regulations concerning discrimination on the basis of age, alienage, race, color, creed, sex, sexual orientation, religion, national origin, handicap status or veteran status or any military service or application for military service); all claims involving any contract, whether oral or written, express or implied; or common law claims. (b) Mr. Amram, on his own behalf and on behalf of members of his family who are stockholders of the Company and who Mr. Amram controls, further agrees to release and discharge the Company, its subsidiaries and affiliates and/or their respective successors, assigns, stockholders, officers, directors, investors, employees, attorneys, representatives and agents, from any and all claims that might be made by any other person or organization on behalf of Mr. Amram or such members of his family, and Mr. Amram and such members of his family specifically waive any right to become, and promise not to become, a member of any class in a case in which any claim against the Company is made involving any matters subject to release pursuant to paragraph 3(a) (or, except as required by law or rule of court, to assist or cooperate in the bringing of any such claim against the Company, or its subsidiaries and/or their respective successors, assigns, stockholders, officers, directors, investors, employees, attorneys, representatives and/or agents). (c) In exchange for the above release by Mr. Amram, the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, on behalf of itself and its successors, assigns, parent, subsidiaries and/or affiliated companies, directors, officers, employees, attorneys, representatives and agents, both individually and in their official capacities, hereby absolutely and unconditionally release and forever discharge Mr. Amram and his fiduciaries, representatives, agents, attorneys, estates, trusts, successors and assigns, from any and all actions or causes of action, suits, claims, complaints, contracts, liabilities, agreements, promises, debts, judgments, damages and demands of every kind and nature, whether existing or contingent, known or unknown, both in law and equity, including without limitation, all claims arising out of Mr. Amram's employment or cessation of employment with the Company, and his actions as an officer and director of the Company. This release is intended by the Company to be all-encompassing and to act as a full and total release of any claims that -4- the Company may have or has had against Mr. Amram and his fiduciaries, representatives, agents, estates, successors and assigns, since the Beginning of the World through the date of this Agreement and Release; provided that nothing herein shall be construed to release any claims arising out of any misappropriation or infringing use of any confidential and/or proprietary information of the Company. The Company acknowledges that it has no knowledge of any misappropriation or infringing use of confidential and/or proprietary information by Mr. Amram. (d) These releases may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action, suit or proceeding that may be prosecuted, instituted, or attempted in breach hereof. Nothing herein shall be deemed to waive the right of either party to bring an action to enforce the terms of, or recover damages for breach of any of terms of this Agreement and Release or of the Noncompetition, Nondisclosure and Developments Agreement. (e) In the event either party brings an action barred by these releases or the Company prevails in an action for violation of the Noncompetition, Nondisclosure and Developments Agreement, the losing party shall be obligated to reimburse the prevailing party for reasonable attorneys' fees and costs in such action. (f) Nothing herein is intended to affect any right to insurance or to indemnification either party may have under applicable law, under the Company's Certificate of Incorporation, or the Company's By-laws. (g) Mr. Amram acknowledges that the payments and benefits set forth herein, together with payments and benefits previously provided to Mr. Amram, shall be complete and unconditional payment, settlement, satisfaction and accord for all compensation arising out of his employment or the cessation thereof or that otherwise might be owed to him by the Company, including without limitation to all wages, salary, accrued but unused vacation pay, commissions, equity, stock options, stock warrants, bonus pay and severance pay. 4. Commitments. ----------- (a) In connection with any pooling transaction entered into by the Company while Mr. Amram serves as a director of the Company, Mr. Amram will execute any affiliate agreement that all other members of the Board of Directors also sign. In the event that Mr. Amram demonstrates to the reasonable satisfaction of the Board of Directors that he has a requirement to sell shares of Company common stock during any "lock-up" period relating to a pooling transaction to which the Company is a party, the Company will make good faith efforts to permit Mr. Amram to make such a sale in a manner and amount that, in the opinion of the Company's independent public accountants, is permitted under pooling-of-interests accounting rules. -5- (b) Mr. Amram will provide the Board of Directors with not less than seven days prior written notice of his intention to purchase the securities of any privately-held company that at the time of such purchase is engaged in any business of the Company. (c) The parties shall maintain strict confidentiality concerning the dollar amount and all other terms of this Agreement and Release and, except as required pursuant to legal process, law or governmental regulation (including without limitation S.E.C. disclosure obligations), will not discuss the same with anyone, except on a confidential basis, with Mr. Amram's spouse, with accountants or attorneys when such disclosure is necessary for them to render professional services, and with representatives of the Company to the extent necessary for them to discharge their corporate duties and obligations. Nothing herein shall preclude Mr. Amram from advising any prospective employer of his post employment obligations to the Company under this Agreement and Release and/or the Noncompetition, Nondisclosure and Developments Agreement. (d) Nothing herein shall be deemed to bar either party from making any truthful disclosures as required by legal process or otherwise mandated by law subject to maximum appropriate protection of confidential information. Mr. Amram further agrees to provide the Company with prompt and timely notice of any request by subpoena or other legal process seeking testimony or information regarding the Company, its business, its employees and/or any and all matters relating to Mr. Amram's employment with or cessation of employment from the Company. (e) Mr. Amram agrees that he will not engage in any defamatory, disparaging, critical or otherwise detrimental communication with any other person or entity concerning the Company, including its officers, directors, employees, attorneys, business affairs or financial conditions or the circumstances surrounding his employment and separation from employment with the Company. The Company agrees that it will not engage in any defamatory, disparaging, critical or otherwise detrimental communication with any person or entity concerning Mr. Amram. Nothing herein shall be deemed to bar either party from making any truthful disclosures as required by legal process, or otherwise mandated by law, or upon request of any governmental agency. 5. Compromise. The parties agree and acknowledge that this Agreement and ---------- Release is the result of a compromise. While this Agreement and Release resolves the issues between the parties, it does not constitute an admission by either party of any liability whatsoever. Neither this Agreement and Release nor any of its terms shall be construed to be, or shall be admissible in any proceeding as, evidence of liability by either party. However, this Agreement and Release may be introduced in any proceeding to enforce its terms. 6. Severability. The parties agree that each provision herein shall be ------------ treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses. Moreover, if one or more of the provisions or subparts contained in this Agreement and Release shall for any reason be -6- held to be excessively broad as to scope or subject matter as to be unenforceable at law or equity, such provision, provisions or subparts shall be construed by limiting and reducing it or them so as to be enforceable to the extent compatible with applicable law. 7. Notices and Payments. All payments to Mr. Amram shall be made at the -------------------- address set forth below, or such other address as he shall inform the Company of in writing or, at the Company's option, shall be made by electronic deposit to a bank account designated by Mr. Amram. All notices and communications shall be given to the parties at the following addresses, or such other addresses as the parties shall provide to each other in writing: If to Mr. Amram: Joseph Amram 330 Beacon Street Boston, MA 02116 with a copy to: Gerard D. Goldstein, Esq. Goldstein & Manello, P.C. 265 Franklin Street Boston, MA 02110 If to the Company: Chairman of the Board of Directors Individual, Inc. 8 New England Executive Park West Burlington, MA 01803 with a copy to: William B. Asher, Jr., Esq. Testa, Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, MA 02110 8. Representations and Governing Law. --------------------------------- (a) This Agreement and Release, together with its Exhibit A, (and those Agreements expressly referenced herein, such as the stock option plan) represents the complete understanding between the parties, supersedes any and all agreements and -7- understandings, whether oral or written, and may not be modified, altered, changed or waived, in whole or in part, except upon written consent of both parties. The parties agree that the Company will not have an adequate remedy if Mr. Amram fails to comply with Paragraphs 2 and 4 hereof, and that damages will not be readily ascertainable for such breach, and that in the event of such failure or breach, Mr. Amram shall not oppose any application by the Company seeking a decree of specific performance or an injunction enjoining a breach of this Agreement and Release. (b) Mr. Amram represents that he has carefully read this Agreement and Release, fully understands its terms, and is voluntarily executing same. In entering into this Agreement and Release, Mr. Amram does not rely on any representation, promise or inducement made by the Company, or any of its representatives, agents or attorneys, with the exception of the consideration described in this document. (c) This Agreement and Release shall in all respects be interpreted, enforced and governed under the internal and domestic laws of the Commonwealth of Massachusetts without giving effect to the principles of conflicts of law thereof. Any dispute hereunder will be adjudicated only in the courts located in Massachusetts. Mr. Amram hereby submits to the jurisdiction of such courts. (d) The parties agree to cooperate fully in the execution of any and all documents, and the taking of any additional action, which may be necessary or appropriate to give full force and effect to the terms and intent of this Agreement and Release. (e) The language of all parts of this Agreement and Release shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either of the parties. (f) This Agreement and Release shall not be assigned by either party but shall be binding on the parties hereto and their respective heirs, legal representatives, successors and assigns, and shall inure to the benefit of the Company's successors and assigns by merger or consolidation with another company or by the sale of all or substantially all of the assets or capital stock of the Company. The parties acknowledge and warrant that they have not assigned to any third party any rights, or claims of any nature against either party or any of the releasees specified in paragraph 3. -8- IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Release to be executed as of the date set forth above. INDIVIDUAL, INC., JOSEPH A. AMRAM, By: /s/ Robert Lentz By: /s/ Joseph A. Amram --------------------------- ------------------------------ Robert Lentz Joseph A. Amram EX-10.27 5 THE HAMM'S BUILDING OFFICE LEASE EXHIBIT 10.27 THE HAMM'S BUILDING ------------------- OFFICE LEASE 1550 BRYANT STREET SAN FRANCISCO, CALIFORNIA ***************** HAMM'S BUILDING ASSOCIATES --LANDLORD-- INDIVIDUAL, INC. --TENANT--
