SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission file number 0-19813
InfoNow Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3083360
(State of Incorporation) (IRS Employer Identification No.)
1875 Lawrence Street, Suite 1100, Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
(303) 293-0212
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, 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-KSB or any amendment to this Form 10-K. 1 /X/
For the year ending December 31, 1997 the Company had $1,053,000 in
revenues from continuing operations.
As of February 13, 1998, 5,364,179 common shares were outstanding. The
aggregate market value of the shares held at that date by
non-affiliates was approximately $1,926,000 based on the average of
the bid and ask prices as quoted on Nasdaq's Electronic Bulletin
Board System.
For the purposes of calculating the above required information,
affiliates are defined as shareholders with greater than 5% beneficial
ownership of the Company's stock and all directors and officers of the
Company.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on
April 24, 1998, is incorporated into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format Yes No X
___ ____
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview InfoNow(R) Corporation ("InfoNow" or the "Company") develops, markets
and provides technology-based teleservices to leading North American companies.
InfoNow's FindNow(R) Referral Management Services (RMS) are designed to enable
companies to manage consumer or commercial referrals with greater effectiveness
and efficiency. Referrals are the ubiquitous "where can I buy your
product" or "where's the closest location" types of questions received
thousands of times a day by leading companies. FindNow's first client was
Visa International, implemented in the third quarter of 1996. Since then, the
list of FindNow RMS users has grown significantly, and now includes six of the
eight largest banks in North America and six of the ten largest
computer/networking companies worldwide, as well as other industry leading
companies like American Airlines, FedEx, Goodyear, Shell, and United Healthcare.
FindNow is an enterprise-wide referral management solution, provided as a
turnkey service.
FindNow Referral Management Services provide a customer-specific,
geographically precise referral, accessible by the Internet, a client's call
center, or an interactive voice response unit, delivered across a range of
geographies. The FindNow system can provide other customized
information to the customer depending on the Client's requirements and can
produce summary reports for the Client's use in operations management or
market analysis. A sample of completed FindNow RMS Internet
implementations can be viewed by anyone with access to the Internet by
browsing the "Customers" section of InfoNow's Internet site page at
www.infonow.com.
During 1997, the Company also provided business presentation and interactive
media services through its subsidiary, Cimarron International, Inc.
("Cimarron"). The Company ceased all operations in this business when it sold
substantially all of the Cimarron assets and operations in December 1997.
Company Background
The Company was incorporated under the laws of the State of Delaware
on October 29, 1990, and was initially focused on the sale of software through
the use of encrypted CD-ROM technology. In 1995,
the Company fundamentally changed its business focus and began
developing its FindNow system to provide technology-based teleservices
to large corporate clients. The Company ceased selling software
using encrypted CD-ROM technology and installed a new senior
management team, led by Michael Johnson, who became President and Chief
Executive Officer in October 1995.
As part of its strategy, the Company acquired Cimarron and Navigist,
Inc. ("Navigist") in 1995. Cimarron provided interactive media authoring
and business services. Navigist offered network
engineering and Internet consulting services. These acquisitions
allowed the Company to utilize resources and capabilities of Navigist
and Cimarron to facilitate its change in strategic
direction as well as to provide an operating infrastructure and revenues
as the Company completed this transition. After the
Company completed the transition to its new business, the Company sold
Navigist on December 13, 1996, and completed the sale of Cimarron
on December 11, 1997. A full discussion of the sale of these two
subsidiaries is contained in "Note 2. Discontinued Operations" of the
Company's financial statements.
Industry Background
Teleservices is the use of the telephone and, increasingly, the
Internet, for sales, marketing and customer service activities.
The North American teleservices market was over $85 billion in 1996, with
outsourced teleservices, currently representing 5 to 10% of the total
teleservices market, expected to grow 35% annually. This trend toward
outsourcing teleservices activities is driven by large companies
narrowing their focus to activities that leverage their core
competencies, and outsourcing others, like managing a call or customer
response center, which typically do not.
A significant development in this market is the emergence of the
Internet as a new medium for company-customer interaction. In addition to
providing access to a vast array of information, the Internet
represents a new vehicle through which organizations and individuals
can conduct business. The potential benefits of conducting business through
the Internet include direct, immediate communications with
consumers and reduced communications and other customer service
transaction costs. In addition, the unique interactive capabilities of the
Internet can help companies better pinpoint customer needs, more
effectively answer customer inquiries, and provide a faster, more
convenient response than traditional customer service approaches.