TABLE OF CONTENTS ----------------- EXHIBIT A. BASIC LEASE INFORMATION.............................................1 RECITALS.......................................................................3 SECTION 1. DEFINITIONS.........................................................3 SECTION 2. PREMISES............................................................7 SECTION 3. TERM; CONDITION OF PREMISES.........................................7 SECTION 4. RENTAL..............................................................9 SECTION 5. ESCALATION RENT....................................................10 SECTION 6. USE................................................................11 SECTION 7. SERVICES...........................................................11 SECTION 8. ALTERATIONS........................................................12 SECTION 9. REPAIRS; LANDLORD'S RESERVATION OF RIGHTS..........................12 SECTION 10. DAMAGE OR DESTRUCTION.............................................13 SECTION 11. SUBROGATION.......................................................13 SECTION 12. INSURANCE.........................................................13 SECTION 13. INDEMNIFICATION...................................................13 SECTION 14. COMPLIANCE WITH LEGAL REQUIREMENTS................................14 SECTION 15. ASSIGNMENT AND SUBLETTING.........................................14 SECTION 16. RULES.............................................................15 SECTION 17. ENTRY BY LANDLORD.................................................15 SECTION 18. EVENTS OF DEFAULT.................................................16 SECTION 19. TERMINATION UPON DEFAULT..........................................16 SECTION 20. ATTORNEY FEES.....................................................17 SECTION 21. EMINENT DOMAIN....................................................17 SECTION 22. ESTOPPEL CERTIFICATE..............................................17 SECTION 23. HOLDING OVER......................................................18 SECTION 24. SECURITY DEPOSIT..................................................18 SECTION 25. LANDLORD'S LIABILITY..............................................18 SECTION 26. BROKERS...........................................................18 SECTION 27. SMOKING...........................................................19 SECTION 28. ENTIRE AGREEMENT..................................................19 SECTION 29. ILLEGALITY OR UNENFORCEABILITY OF PORTION OF LEASE................19 SECTION 30. GOVERNING LAW.....................................................19 SECTION 31. PARKING...........................................................19 SECTION 32. QUIET ENJOYMENT...................................................19 SECTION 33. AUTOMATIC SUBORDINATION...........................................19 SECTION 34. TEMPORARY OCCUPANCY...............................................20 SECTION 35. EXHIBITS..........................................................20 SECTION 36. NOTICES...........................................................20 SECTION 37. ARBITRATION.......................................................20 Exhibit B. Description of the Premises.......................................22 Exhibit C. Rules.............................................................23 Exhibit D....................................................................27 Exhibit E....................................................................31
Exhibit A. Basic Lease Information Date: September 3, 1996 Landlord: HAMM'S BUILDING ASSOCIATES Tenant: Individual, Inc. Premises: That portion of the 6th floor of the Building designated on the attached floor plan labeled Exhibit B, Suite 600. Rentable Area of Premises: Approximately 15,257 rentable square feet Commencement Date: Upon Landlord's Substantial Completion of the Tenant Improvements. Scheduled Commencement Date: Landlord shall deliver Premises to Tenant no later than Sixty (60) days after execution of Lease by both Parties. Termination Date: The last day of the 60th full calendar month after Commencement Date. Base Rent (annually): Months RSF Rental Rate --------------------------------------- 1-24 15,257 18.00 PRSFPY 25 - 36 15,257 18.72 PRSFPY 37-48 15,257 19.47 PRSFPY 49-60 15,257 20.25 PRSFPY (PRSFPY = per rentable square foot per year) Base Year: Calendar 1997 Security Deposit: Tenant shall pay a Security Deposit of $25,746.19 and First Month's Rent of $22,855.50 upon execution of this lease. Tenants Percentage Share Of Operating Expenses And Property Tax Escalations 10.49 % Tenant Improvement Allowance: Up to $5.77 per Rentable Square Foot of Premises. Tenant's Broker CB Commercial 275 Battery Street - Suite 1300 San Francisco, CA 94111 Tenant's Address for Notice: Individual, Inc. 1550 Bryant Street, Suite 600
1 San Francisco, CA 94103 With a Copy to: Testa, Hurwitz & Thibeault, LLP 125 High Street Boston, MA 02110 Attn.: Real Estate Department Landlord's Address for Notice: Hamm's Building Associates c/o Rubin Glickman 1550 Bryant Street, Suite 600 San Francisco, CA 94103 Exhibits: Exhibit A. Basic Lease Information Exhibit B. Description of Premises Exhibit C. Rules Exhibit D. Construction Rider Exhibit E. Construction Documents Landlord: Tenant: HAMM'S BUILDING ASSOCIATES, Individual, Inc. a California Limited Partnership By: RHGA, Inc., General Partner By: /s/ Rubin Glickman By: /s/ Robert L. Lentz ----------------------------- -------------------------------- Rubin Glickman, President Robert L. Lentz, Vice-President
2 This Lease ("Lease") dated as of September 3, 1996, is entered into between HAMM'S BUILDING ASSOCIATES, a California Limited Partnership ("Landlord"), and Individual, Inc., ("Tenant"). Recitals A. Landlord is the owner of real property ("Real Property") located at 1550 Bryant Street, San Francisco and the building ("Building") located on it. The Real Property and the Building are collectively the "Property." B. Landlord desires to lease to Tenant, and Tenant desires to lease from Landlord the Premises (as defined below) for the term and subject to the terms, covenants, agreements, and conditions in this Lease. For good and valuable consideration the receipt and adequacy of which are acknowledged, the parties agree as follows: Section 1. Definitions. As used in this Lease, the following terms shall have the meanings specified in this Section 1. Alterations is defined in Section 8. Base Operating Expenses means the Operating Expenses paid or incurred by Landlord in the Base Year. Base Property Taxes means the amount of Property Taxes for the tax year ending June 30 of the Base Year. Base Rent means the Base Rent as set forth in the Basic Lease Information. Base Year means the calendar year specified in the Basic Lease Information as the Base Year. Basic Lease Information is attached to and incorporated in this Lease as Exhibit A. Building means the building constructed on the Real Property known as 1550 Bryant Street, San Francisco California, commonly known as the Hamm's Building, any property interest in the area of The Hamm's Building and all other improvements on or appurtenances to the Real Property or the streets abutting the Real Property. The Building includes, but is not limited to, an office building with twelve (12) floors of office space and an open air parking lot located as shown on the attached site plan. Commencement Date means the Commencement Date as set forth in the Basic Lease Information. 3 Common Area means the total area on a floor consisting of rest rooms, janitor, telephone and electrical closets, mechanical areas, public corridors providing access to tenant space, public stairs, elevator shafts and pipe shafts, together with their enclosing walls. Deposit is defined in Section 24. Escalation Rent is defined in Section 4(a). Encumbrance is defined in Section 36. Event of Default is defined in Section 18. Landlord is defined in the preamble. Legal Requirements is defined in Section 14. Lease is defined in the preamble. Tenant is defined in the preamble. Tenant's Percentage Share means the percentage figure specified as Tenant's Percentage Share in the Basic Lease Information. Tenant's Percentage Share has been obtained by dividing the net rentable area of the Premises, as specified in the Basic Lease Information, by the total net rentable area of the Building, which is 160,029 square feet, and multiplying that quotient by one hundred (100). In the event the rentable area of the Premises is increased or decreased by the addition to or deletion from the Premises of any office space, Tenant's percentage share shall be appropriately adjusted. Operating Expenses means all reasonable costs of management, operation and maintenance of the Building determined by generally accepted accounting principles, including without limitation: wages, salaries and payroll burden of employees excluding employees above the rank of Building Manager, property management fees at current market rates, janitorial, maintenance, security and other services; Building office rent or rental value for a building office as small as reasonably practical to operate the building; power, water, waste disposal and other utilities; materials and supplies; maintenance and repairs (including the repair and replacement of glass and the roof covering or membrane); permit and license costs; insurance premiums and the deductible portion of any insured loss under Landlord's insurance to the extent reasonable; accounting, legal or other professional fees of independent service providers who are not employees of Landlord incurred in connection with operating the Building and the calculation of Operating Expenses and Property Taxes, provided, however, if Landlord incurs any costs for; any capital improvements made to the Building by Landlord after the Base Year that (i) are made in the reasonable expectation of reducing other Operating Expenses, or (ii) are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed, such cost shall be-amortized over the useful life of such capital improvements, together with interest on the unamortized balance at the rate equal to that paid by Landlord on funds borrowed for the purpose of constructing or installing those capital improvements, and only 4 the annual amortized portion of such costs, with such interest, shall be included in Operating Expenses for any calendar year. Notwithstanding any contrary provision of this Lease, Operating Expenses shall not include costs relating to the following: i. principal, interest or other changes relating to indebtedness secured by an Encumbrance; ii. rent, additional rent or other charges payable under any Underlying Lease; iii. leasehold improvements made in connection with the preparation of any portion of the Building for occupancy by a new or existing tenant which is not generally beneficial to all tenants of the Building; iv. any expansion of the rentable area of the Building; v. costs, expenses or charges properly chargeable or attributable to a particular tenant or tenants; vi. any utility or other service used or consumed in premises leased to any tenant or occupant of the Building, but only if Tenant's use or consumption of such utility or other services is separately metered or sub-metered at the Premises; vii. efforts to lease portions of the Building or to procure new tenants for the Building, including advertising expenses, leasing commissions and attorney's fees; viii. negotiations or disputes with any tenant of the Building; ix. Landlord's general overhead not directly related to the management or operations of the Building; x. depreciation of the Building; xi. repairs and replacements arising out of a fire or other casualty, except a reasonable deductible under insurance carried by Landlord or out of an exercise of the eminent domain affecting the Building or any of the parking areas serving the Building; xii. Landlord's or Landlord's managing agents' breach or violation of a law, lease or other obligation, including fines, penalties and attorneys' fees; xiii. compensation paid to employees or other person in connection with commercial concession operated by Landlord or Landlord's managing agent; xiv. fees for licenses, permits or inspections that are not part of routine maintenance of the Building or result from the act or negligence of Landlord, Landlord's managing agent or any other tenant of the building; xv. remediation of environmental contamination existing as of the date of this Lease and any environmental testing required by Landlord's lender; 5 xvi. compliance with laws existing as of the date of this Lease, including without limitation the Americans With Disabilities Act, and any environmental laws other than reinterpretations of existing laws, subsequent to execution of this Lease; xvii. sculptures, paintings and other works of art; xviii. any items with respect to which Landlord receives reimbursement from insurance proceeds of from a third party; xix. Property Taxes. Actual Operating Expenses for both the Base Year and each subsequent calendar year will be adjusted to equal Landlord's reasonable estimate of Operating Expenses had ninety-five (95) percent of the Building been occupied. Premises means the portion of the Building located on