The Company believes that the Internet will play a growing role in the
teleservices market due to a number of factors, including the proliferation
of Internet-enabled computers, increases in the public data network
infrastructure, reductions in the cost of Internet access, and
the availability of intuitive graphical
software that allows non-technical users to access the Web. Such developments
would support widespread Internet access at a declining cost. The Company
believes these factors will promote continued growth in
consumer usage of the Internet and spur the interest of leading
corporations in utilizing the Internet as a tool for interacting with
customers or prospects. This trend should create significant demand for
products or services that facilitate the success of such interactions.
The Company believes that it can provide significant value by
supplying systems and services to enable companies to provide automated
customer service via the Internet and other means. The Company
believes that these systems and services are an attractive alternative
to many functions currently performed within a traditional, telephone
agent-based call center.
InfoNow's long-term objective is to develop systems and services that
will facilitate the shift of a large portion of this live agent call
center market to the Internet and other self-service technologies.
FindNow is the Company's first technology-based teleservices offering.
InfoNow developed its FindNow Referral Management Services to enable
companies to respond to consumer or commercial referral
inquiries with greater effectiveness and efficiency.
Business Strategy
InfoNow's primary objective is to be the leading provider of
technology-based referral management services to corporate clients.
The Company is pursuing the following strategies with respect to its
FindNow RMS offering:
Extend Functionality of the FindNow Service. InfoNow intends to provide a
broader and more flexible menu of FindNow services through
internally-developed enhancements and the integration of purchased third
party applications. During 1997, the Company introduced
several new FindNow RMS extensions, including the ability to receive
and respond to queries from Interactive Voice Response
systems ("IVRs"). The Company will use a combination of customer input
and its own knowledge of using the Internet and other self-service
technologies to deliver referral management services as its
primary source of direction in developing new referral management
technologies and services.
Leverage the Company's Information-based Assets. The Company currently
has licenses for geographic data for the United States, Australia, and
other countries, including an exclusive license for certain geographic data
in Canada. In addition, the Company has developed unique location databases
through its activities with its current customer base. The Company
intends to utilize this information as well as other databases it may
acquire or build, to enhance and distinguish its service offering.
Target Industry-Leading Corporate Customers. The Company intends to
focus primarily on corporate customers, utilizing its own direct sales
force to sell to such companies.
Emphasis on Customer Support and Value Added. The Company intends to
develop and maintain strong customer relationships, by leveraging the
broad range of expertise of its consultative sales force,
and to provide excellent client service, through skilled, dedicated
client service teams.
Establish and Extend Strategic Alliances. The company will continue
to pursue strategic alliances that can provide additional technical,
financial or distribution resources that will allow the Company to
develop and market its products and services into a broader range of
markets. In addition, the Company may seek to accelerate its growth
through strategic acquisition of complementary businesses, products or
technology. However, the Company currently has no plans, commitments
or agreements with respect to any such transactions.
Products and Services With the discontinuation of its Cimarron operations,
the Company is focused on providing its FindNow technology-based teleservices.
The sales of its FindNow services generated all of the revenues
from continuing operations for the year ended December 31, 1997,
amounting to $1,053,000 compared to $345,000 in the prior year ended
December 31, 1996. See Note 9 to the Consolidated Financial Statements
in this report for financial information as to the Company's business
segments.
FindNow(R) Referral Management Services
FindNow can support customer queries from a Client's call center
agent, interactive voice response system or corporate web site.
The customer's location is established through the input of an address
by the user or via other means. Once this is done, the FindNow system uses
advanced geographic information system ("GIS") technology to determine the
locations closest to the specified address that also meet any
additional customer requirements. FindNow can then produce a map to
help the customer find the identified locations. The map can include
other company location information and be delivered
immediately upon a customer's request. The FindNow system can also provide
other customized information to the customer depending on the Client's
requirements and can produce referral summary reports for the Client's
use in operations management or market analysis.
The Company believes that, by using FindNow RMS, a Client can
significantly improve the effectiveness and efficiency of its referral
activities. Significant benefits include: increased revenue capture; reduced
cost, resulting from the replacement of telephone agents with an automated
approach; the ability to gather customer-specific information; advanced
reporting capabilities; and the ability to provide a consistent response
across the enterprise.