the floor or floors specified in the Basic Lease Information which is cross-hatched on the plan or plans attached to this Lease as Exhibit B. Property is defined in Recital A of this I-case. Property Taxes means all real property taxes and general, special or district assessments or other governmental impositions, of whatever kind, imposed on or by reason of the ownership or use of the Property; governmental charges, fees or assessments for police, fire or other governmental services; service payments in lieu of taxes and taxes and assessments of every kind levied in addition to, in lieu of or in substitution for existing or additional real or personal property taxes on the Property; and all real estate tax consultant expenses and attorney fees of consultants and attorneys who are not employees of Landlord incurred for the purpose of maintaining an equitable assessed valuation of the Building or contesting the validity of any taxes, assessments or charges described above. Property Taxes shall exclude any income, franchise, gift, estate, inheritance, transfer and excise taxes. Real Property is defined in Recital A of this Lease. Rentable Area means the rentable area of the Premises specified on the Basic Lease Information. If any office space is added to or deleted from the Premises, the rentable area of the space added or deleted shall mean: (a) as to an entire floor added to or deleted from the Premises, all areas within outside permanent Building walls, measured to the inside glass surface of outside permanent Building walls, including rest rooms; janitor, telephone, and electrical closets; allocated mechanical areas and columns and projections necessary to the Building, but excluding public stairs, elevator shafts, and pipe shafts, together with their enclosing walls; (b) as to a portion of a floor added to or deleted from the Premises, the aggregate of the Usable Area of the portion of the floor added to or deleted from the Premises, plus the result obtained by multiplying the area of the Common Area on this floor by a fraction, the numerator of which is the aggregate of the usable area of the portion of the floor added to or deleted from the Premises and the denominator of which is the usable area of all tenant space on the floor. 6 Substantially Complete and Substantial Completion are defined in Paragraph 3 of Exhibit D. Term is defined in Section 3 of this Lease. Termination Date means the Termination Date in the Basic Lease Information. Underlying Lease is defined in Section 36. Usable Area means all floor area in a tenant space, measured to the inside glass surface of outer Building walls, to the office side of corridors and other permanent partitions, and to the center of partitions that separate the tenant space from adjoining tenant spaces, without deduction for columns and projections necessary to the Building. Section 2. Premises. Landlord leases to Tenant, and Tenant leases from Landlord the Premises (as set forth in the Basic Lease Information) for the term and subject to the terms, covenants, agreements, and conditions set forth in this Lease. Tenant shall have the right, in common with others entitled thereto, to use: the driveways and sidewalks necessary for access to the Building and the parking areas on the Real Property; the entrances, lobbies, corridors, elevators and stairways necessary for access to the Premises; the pipes, wires and conduits and the plumbing, electrical, heating, ventilating, air conditioning, emergency and other mechanical systems and equipment serving the Premises exclusively; and any other common areas and facilities provided to tenants of the Building by the Landlord from time to time. Section 3. Term; Condition of Premises. (a) The term ("Term") of this Lease shall commence on the Commencement Date (as set forth in the Basic Lease Information) and, unless sooner terminated as later provided, shall end on the Termination Date (as set forth on the Basic Lease Information). Landlord shall deliver the Premises to Tenant on the Commencement Date in broom clean condition, after having Substantially Completed the Tenant Improvements, free of tenants and occupants. If the Tenant Improvements are completed before the Commencement Date, and if Tenant desires to take occupancy in advance of that date, Landlord shall deliver the Premises to Tenant at that time in advance of a date that will be mutually approved by Landlord and Tenant and, notwithstanding anything to the contrary contained in this Lease, the Term of the Lease shall commence on delivery. Landlord shall use its best efforts to deliver the premises to Tenant in the condition required under this Lease on the Scheduled Commencement Date, but Landlord shall not be liable for delays in delivery arising from acts of force majeure. (b) Tenant shall have the option, exercisable by written notice to Landlord no later than nine months before the end of the Term, to extend the Term for a period of five years, the terms and conditions of this Lease, except that the annual rate of Base rent during such five-year extended term shall equal 95 % of the fair market rent to be determined by the comparable rent charged in the Hamm's Building for premises comparable to the subject premises with five-year terms, but not less than last month's rent. If Landlord and Tenant are unable to agree on the Fair 7 Market Rent within such 30 days after delivery of such notice to Landlord, the Fair Market Rent shall be determined according to the following procedures: i. At any time after such 30-day period, Landlord and Tenant shall have the right, by written notice (a "Notice of Arbitration") to the other, to demand arbitration of the calculation of the Fair Market Rent. The party demanding arbitration (the "first party") shall appoint an arbitrator in the Notice of Arbitration. Within seven days after the Notice of Arbitration is given, the other party (the "second party") shall by notice to the first party appoint a second arbitrator. If the second party fails to appoint a second arbitrator within such seven-day period, the position taken by the first party shall be deemed to be the correct calculation of the Fair Market Rent. ii. Within seven days after the designation of the second arbitrator, Landlord and Tenant shall submit their respective positions with respect to the calculation of the Fair Market Rent to the two arbitrators. Within fourteen days after the designation of the second arbitrator, the two arbitrators shall conduct such hearings and investigations as they deem appropriate and determine the correct calculation of the Fair Market Rent. The arbitrators, or either of them, shall give notice of such resolution (or notice of their inability to reach agreement, as the case may be) to the Landlord and the Tenant within such fourteen-day period. Any agreement of the two arbitrators shall be binding upon the Landlord and the Tenant. iii. If the two arbitrators are unable to reach and agreement within such fourteen-day period, the two arbitrators shall, within such fourteen-day period, designate a third arbitrator. If the two arbitrators fail to agree upon the designation of a third arbitrator within such fourteen-day period, then they or either of them shall give notice of such failure to agree to Landlord and Tenant within such fourteen-day period. If Landlord and Tenant fail to agree upon the selection of a third arbitrator within seven days after the arbitrators give such notice, then either party on behalf of both may apply to a court of competent jurisdiction, for the designation of such third arbitrator. iv. Within seven business days after the designation of the third arbitrator, the parties shall submit their respective positions with respect to the calculation of the Fair Market Rent to the third arbitrator. Within fourteen days after the designation of the third arbitrator, the third arbitrator shall conduct such hearings and investigation as he or she may deem appropriate and determine the correct calculation of the Fair Market Rent. Within such fourteen-day period, the three arbitrators shall give notice of such resolution to Landlord and Tenant. The third arbitrator's determination shall be binding upon Landlord and Tenant. v. All arbitrators shall be qualified real estate professionals who shall have had at least ten years of experience appraising buildings comparable to the Building in the Greater San Francisco area. Landlord and Tenant shall each be entitled to present evidence to the arbitrators in support of their respective positions. The arbitrators shall not make any determination inconsistent with the terms of this Lease. The arbitrators shall not have the power to add to, modify or change any of the provisions of this Lease. The determination of the arbitrator(s) shall be conclusive and shall have the same force as a judgment in a court of competent jurisdiction. Judgment on the determination made by the arbitrator(s) under the foregoing provisions may be entered in any court of competent jurisdiction. 8 vi. Each party shall pay the fees, costs and expenses of the arbitrator appointed by such party and of the attorneys and expert witnesses of such party and one-half of the other fees, costs and expenses of arbitration properly incurred under this Lease. Section 4. Rental. (a) Tenant shall pay to Landlord throughout the Term as rental for the Premises the Base Rent, subject to the following adjustments: (i) The rental payable during each calendar year subsequent to the Base Year shall be(i) the Base Rent, plus (ii) Tenant's Percentage Share of the total dollar increase, if any, in Operating Expenses paid or incurred by Landlord in that year over the Base Operating Expenses, and also increased by Tenant's Percentage Share of the total dollar increase, if any, in Property Taxes paid by Landlord in that year over the Base Property Taxes ("the Escalation Rent"). The increased rental due pursuant to this Section 4(a)(ii) is the "Escalation Rent." (b) Base Rent shall be paid to Landlord in equal monthly installments, in advance, on or before the first day of calendar month during the Term of this Lease. Tenant shall pay the monthly installment of Base Rent for the first full calendar month of the Term at the time of the execution of this Lease. In the event the Term of this Lease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, the monthly rental for the first and last fractional months of the Term of this Lease shall be prorated according to the fraction of the total number of days in such month falling within the Term, and such prorated payment shall be due on the first day of such month within the Term. If the term of this lease commences on a day other thin the first day of a calendar year or ends on a day other than the last day of a calendar year, the Base Rent and Escalation Rent for the first and last calendar years of the Term shall be prorated according to the fraction of the total number of days in such year falling within the Term. (c) All sums of money due to Landlord under this Lease, not specifically characterized as rental, shall constitute additional rent and shall be due within ten (10) days after receipt by Tenant of a billing. If any sum is not paid when due, it shall be collectible as additional rent with the next installment of rental falling due. (d) Tenant acknowledges that late payment of rent and other sums due under this Lease after the expiration of any applicable cure period under Section 18(a) will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be difficult to ascertain. These costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any trust deed covering the Premises. Accordingly, if any installment of rent or any other sums due from Tenant are not received when due, or if a cure period is applicable under Section 18(a), prior to the expiration of the cure period, Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that the late charge represents a fair and reasonable estimate of the costs Landlord will incur because of late payment. Acceptance of the late charge by Landlord shall not constitute a waiver of Tenant's default for the overdue amount, nor prevent Landlord from exercising the other rights and remedies granted under this Lease. [INITIALS APPEAR HERE] [Initials of landlord] - ---------------------- [INITIALS APPEAR HERE] [Initials of Tenant] - ---------------------- 9 (e) Any amount due to Landlord other than monthly rental, if not paid within five (5) days following the due date will bear interest from the due date until paid at the rate of ten percent (10%) per year. However, interest shall not be payable on late charges incurred by Tenant nor on any amounts on which late charges are paid by Tenant to the extent this interest would cause the total interest to be in excess of that legally permitted. Payment of interest shall not excuse or cure any default by Tenant. (f) All payments due shall be paid to Landlord, without deduction or offset except as set forth in this Lease, in lawful money of the United States of America at Landlord's address for notices under this Lease or to another person or at another place as Landlord may designate by notice to Tenant. If Tenant pays by check and the check is returned for non-sufficient funds more than once, upon request of the Landlord, the Tenant shall make future payments by cashiers check. Section 5. Escalation Rent. Escalation Rent shall be paid monthly on an estimated basis, with subsequent annual reconciliation, in accordance with the following procedures: (a) No later than fifteen (15) days prior to the end of the Base Year and no later than fifteen (15) days prior to the end of each subsequent calendar year, or as soon after that time as practicable, Landlord shall give Tenant notice of Landlord's estimate of any Escalation Rent due under Section 4(a) for the ensuing calendar year. On or before the first day of each month during the ensuing calendar year, Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated Escalation Rent. If Landlord fails to give notice as required in this Section, Tenant shall continue to pay on the basis of the prior year's estimate until the month after that notice is given. If at any time it appears to Landlord that the Escalation Rent for the current calendar year will vary from the estimate, Landlord may, by notice to Tenant, revise the estimate for that year, and subsequent payments by Tenant for that year shall be based on the revised estimate. (b) Within ninety (90) days after the close of each calendar year, or as soon after the ninety (90) day period as practicable, Landlord shall deliver to Tenant a statement of the actual Escalation Rent for that calendar year showing Operating Expenses and Property Taxes on the basis of which the actual Escalation Rent was determined. At Tenant's request, Landlord shall provide Tenant reasonable supporting detail underlying the calculations of Operating Expenses and Property Taxes. If Landlord's statement discloses that Tenant owes an amount that is less than the estimated payments for the calendar year previously made by Tenant, Landlord shall credit the excess first against any sums then owed by Tenant, and then against the next payments of rental due, or, after the end of the Term, Landlord shall pay such excess to Tenant at the time of the delivery of Landlord's statement for the last calendar year of the Term. If Landlord's statement discloses that Tenant owes an amount that is more than the estimated payments for the calendar year previously made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of the statement. (c) Landlord shall maintain at all times during the term of this Lease, at the office of Landlord in the Building or such other office as Landlord may designate full, complete and accurate books of account and records prepared in accordance with generally accepted accounting principles with respect to Escalation Rent, and shall retain such books and records, as well as contracts, bills, vouchers, and checks, and such other documents as are reasonably necessary to properly audit the Escalation Rent. Upon reasonable notice from Tenant, Landlord shall make available for Tenant's inspection (or inspection performed by Tenant's accountant and/or 10 consultants) at Landlord's office in the Building, during normal business hours, Landlord's books and records relating to the Escalation Rent for the previous calendar year. If Tenant's inspection reveals that Tenant was overcharged for escalation rent, the amount of the overcharge shall be promptly refunded to Tenant. (d) The termination of this Lease shall not affect the obligations of the parties pursuant to Section 5(b) to be performed after the termination. Section 6. Use. The Premises shall be used for general office purposes. Tenant shall not do or permit to be done on the Premises, nor bring or keep or permit to be brought or kept in the Premises, anything (a) which is prohibited by or in conflict with any law, ordinance, or governmental rule or, (b) which is prohibited by the standard form of fire insurance policy or, (c) which will increase the existing rate of or affect fire or other insurance on the Building or its contents or cause a cancellation of any insurance policy covering the Building or any part of it or its contents. Tenant shall not use or store in the Premises any hazardous or toxic substances, with the sole exception of reasonably necessary substances that are kept in reasonably necessary quantities for normal office operations, provided that their use and storage are in accordance with applicable laws. Tenant shall not do or permit anything to be done on the Premises that will obstruct or interfere with the rights of other tenants of the Building, or injure them, or use or allow the Premises to be used for any unlawful purposes, nor shall Tenant cause, maintain, or permit any nuisance or waste on or about the Premises. Section 7. Services. (a) Landlord shall maintain in good condition and working order and in compliance with all applicable laws lobbies, stairs, elevators, corridors, rest rooms, and other Common Areas, all exterior landscaping, the driveways, sidewalks and parking areas on the Real Property, the exterior windows, the mechanical, plumbing, emergency, heating, ventilating, air conditioning and electrical equipment serving the Building, the roof, foundation and other structural components of the Building, except for damage, excluding normal wear and tear, caused by the Tenant. Damage caused by Tenant, other than normal wear and tear by Tenant, shall be repaired by Landlord at Tenant's expense. The standard of maintenance shall be equal to that of other office buildings of a similar class in San Francisco, California. (b) Landlord shall furnish (i) electricity for lighting and the operation of office machines, (ii) heat and air conditioning, to the extent reasonably required for the comfortable occupancy by Tenant in Tenant's use of the Premises during the period from 7:00 a.m. to 7:00 p.m. on weekdays, except holidays, or a shorter period as may be prescribed by applicable policies or regulations adopted by any utility or governmental agency, (iii) elevator service, (iv) lighting replacement, for building standard lights, (v) rest room supplies, (vi) window washing with reasonable frequency, (vii) water for the rest rooms and kitchen areas, and (viii) security guard services and daily janitor services during the times and in the manner that these services are customarily furnished in comparable office buildings in the area. Landlord may establish reasonable measures to conserve energy and water, including but not limited to, automatic light shut off after hours and efficient lighting forms, so long as these measures do not unreasonably interfere with Tenant's use of the Premises. (c) Landlord shall not be in default under this Lease, nor be liable for any damages resulting from, nor shall the required rental be abated because of (i) any reasonably necessary 11 installation, use, or interruption of use of any equipment in connection with furnishing the previously listed services, (ii) failure to furnish or delay in furnishing these services, when failure or delay is caused by accident or conditions beyond the reasonable control of Landlord or by necessary repairs or improvements to the Premises or to the Building, or (iii) the limitation, curtailment, rationing, or restrictions on use of water, electricity, gas, or any other form of energy serving the Premises or the Building caused by circumstances beyond the reasonable control of Landlord; provided, however, Landlord shall use reasonable efforts to avoid interference with Tenant's use and occupancy of the Premises, and Landlord shall use reasonable efforts to diligently remedy interruptions in the furnishing of these services. Section 8. Alterations. Tenant shall not make or allow any alterations, additions, or improvements to the Premises or any part of the Premises ("Alterations"), except for pre- occupancy tenant improvements ("Tenant Improvements") as evidenced by Exhibit E ("Construction Documents"), without Landlord's prior consent, which shall not be unreasonably withheld, provided, however, Tenant shall have the right, with Landlord's prior consent, to make alterations, additions or improvements to the Premises which do not cost more than $10,000 in any one instance and which do not affect the base mechanical systems of the Building. The installation of furnishings, fixtures, equipment, or decorative improvements, none of which shall affect Building systems or the structure of the Building, and the repainting or recarpeting of the Premises, shall not constitute Alterations. All Alterations (except Tenant's trade fixtures and personal property) shall immediately become Landlord's property and, at the end of the Term, shall remain on the Premises without compensation to Tenant, unless Landlord elects by notice to Tenant at the time of installation to have Tenant remove any Alterations that are peculiar to Tenant's use of the Premises and are not normally required or used by other tenants. In this event, Tenant shall bear the cost of restoring the Premises to their condition prior to the installment of the Alterations. Section 9. Repairs; Landlord's Reservation of Rights. (a) At all times during the term of this Lease and at Tenant's sole cost, except as set forth in Section 7 of this Lease. Tenant shall keep the Premises in good condition and repair; ordinary wear and tear, eminent domain, and damage to the Premises by fire, earthquake, or act of God or the elements are excepted. At the end of the term of this Lease, Tenant shall surrender to Landlord the Premises and all Alterations that are to remain in the Premises in the same condition as when received; ordinary wear and tear and damage by fire, earthquake, or act of God or the elements are excepted. Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate, or paint the Premises or any part of them, except as specifically set forth in Exhibit E. Landlord has made no representations respecting the condition of the Premises or the Building, except as specifically set forth in this Lease. (b) Landlord reserves the right, at any time and from time to time, without the same constituting an actual or constructive eviction, but provided that Landlord does not unreasonably interfere with Tenant's use and occupancy of the building, to (i) make alterations, additions, repairs, improvements to or in, or to decrease the size of area of all or any part of the Building (except the Premises), the fixtures and equipment therein, the heating, ventilation, air- conditioning, plumbing, electrical, fire protection, life safety, security and all mechanical systems of the building ("Building Systems"), the common areas and all other parts of the Building; (ii) to change the arrangement and/or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, toilets and other public parts of the Building and to create additional rentable areas through use or enclosure of common areas; (iii) to change the Building's name or street 12 address or to change the room number or numbers of the Premises; (iv) to install, affix and maintain any and all signs on the exterior and interior of the Building. Section 10. Damage or Destruction. (a) In the event the Premises or any portion of the Building necessary for Tenant's occupancy are damaged by fire, earthquake, act of God, the elements, or other casualty, within thirty (30) days after that event, Landlord shall notify Tenant of the estimated time, in Landlord's reasonable judgment, required for repair or restoration. If the estimated time is thirty (30) days or less after the commencement of the physical work and ninety (90) days or less after the casualty event, Landlord shall proceed promptly and diligently to adjust the loss with applicable insurers, to secure all required governmental permits and approvals, and to repair or restore the Premises or the portion of the Building necessary for Tenant's occupancy. This Lease shall remain in full force, except that until such repairs and restoration are complete, Base Rent and Escalation Rent shall abate equitably on proration to the extent of such damage and its effect on Tenant's use of the Premises. (b) If the estimated time for repair or restoration is in excess of thirty (30) days after the commencement of the physical work or ninety (90) days after the casualty event, Tenant or Landlord may elect to terminate this Lease as of the date of the casualty event by giving notice to the other party within fifteen (15) days following receipt of Landlord's notice of the estimated time for repair. Section 11. Subrogation. Landlord and Tenant shall each obtain from their respective insurers under all policies of fire, theft, public liability, worker's compensation, and other insurance maintained during the term of this Lease covering the Building, or any portion of it, or operations in it, a waiver of all rights of subrogation that the insurer of one party might have against the other party. Landlord and Tenant shall each indemnify the other against any loss or expense, including reasonable attorney fees, resulting from the failure to obtain this waiver. Section 12. Insurance. Tenant, at its expense, shall maintain in full force during the Term of this Lease, a policy or policies of public liability and property damage insurance insuring against all liability, subject to standard ISO CGL policy exclusions, of Tenant and its representatives, agents and visitors for personal or bodily injury or property damage arising out of or incurred in connection with Tenant's use or occupancy of the Premises or the Real Property. Such policy or policies subject to standard ISO CGL policy exclusions shall further insure the indemnification obligations of Tenant under this Lease. Each policy of insurance required under this Lease shall be in a form, in an amount, and with an insurer reasonably acceptable to Landlord, but no event less than $1,000,000 combined single limit and shall require at least ten (10) days' written notice to Landlord prior to any termination of the policy. Each policy of liability insurance shall name the Landlord, and its property managers as additional insured and provide that it is primary, and not contributing with, any policy carried by Landlord covering the same loss. Tenant shall provide to Landlord, upon request, evidence that the insurance required to be carried by Tenant is in full force and effect and the premiums have been paid. Section 13. Indemnification. Tenant and Landlord each waives all claims against the other party for damage to any property or injury or death of any person on the Premises arising at any time and from any cause 13 other than the sole negligence or willful misconduct of the other party's employees, agents, or contractors. Tenant and Landlord each shall hold the other party harmless from and defend the other party against all claims, liability, damage, or loss arising out of any injury or death of any person or damage to or destruction of property attributable to the action or inaction (where there is a duty to act) of the indemnifying party, except that caused by the sole negligence or willful misconduct the other party or its agents, contractors, or employees. Tenant and Landlord each shall also hold the other party harmless from any liability, cost, or expense arising from the indemnifying party's use or storage on the property of any hazardous or toxic substance. These indemnity obligations shall include reasonable attorney fees, investigation costs, and all other reasonable costs incurred by the indemnified party from the first notice that any claim or demand is to be made or may be made. The provisions of this Section shall survive the termination of this Lease for any event occurring prior to the termination. Section 14. Compliance with Legal Requirements. At Tenant's sole cost, Tenant shall promptly comply with all laws and governmental rules now or later in force; with the requirements of any board of fire underwriters or other similar body now or in the future constituted; with any direction or occupancy certificate issued by public officers ("Legal Requirements"), insofar as they relate to the use, or occupancy of the Premises. Excluded are (a) structural changes or changes to the electrical, mechanical, or plumbing systems of the Building, except to the extent necessitated by Tenant's acts or by improvements made for Tenant (other than the tenant improvements to be made pursuant to this Lease by Landlord); (b) alterations or improvements to the Building as a whole or the Premises of tenants generally that are not by law the tenants' responsibility with which to comply; and (c) work necessitated by defects in the construction of the Building. Landlord shall comply in a timely manner with all Legal Requirements that are not Tenant's responsibility under this Section. Section 15. Assignment and Subletting. (a) Except as otherwise expressly permitted by this Lease, Tenant shall not, without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed, assign or hypothecate this Lease or any interest in this Lease, sublet the Premises or any part of them, or license the use of the Premises by any party other than Tenant or Freeloader, Inc. Neither this Lease nor any interest in this Lease shall be assignable without the consent of Landlord, which shall not be unreasonably withheld or delayed. Any of the previous acts without consent shall be void and shall, at the option of Landlord, constitute a default under this Lease. Landlord shall respond to Tenant's request for consent to an assignment or sublease within fifteen (15) days of receiving a written request from Tenant and receipt of documentation regarding description and financial condition of proposed Tenant and other necessary information as required by Landlord. Notwithstanding any other provision of this Lease, Tenant shall have the right to assign this Lease or sublet any portion of the Premises to an entity controlling, controlled by or under common control with Tenant or in connection with a merger or consolidation of or into Tenant of the sale of all or substantially all of Tenant's assets (any of the foregoing be "Affiliate Transfers)". (b) No sublessee shall have a right to further sublet without Landlord's prior consent, which may not be unreasonably withheld, and any assignment by a sublessee of the sublease shall be subject to Landlord's prior consent in the same manner as if Tenant were entering into a new sublease. (c) In the case of an assignment or subletting (other than a sublease in an affiliate transfer), any sums or economic consideration received by Tenant as a result of the assignment or subletting 14 shall be paid to Landlord after first deducting (i) in the case of a sublet, the rental due under this Lease, prorated to reflect only rental allocable to the sublet portion of the Premises, (ii) any tenant improvements paid for by Tenant, and (iii) the cost of any real estate commissions, reasonable attorney fees, or other out-of-pocket expenses paid by Tenant in connection with the assignment or subletting. (d) Regardless of Landlord's consent, no subletting or assignment shall release or alter Tenant's obligation or primary liability to pay the rental and perform all other obligations under this Lease. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee or successor of Tenant in the performance of any of the terms of this Lease, after notice of default to Tenant pursuant to Section 18 and the expiration of any applicable cure period, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against the assignee or successor. (e) If Tenant assigns this Lease, sublets the Premises, or requests the consent of Landlord to any assignment, subletting, hypothecation, or other action requiring Landlord's consent under this Lease, Tenant shall pay Landlord's reasonable attorney fees incurred in connection with the action, not to exceed nine hundred ($900.00) dollars. Section 16. Rules. Tenant shall comply with the rules attached to and incorporated in this Lease as Exhibit C, and after notice, with all reasonable modifications and additions to these rules, from time to time promulgated in writing by Landlord provided such modifications and additions apply generally to all tenants of the Building. Landlord shall not be responsible to Tenant for the nonperformance of any of these rules by any other tenant or occupant of the Building, but Landlord shall take reasonable steps to enforce any rules, the nonperformance of which by other tenants materially and adversely affects Tenant in the use of the Premises. However, if any rule conflicts with any term, covenant, or condition of this Lease, this Lease shall prevail. In addition, no rule, or any subsequent amendments to it adopted by Landlord shall alter, reduce, or adversely affect any of Tenant's rights or enlarge Tenant's obligations under this Lease. Section 17. Entry by Landlord. Landlord may enter the Premises at reasonable hours with notice to Tenant to (a) inspect the Premises; (b) exhibit the Premises to prospective purchasers, lenders tenants; (c) determine whether Tenant is complying with all obligations under this Lease; (d) supply janitorial service and any other services to be provided by Landlord under this Lease; (e) post notices of nonresponsibility; and (f) make repairs or perform maintenance required of Landlord by this Lease, make repairs to any adjoining space or utility services, or make repairs, alterations, or improvements to any other portion of the Building. However, all this work shall be done as promptly as reasonably possible and cause as little interference to Tenant as reasonably possible. Subject to Landlord's undertakings in the previous sentence, Tenant waives any damage claims for inconvenience to or interference with Tenant's business or loss of occupancy or quiet enjoyment of the Premises caused by Landlord's entry. At all times Landlord shall have a key with which to unlock the doors on the Premises, excluding Tenant's vaults, safes, and similar areas designated as secure areas in writing by Tenant in advance. In an emergency, Landlord shall have the right to use any means that Landlord deems proper to open Tenant's doors and enter the Premises. Entry to the Premises by Landlord in an emergency shall not be construed as a forcible or unlawful entry, a detainer, or an actual or constructive eviction of Tenant. 15 Section 18. Events of Default. The following events shall constitute events of default under this Lease (each an Event of Default): (a) failure by Tenant to pay when due any rent or other sum payable under this Lease and the continuation of this failure for ten (10) or more days after notice of the default from Landlord; (b) failure to make payments of rent when due under this Lease three (3) or more times during any twelve (12) month period during the term of this Lease; (c) a default by Tenant in the performance of any of the terms, covenants, agreements, or conditions in this Lease, other than a default by Tenant in the payment when due of any rent or other sum payable under this Lease, and the continuation of the default beyond fifteen (15) days after notice by Landlord or, if the default is curable and would require more than fifteen (15) days to remedy, beyond the time reasonably necessary for cure; provided, however, that if Tenant has defaulted in the performance of the same obligation two (2) or more times in twelve (12) months and notice of the default has been given by Landlord in each instance, no notice shall be required after this until the expiration of twelve (12) months without any default by Tenant; (d) the bankruptcy or insolvency of Tenant, a transfer by Tenant in fraud of creditors, an assignment by Tenant for the benefit of creditors, or the commencement of proceedings of any kind by or against Tenant under the Federal Bankruptcy Act or under any other insolvency, bankruptcy, or reorganization act, unless Tenant is discharged from voluntary proceedings within ninety (90) days; (e) the appointment of a receiver for a substantial part of Tenant's assets; (f) the abandonment of the Premises; and (g) the levy upon this Lease or any estate of Tenant under this Lease by attachment or execution and the failure to have the attachment or execution vacated within sixty (60) days. Section 19. Termination upon Default. On occurrence of any Event of Default by Tenant, Landlord may, in addition to any other rights and remedies given here or by law, terminate this Lease and exercise remedies relating to it without further notice or demand in accordance with the following provisions: (a) So long as the Event of Default remains uncured, Landlord shall have the right to give notice of termination to Tenant, and on the date specified in this notice, this Lease shall terminate. (b) If this Lease is terminated, Landlord may, by judicial process, reenter the Premises, remove all persons and property, and repossess and enjoy the Premises, all without prejudice to other remedies that Landlord may have because of Tenant's default or the termination. (c) If this Lease is terminated by Landlord, Landlord shall have all of the rights and remedies of a landlord provided by Civil Code (S) 1951.2, in addition to any other rights and remedies Landlord may have. The damages which Landlord may recover shall include, without limitation, (i) the worth at the time of award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which 16 would have been earned after termination until the time of the award exceeds the amount of the rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of award, computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%), of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of the fair market value of the Premises for the balance of the Term; (iv) all reasonable legal expenses and other related costs incurred by Landlord following Tenant's default; (v) all reasonable costs incurred by Landlord in restoring the Premises to good order and condition to relet the Premises; and (vi) all reasonable costs, including without limitation, any brokerage commissions incurred by Landlord in reletting the Premises. The remedies provided in this Lease are in addition to any other remedies available to Landlord at law, in equity, by statute, or otherwise. (d) Even though Tenant has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all rights and remedies under this Lease, including the right to recover the rental as it becomes due under this Lease. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. Section 20. Attorney Fees. If, as a result of a breach or default under this Lease, either party uses an attorney to secure compliance with Lease provisions, to recover damages, to terminate this Lease, or to evict Tenant, the non-prevailing party shall reimburse the prevailing party, on demand, for all reasonable attorney fees and expenses incurred by the prevailing party in enforcing its rights under this Lease. Section 21. Eminent Domain. If all or any part of the Premises are taken through eminent domain, this Lease shall terminate for the part taken as of the date of taking. For a partial taking, either Tenant shall have the right to terminate this Lease for the balance of the Premises by notice to Landlord within thirty (30) days after the taking. In the event of any taking, Landlord shall be entitled to all compensation, damages, income, rent, awards, or any interest that may be paid in connection with the taking, except for any portion specifically awarded to Tenant for moving expenses, trade fixtures, equipment, and any leasehold improvements in the Premises to the extent of the then unamortized value of these improvements for the remaining term of the Lease as determined in the award. However, Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise, other than for prepaid rent. In the event of a partial taking of the Premises that does not result in a termination of this Lease, the subsequent monthly rental shall be equitably reduced. Section 22. Estoppel Certificate. At any time with at least fifteen (15) days' prior notice by Landlord, Tenant shall execute, acknowledge, and deliver to Landlord a certificate in a form satisfactory to Landlord certifying, to the best of Tenant's knowledge, to the extent true: (a) that this Lease is unmodified and in full force or, if there have been modifications, that this Lease is in full force, as modified, together with the date and nature of each modification, (b) the amount of the Base Rent, most recent Escalation Rent, if any, and the date to which the rent has been paid, (c) that no notice has been received by Tenant of any default that has not been cured, except defaults specified in the certificate, (d) that no default of Landlord is claimed by Tenant, except defaults specified in the certificate, and (e) other matters as may be reasonably requested by Landlord. Any certificate may be relied on by 17 prospective purchasers, mortgagees, or beneficiaries under any deed of trust on the Building or any part of it. Section 23. Holding Over. (a) If, without objection by Landlord, Tenant holds possession of the Premises after expiration of the term of this Lease, Tenant shall become a tenant from month-to-month on the terms specified in this Lease, except those pertaining to the term and any option to extend, but at a monthly rental negotiable between the Parties, payable in advance on or before the first day of each month. Each party shall give the other notice of intention to terminate the tenancy at least one (1) month prior to the date of termination of a monthly tenancy. (b) If, over Landlord's objection, Tenant holds possession of the Premises after expiration of the term of this Lease or expiration of the holdover tenancy, Tenant shall be deemed to be a tenant-at-sufferance and, without limiting the liability of Tenant for unauthorized occupancy of the Premises, Tenant shall indemnify Landlord and any replacement tenant for the Premises for any damages or loss suffered by either Landlord or the replacement tenant resulting from Tenant's failure to vacate the Premises in a timely manner. The monthly rental shall be at one hundred and fifty percent (150%) of the then prevailing monthly rental paid by tenant. Section 24. Security Deposit. Tenant has deposited with Landlord the sum specified in the Basic Lease Information as the Security Deposit (Deposit). The Deposit shall be held by Landlord as security for the faithful performance by Tenant of all provisions of this Lease. If Tenant fails to pay rent or other sums due under this Lease or defaults with respect to any provision of this Lease, and such failure or default continues after required notice and the expiration after of any applicable grace period, Landlord may use or apply, such portion of the Deposit as is necessary for the payment of rent or other sums in default, for the payment of any other sums to which Landlord may become obligated because of Tenant's default, or to compensate Landlord for any loss or damage that Landlord may suffer because of the Tenant's actions. If Landlord uses or applies the Deposit, Tenant shall, within ten (10) days after demand, deposit cash with Landlord in an amount sufficient to restore the Deposit to the full amount, and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the Deposit separate from Landlord's general accounts. If Tenant performs all of Tenant's obligations under this Lease, the Deposit, or the amount not applied by Landlord shall be returned, without interest, to Tenant or at Landlord's option, to the last assignee, if any, of Tenant's interest under this Lease at the expiration of the Term and after Tenant has vacated the Premises. No trust relationship is created between Landlord and Tenant with respect to the Deposit. Section 25. Landlord's Liability. Notwithstanding any other term or provision of this Lease, the liability of the Landlord for its obligations under this lease is limited solely to Landlord's interest in the Property as the same may from time to time be encumbered, and no personal liability shall at any time be asserted or enforceable against any other assets of Landlord or against Landlord's stockholders, directors, officers or partners on account of any of the Landlord's actions or obligations under this Lease. In addition, in the event of the conveyance of title to the Building or the Project, then from and after the date of such conveyance, Landlord shall be relieved of all liability with respect to Landlord's obligations to be performed under this Lease. Section 26. Brokers. 18 Tenant and Landlord each warrants and represents to the other that in the negotiating or making of this Lease neither Tenant nor anyone acting on its behalf has dealt with any real estate broker or finder who might be entitled to a fee or commission for this Lease other than the Tenant's Broker identified in Exhibit A: Basic Lease Information, whose commission is to be paid by Landlord. Tenant and Landlord each agrees to indemnify and hold harmless the other from any claim or claims, including costs expenses and attorney's fees, asserted by any other broker or finder for a commission based upon any dealings with or statements made by the indemnifying party. Section 27. Smoking. Smoking in the offices is prohibited. Section 28. Entire Agreement. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels all previous negotiations, arrangements, brochures, agreements, and understandings between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease. There are no representations between Landlord and Tenant other than those contained in this Lease. All implied warranties, including implied warranties of merchantability and fitness, are excluded. Section 29. Illegality or Unenforceability of Portion of Lease. If any provision of this Lease is determined to be illegal or unenforceable, this determination shall not affect any other provision of this Lease, and all other provisions shall remain in full force and effect. Section 30. Governing Law. This Lease shall be governed by and construed pursuant to law of the State of California. Section 31. Parking. Tenant shall have the option to rent three (3) reserved parking spaces in Lot A and five (5) in Lot B from Landlord for the duration of this Lease at the prevailing building rate. Tenant shall be allowed its pro-rata share of parking permits for Lot B so long as spaces are available. Section 32. Quiet Enjoyment. Landlord agrees to and shall in the commencement of this Lease place Tenant in quiet possession of the premises and shall secure it in the quiet possession thereof against all persons lawfully claiming the same during the lease term. Section 33. Automatic Subordination. If Landlord delivers to Tenant an agreement (a "Non-Disturbance Agreement") from the holder of any Encumbrance and the Lessor under any Underlying Lease that, if any such holder or Lessor forecloses or otherwise exercises its rights under its Encumbrance or if any such Lessor terminates or otherwise exercises its rights under the Underlying Lease, or if such holder or Lessor otherwise acquires Landlord's interest in the Lease, such holder or Lessor shall recognize Tenant's rights under this Lease, shall not disturb Tenant's occupancy of the Premises under this Lease, and shall assume Landlord's obligation under this Lease, then this Lease shall be subject and subordinate to: (a) The lien of any mortgages, deeds of trust, or other encumbrances of the Building and Real Property ("Encumbrances"); 19 (b) All present and future ground or underlying leases of the Building and Real Property now or hereafter in force against the Building and Real Property ("Underlying Leases"); (c) All renewals, extensions, modifications, consolidations, and replacements of the items described in subparagraphs (a) - (b); and (d) All advances made or hereafter to be made on the security of the Encumbrances. Despite any other provision of this Section 33, any Encumbrance holder or lessor may elect that this lease shall be senior to and have priority over that Encumbrance or Underlying Lease whether this lease is dated before or after the date of the Encumbrance or Underlying Lease. Tenant shall agree in each Non-Disturbance Agreement to attorn to the transferee of Landlord's interest in the Real Property by foreclosure, deed in lieu of foreclosure, exercise of any remedy provided in any Encumbrance or Underlying Lease, or operation of law, if requested to do so by the transferee, and to recognize the transferee as the lessor under this Lease, provided Transferee agrees to Tenant's quiet possession. The transferee shall not be liable for: (a) Any acts, omissions, or defaults of Landlord that occurred before the sale or conveyance; or (b) the return of any security deposit except for deposits actually paid to the transferee. Section 34. Temporary Occupancy. From the date of the execution of this Lease until ten business days after the Commencement Date, Tenant shall have the right to occupy approximately 2,000 square feet of rentable area on the second floor of the Building shown as "Temporary Space" on Exhibit B attached to this Lease, except that Tenant's monthly installment of Base Rent and Escalation Rent with respect to the Temporary Space shall total $1.00 per square foot per month. Such monthly payments shall not commence until Tenant occupies such Temporary Space for the conduct of its business and shall cease as of the day Tenant vacates such Temporary Space. If Tenant occupies such Temporary Space for any portion of a calendar month, the monthly installment of Base Rent and Escalation Rent due under this Section 34 shall be prorated according to the fraction of the total number of days in such month that Tenant occupies the Temporary Space for the conduct of its business. Section 35. Exhibits. The exhibits specified in the Basic Lease Information are attached to this Lease and by this reference made a part of it. Section 36. Notices. Any notice under this Lease shall be in writing and shall be delivered by hand or sent by certified mail, return receipt requested, to Tenant at Tenant's Address for Notice or if to Landlord at Landlord's Address for Notice, as set forth on Exhibit A attached to this Lease. Any such notice shall be effective at the earlier of (i) receipt by such notice or (ii) or three business days after being so mailed. Section 37. Arbitration. Any dispute that arises out of or relating to this Lease or the alleged breach of this Lease shall, after notice by one party to the other, be submitted to arbitration in accordance with the process set forth in Section 3 (b), but all language referred to in that Section as to Fair Market Rent shall instead refer to the resolution of any such dispute, and all arbitrators shall be qualified real estate attorneys or other professionals with at least ten (10) years experience in matters substantially similar to the matter in dispute. 20 The parties have executed this Lease as of the date first set forth above. Landlord: Tenant: HAMM'S BUILDING ASSOCIATES, a Individual, Inc. California Limited Partnership by: RHGA, Inc., General Partner By: /s/ Rubin Glickman By: /s/ Robert L. Lentz --------------------------- ------------------------------ Rubin Glickman, President Robert L. Lentz, Vice President 21 EXHIBIT "B" [DIAGRAM DEPICTING FLOORPLAN APPEARS HERE] 22 Exhibit C. Rules 1. The sidewalks, halls, passages, exits, entrances, shopping malls, elevators, escalators, and stairways of the Building shall not be obstructed by any of the tenants or used for any purpose other than for ingress to and egress from their respective Premises. The halls, passages, exits, entrances, shopping malls, elevators, escalators, and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access to them by all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation, and interests of the Building and its tenants. However, nothing here shall be construed to prevent access to persons with whom any tenant normally deals in the ordinary course of business, unless these persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go on the roof of the Building. 2. A sign, placard, picture, name, advertisement, or notice visible from the exterior of any tenant's Premises shall not be inscribed, painted, affixed, or otherwise displayed by any tenant on any part of the Building without the prior written consent of Landlord. Landlord will adopt and furnish to tenants general guidelines relating to signs inside the Building on the office floors. Each tenant shall conform to these guidelines, but may request approval of Landlord for modifications, which will not be unreasonably withheld. All approved signs or lettering on doors shall be printed, painted, affixed, or inscribed at the expense of the tenant by a person approved by Landlord, which will not be unreasonably withheld. Material visible from outside the Building will not be permitted. 3. The Premises of each tenant shall not he used for the storage of merchandise held for sale to the general public or for lodging. No cooking shall he done or permitted by any tenant on the Premises, except that (a) each tenant may establish and operate a lunchroom facility for use by tenant's employees, and (b) each tenant may use and install food and beverage vending machines and Underwriters' Laboratory approved microwave ovens and equipment for brewing coffee, tea, hot chocolate, and similar beverages, provided that adequate provisions are made for venting and control of odors and all facilities and equipment are in accordance with all applicable federal, state, and city laws, codes, ordinances, rules, and regulations. 4. No tenant shall employ any person other than Landlord's janitorial service for cleaning the Premises, unless otherwise approved by Landlord. No person other than those approved by Landlord shall be permitted to enter the Building to clean it. No tenant shall cause any unnecessary labor because of carelessness or indifference in the preservation of good order and cleanliness. Janitor service will not be furnished on nights when rooms are occupied after 9:30 p.m. unless, by prior arrangement with Landlord, service is extended to a later hour for specifically designated rooms. 5. Landlord will furnish each tenant, free of charge, two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. No tenant shall have any keys made. No tenant shall alter any lock or install a new or additional lock or any bolt on any door of the premises without the prior consent of Landlord which will not be unreasonably withheld. The tenant shall in each case furnish Landlord with a key for any lock. Each tenant, upon the termination of the tenancy, shall deliver to Landlord all keys to doors in the Building that have been furnished to the tenant. 23 6. The freight elevator shall be available for use by all tenants in the Building, subject to reasonable scheduling as Landlord deems appropriate. The persons employed to move equipment in or out of the Building must be acceptable to Landlord. Landlord shall have the right to prescribe the weight, size, and position of all equipment, materials, furniture, or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on wood strips of a thickness necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any property from any cause, and all damage done to the Building by moving or maintaining property shall be repaired at the expense of the tenant. 7. No tenant shall use or keep in the Premises or the Building any kerosene, gasoline, or inflammable or combustible fluid or material other than limited quantities reasonably necessary for the operation or maintenance of office equipment, and may not, without Landlord's prior approval, use any method of heating or air conditioning other than that supplied by Landlord. No tenant shall use or keep any foul, noxious, or hazardous gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building because of noise, odors, or vibrations, or interfere in any way with other tenants or those having business in the Building. No pets shall be kept in the Premises. 8. Landlord shall have the right, exercisable without notice and without liability to any Tenant, to change the name and street address of the Building. 9. Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 7:00 a.m. and at all hours on Saturdays, Sundays, and legal holidays any person who does not present a proper access card and or other identification as a tenant or an employee of a tenant, or who does not otherwise present proper authorization by a tenant for access to the premises. Each tenant shall be responsible for all persons for whom it authorizes access and shall be liable to Landlord for all acts of these persons. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In the case of invasion, mob, riot, public excitement, or other circumstances rendering an action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the circumstance by any action Landlord deems appropriate. 10. A directory of the Building will be provided to display the name and location of tenants, their subtenants, and a reasonable number of the principal officers and employees of tenants, and Landlord reserves the right to exclude any other names. Any additional name that a tenant desires to have added to the directory shall be subject to Landlord's approval and may be subject to a charge. 11. No curtains, draperies, blinds, shutters, shades, screens, or other coverings, hangings, or decorations shall be attached to, hung, or placed in, or used in connection with any exterior window in the Building without the prior consent of Landlord. If consented to by Landlord, these items shall be installed on the office side of the standard window covering and shall in no way be visible from the exterior of the Building. 12. Messenger services and suppliers of bottled water, food, beverages, and other products or services shall be subject to reasonable regulations as may be adopted by Landlord. 13. Each tenant shall see that the doors of the premises are closed and locked and that all water faucets or apparatus, cooking facilities, and office equipment, excluding office equipment 24 required to be operative at all times, are shut off before the tenant or employees leave the Premises at night, so as to prevent waste or damage. For any default or carelessness in this regard the tenant shall be responsible for any damage sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. 14. The toilets, urinals, wash bowls, and other rest room facilities shall not be used for any purpose other than that for which they were constructed. No foreign substance of any kind shall be thrown in them, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, have caused it. 15. Except with the prior consent of Landlord, no tenant shall sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets, or any other goods or merchandise to the general public in the Premises, nor shall any tenant carry on, permit, or allow any employee or other person to carry on the business of stenography, typewriting, or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the Premises of any tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided for in the tenant's lease. 16. No tenant shall install any antenna, loudspeaker, or other device on the roof or exterior walls of the Building. 17. No motorcycles or motor scooters shall be parked or stored anywhere in the Building other than the garage of the Building, and no bicycles may be parked or stored anywhere in the Building other than in facilities provided in the garage or the Common Area of the Building. 18. Hand trucks or other material handling equipment, except those equipped with rubber tires and side guards, may not be used in any portion of the Building unless approved by Landlord. 19. Each tenant shall store refuse within that tenant's premises. No material of a nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of refuse in the city of San Francisco without being in violation of any law or ordinance governing this disposal shall be placed in the refuse boxes or receptacles. All refuse disposal shall be made only through entryways and elevators provided for these purposes and at the times Landlord shall designate. 20. Canvassing, peddling, soliciting, and distributing handbills or any other written materials in the Building is prohibited, and each tenant shall cooperate to prevent this type of occurrence. 21. Smoking of cigarettes, cigars, pipes, or any other form of tobacco is prohibited in the Building. Tenant shall not permit its employees, guest or invitees to smoke in any portion of the Building or Premises. 22. The requirements of the tenants will be attended to only on application by telephone or in person at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 25 23. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant, so long as Tenant's use of the Premises is not adversely affected by the waiver, and no waiver by Landlord shall be construed as a waiver of the Rules in favor of any other tenant, nor prevent Landlord from later enforcing any of the Rules against any of the tenants of the Building. 24. These Rules are in addition to, and shall not be construed to modify or amend, in whole or in part, the terms, covenants, agreements, and conditions of any lease of Premises in the Building. 25. Landlord reserves the right to make other reasonable rules as Landlord judges may be needed for the safety, care, and cleanliness of the Building, and for the preservation of good order, provided that Tenant's use and occupancy of the Premises shall not be adversely affected by other rules. 26 Exhibit D. CONSTRUCTION RIDER ------------------ 1. Tenant Improvements ------------------- Landlord shall, with reasonable diligence through a contractor selected by Landlord construct and install in the Premises the improvements and fixtures (the "Tenant Improvements") provided for on the attached Exhibit E ("Construction Documents"). Improvements consisting of the type and amount of work and materials described on Exhibit E attached to this Construction Rider are referred to herein as "Building Standard Tenant Improvements." All Tenant Improvements in addition to or in substitution for or modification of the Building Standard Tenant Improvements are referred to herein as "Above-Standard Tenant Improvements." 2. Plans ----- Landlord will retain Keith Hooks as the space planner/architect for the Premises ("Space Planner") who will prepare Construction Documents for the Premises. Additional interior decorating services and advice on the furnishings and decoration of the Premises, such as the selection of fixtures, furnishings, design of millwork or other Above Standard Tenant Improvements required by Tenant, shall be provided by Tenant at its expense, but shall be subject to the reasonable approval of Landlord. 3. Construction ------------ Upon Landlord's receipt of the Construction Documents by the Space Planner, Landlord shall use best efforts to cause the Tenant Improvements to be Substantially Completed on or prior to the Scheduled Commencement Date. The term "Substantially Complete" or "Substantial Completion" as used in the Lease or this Agreement shall mean: (1) the shell and core of the Building are complete and in compliance with all applicable laws, statutes, codes, rules and regulations (collectively, "Laws") and all of the Building's heating, ventilating, air-conditioning ("HVAC"), and plumbing, life safety, telephone cable, mechanical and/or electrical systems (collectively, "Building Systems") are operational to the extent necessary to service the Premises; (2) Landlord has sufficiently completed the Tenant Improvements (except for finishing details, minor omissions, decorations and mechanical adjustments of the type normally found on an architectural "punch list," and minor punch list items the completion of which will not interfere with Tenant's ability to conduct Tenant's normal business operations in the Premises) such that Tenant can conduct normal business operations from the Premises; and (3) Landlord has obtained a certificate of occupancy for the Building, or a temporary certificate of occupancy for that portion of the building that includes all of the Premises, or its equivalent. Following Substantial Completion of the Tenant Improvements and within thirty (30) days after Tenant takes possession of the Premises, Landlord and Tenant shall inspect the Premises and jointly prepare a "punch list" of agreed items of construction remaining to be completed. Landlord shall complete the items set forth in the punch list as soon as reasonably possible. Tenant shall cooperate with and accommodate Landlord and its workers in completing the items on the punch list.. The Tenant Improvements shall be limited to the Building Standard Tenant Improvements, and any additional alterations or improvements to the Premises desired by Tenant shall be made 27 after the commencement of the term of the Lease and shall be subject to the provisions of Section 8- "Alterations" of the Lease. 4. Cost of Tenant Improvements --------------------------- Landlord shall contribute up to Five Dollars and Seventy-seven Cents ($5.77) per rentable square foot towards the cost of the Tenant Improvements (The "Tenant Improvement Allowance") from existing "As Is" condition. The Tenant Improvement cost to be paid from the Tenant Improvement Allowance, shall include but not be limited to: a) All costs of permit, architecture, engineering plans and specifications for the Tenant Improvements. b) All costs of obtaining building permits and other necessary authorizations for the City of San Francisco. c) All direct and indirect costs of procuring, constructing and installing the Tenant Improvements in the Premises. Tenant shall reimburse Landlord for all costs of completing the Tenant Improvements in excess of the Tenant Improvement Allowance. 5. Changes ------- If Tenant requests any change, addition or alteration in or to any Construction Documents ("Changes"), Landlord shall cause the architect and contractor to prepare additional Plans and estimates implementing such Change. As soon as practicable after the completion of such additional plans and estimates, the Landlord shall provide Tenant with the estimated cost of the Changes. Within three (3) working days after receipt of such cost estimate, Tenant shall notify Landlord in writing whether Tenant approves the Change. If Tenant approves the Change, Landlord shall proceed with the Change and Tenant shall be liable for any additional cost resulting from the Change including architectural costs, permit and related fees, and all costs of construction related to said change. If Tenant fails to approve the Change within such three (3) day period, construction of the Tenant Improvements shall proceed as provided in accordance with the original Construction Documents. 6. Delays ------ Tenant shall be responsible for, and shall pay to Landlord, any and all costs and expenses incurred by Landlord in connection with any delay in the commencement or completion of any Tenant Improvements and any additional cost caused by (i) Tenant's failure to approve any space plan or Construction Documents within the time periods herein, (ii) any delays in obtaining any items or materials constituting part of the Above Standard Tenant Improvements requested by Tenant, or (iii) any other delay requested or caused by Tenant ("Tenant Delay"). The term "Landlord Delay" as used in this Agreement, shall mean any delay in the completion of the Tenant Improvements which is due to any act or omission of Landlord (wrongful, negligent or otherwise), its agents or contractors (including acts or omissions while acting as agent or contractor for Tenant). The term Landlord Delay shall include, but shall not be limited to any: (1) delay in the giving of authorizations or approvals by Landlord; (2) delay attributable to the acts or failures to act, whether willful, negligent or otherwise, of Landlord, its agents or contractors, where such acts or failures to act delay the completion of the Tenant Improvements; and (3) delay attributable to Landlord's failure to allow Tenant sufficient access to the Building and/or Premises during the move-in period to move into the Premises over one (1) weekend. In no event shall Tenants 28 remedies or entitlements for the occurrence of a Landlord Delay be abated, deferred, diminished or rendered inoperative because of a prior, concurrent, or subsequent delay resulting from any action or inaction of Tenant. No Landlord Delay shall be deemed to have occurred unless and until Tenant has given written notice to Landlord specifying the action or inaction which Tenant contends constitutes a Landlord Delay. If such action or inaction is not cured within five (5) business days after Landlord's receipt of such notice, then a Landlord Delay, as set forth in such notice, shall be deemed to have occurred commencing as of the date Landlord received such notice and continuing for the number of days the Substantial Completion of the Premises was in fact delayed as a direct result of such action or inaction. Notwithstanding the Commencement Date provided in the Lease, Tenant's obligation for the payment of rent thereunder shall not commence until Landlord has substantially completed all work to be performed by Landlord as set forth herein; provided, however, that (a) if Landlord is delayed in Substantially Completing the Tenant Improvements solely as a result of Tenant Delay, then the abatement of rent provided for herein shall continue only until the date on which Landlord would have Substantially Completed the Tenant Improvements but for such delays. (b) in the event Landlord is unable to tender possession of the Premises, Substantially Complete, to Tenant on the Scheduled Commencement Date due to acts of force majeure delay or Landlord Delay, the Commencement Date, and the commencement of the abatement of rent afforded Tenant, shall be postponed until the date upon which Landlord shall tender possession of the Premises with the Tenant Improvements Substantially Complete to Tenant. Additionally, to the extent that Landlord is unable to so tender possession due to Landlord Delay, Tenant shall receive one (1) additional day of rental abatement for each such day of Landlord Delay. 7. Commencement of Term -------------------- Upon Substantial Completion of the Tenant Improvements, Landlord shall deliver possession of the Premises to Tenant. If Landlord has not Substantially Completed the Tenant Improvements and tendered possession of the Premises to Tenant on or before the Scheduled Commencement Date, or if Landlord, using its best efforts, is unable for any other reason to deliver possession of the Premises to Tenant on or before such date, neither Landlord nor its representatives shall be liable to Tenant for any damage resulting from the delay in completing such construction obligations and/or delivering possession to Tenant and the Lease shall remain in full force and effect unless and until it is terminated under the express provisions of this Paragraph. In such event, the Commencement Date shall be the actual date of delivery of possession of the Substantially Completed Premises to Tenant; provided, however, that if and to the extent that any delays in the Commencement Date are attributable to (i) delays by Tenant in submitting information to the Space Planner or in approving Construction Documents, (ii) any delays in obtaining any items or materials constituting part of the Above Standard Tenant Improvements requested by Tenant, or (iii) any other delay requested by or caused by Tenant Delay, then the term of the Lease shall commence and the Commencement Date shall be deemed to have occurred on the date which Landlord would have Substantially Completed the Premises and tendered the premises to Tenant but for such Tenant Delay. 8. Access to Premises ------------------ Landlord, at its discretion, may allow Tenant or Tenant's Representatives to enter the Premises prior to the Commencement Date to permit Tenant to make the Premises ready for its use 29 and occupancy; provided, however, that prior to such entry of the Premises, Tenant shall provide evidence reasonably satisfactory to Landlord that Tenant's insurance, as described in Section 12- "Insurance," shall be in effect as of the time of such entry. Such permission may be revoked at any time upon twenty-four (24) hours notice, and Tenant or its representatives shall not interfere with Landlord or Landlord's contractor in completing the Tenant Improvements. Tenant agrees that Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of Tenant's property placed upon or installed in the Premises prior to the Commencement Date, the same being at Tenant's sole risk, and Tenant shall be liable for all injury, loss or damage to persons or property arising as a result of such entry of the Premises by Tenant or its representatives. 9. Ownership of Tenant Improvements -------------------------------- All Tenant Improvements except Tenant's trade fixtures, equipment and personal property, whether Building Standard or Above Standard, and whether installed by Landlord or Tenant, shall become a part of the Premises, shall be the Property of Landlord and shall be surrendered by Tenant with the Premises, without any compensation to Tenant, at the expiration or termination of the Lease in accordance with Section 8- "Alterations" of the Lease. [Initials of Landlord] [INITIALS APPEAR HERE] ---------------------- [Initials of Tenant] [INITIALS APPEAR HERE] ---------------------- 30 Exhibit E. Exhibit E - Construction Documents --------- The following construction work shall be performed: 1. entire space recarpetted with 32 oz. glue-down carpet 2. entire space will be repainted 3. pursuant to attached drawing, the two work areas and several office walls will be demolished 31 EX-11.1 6 COMPUTATION OF EARNINGS PER SHARE Individual, Inc. Exhibit 11.1 Computation of Weighted Average Shares Used in Computing Loss Per Share Amounts
Primary Fully Diluted Supplemental Type of Security Shares Shares Shares (1) - ----------------------------------------------------------------- ----------- ------------ ------------ For the twelve months ended December 31, 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) 315,821 315,821 315,821 Weighted average common stock issued during the period 12,341 12,341 12,341 Conversion of preferred stock and redeemable preferred stock into common stock (1) - - 7,625,210 ----------- ------------ ------------ Weighted average shares of common stock outstanding 1,994,164 1,994,164 9,619,374 =========== ============ ============ Net loss per common share ($4.05) ($4.05) ($0.67) =========== ============ ============ For the twelve months ended December 31, 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 3,335,909 3,335,909 3,335,909 Weighted average treasury stock repurchased during the period (1,233) (1,233) (1,233) Weighted average conversion of preferred stock and redeemable preferred stock into common stock (1) 5,949,340 5,949,340 7,625,210 =========== ============ ============ Weighted average shares of common stock outstanding 10,997,112 10,997,112 12,672,982 =========== ============ ============ Net loss per common share ($4.68) ($4.68) ($4.03) =========== ============ ============
(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-21.1 7 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 ------------ Subsidiaries ------------ Japan: Individual, K.K. U.S.: FreeLoader, Inc. EX-23.1 8 CONSENT OF COOPERS & LYBRAND L.L.P. Exhibit 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the Registration Statements of Individual, Inc. on Form S-8 (File Nos. 333-02806 and 333-07815), of our reports dated February 15, 1997, on our audits of the consolidated financial statements of Individual, Inc. as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and 1994, which report is included or incorporated by reference in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 28, 1997 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 JAN-01-1995 21,886,219 17,517,743 8,448,306 0 11,088,046 5,741,694 0 0 0 0 41,879,394 23,374,531 4,102,709 2,926,234 0 0 46,929,316 26,802,505 24,931,216 13,505,284 0 0 0 23,999,013 0 6,113 144,140 18,706 20,443,335 (21,712,349) 46,929,316 26,802,505 24,144,780 16,732,749 0 0 11,866,768 7,782,945 63,177,221 15,181,453 0 0 0 0 861,610 441,901 (51,017,359) (6,442,808) 0 0 0 0 0 0 0 0 0 0 (51,017,359) (6,442,808) (4.03) (.67) 0 0
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