The GIS technology used as part of the FindNow system can pinpoint
locations, calculate the "true" location proximity, and generate dynamically
scaled maps. Many call centers currently employ simple city and state
listings or search approaches based on zip code areas. These traditional
approaches do not always provide the nearest locations and give no
information such as a map or directions that would help a user find the
nearest location once it has been identified. The ability to respond
virtually instantaneously with text and graphics rather than a verbal
explanation results in a reduction in wait times and represents a
substantial improvement in efficiency and effectiveness over current
call center solutions from a customer's perspective. Because the FindNow
system utilizes database searching, it can also perform sophisticated
searches for locations with certain criteria.
Although each FindNow application uses the same basic underlying
technology, the Company customizes a suite of services to meet the
individual Client requirements.
These services are sold under multi-year contracts. A typical FindNow
installation includes the development of customized, Client-specific access
to the service, and the design and implementation of client databases.
The FindNow service is generally provided on a two-year contract basis
which provides for an initial setup charge and a monthly service fee.
These combined fees for the initial year of service typically range from
$20,000 for a simple installation to greater than $100,000 for a complex
corporate application. Ongoing services include hosting the FindNow
service on the Company's servers, maintenance of the Client's locations
database, and maintaining operation of the Client's FindNow
interface. The setup and monthly service fees are determined based on
a variety of factors, and may include the type of service selected, the
number of Client locations supported, anticipated transaction
volumes, geographies required and the level of service customization
requested by the Client. In addition to standard services, the Company also
offers other additional services which are priced and delivered on
a project by project basis.
Business Presentation and Media Services.
Prior to the sale of Cimarron, this subsidiary provided comprehensive
business presentation services that ranged from simple graphic design
to complete productions and presentations utilizing sophisticated
multimedia presentations, multimedia authoring, production and project
management. These services were generally provided on a time and materials
basis or were billed based on a standard pricing list depending upon the
nature of the service.
Research and Development
The Company believes that its future success will largely be dependent on its
ability to enhance the functionality of the FindNow system and to develop
other related products and services. The Company's research and development
efforts at the current time are influenced significantly by customer
requirements. New features are customized initially for delivery to a
single customer and then incorporated into future versions of the Company's
products and services. The Company continually evaluates its products and
services to determine what additional products or enhancements are required
by its customers and plans to utilize both purchased technologies as well
as internally developed software that will be integrated into the Company's
products.
The custom installation and service nature of the Company's FindNow
system and other services was such that the Company did not incur direct
research and development expense for the years ended
December 31, 1997 and 1996. However, the Company capitalized $250,248
during 1996 related to the development of its FindNow system in
accordance with FAS 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." The Company may
incur significant direct research and development expenses in the future
as it develops new Internet products and services or new
capabilities for the FindNow system not developed in conjunction with
specific customer projects.
Sales and Marketing
The Company's sales efforts for its FindNow service rely primarily on
direct sales contact, promotional mailings and referrals. The Company
utilizes a staff of sales professionals headquartered in
its Denver, Colorado offices that sell to national and international
accounts. The Company's primary sales and marketing efforts have been
directed at increasing the visibility of the FindNow product through the
use of direct sales efforts, trade show exhibits and promotional
mailings. The Company has recently added additional sales personnel
and plans to further expand its sales and marketing efforts in 1998. The
Company intends to leverage its acquisition of an exclusive license
for Canadian geographic data as well as other recent data acquisitions
by focusing significant sales efforts on customers who may require such
data assets. Although InfoNow is initially targeting several selected
vertical markets for FindNow, the Company believes that the market for
FindNow includes every major national or multinational company
that has multiple locations and could benefit from helping its
consumers find them.
Customers
The Company serves primarily medium to very large corporate
organizations, including many Fortune 500 companies. The following table
is a representative list of current clients of the Company:
American Airlines
Apple Computer
BancOne
Bank of America
Canadian Airlines
Cisco Systems
Citibank
Compaq Computers
Federal Express of Canada
First Union Bank
Fujitsu
H&R Block
IBM
Kenwood USA
Lexmark International
NationsBank
Royal Bank of Canada
3Com Corporation
Toronto Dominion Bank
United Healthcare
Visa International
The Company has approximately 32 long term contracts for its FindNow
service which contribute approximately equally to revenues. In addition
the Company may perform significant initial setup work
on a contract which may account for a significant portion of the
Company's revenue in a given period. In 1997, two customers accounted
for 29% of the Company's total revenues. A single customer accounted
for 16% of the Company's total revenue in 1996. The Company
anticipates that its revenues per customer will become less concentrated
as more contracts for its FindNow services are awarded.
The Company's backlog is composed of future monthly service fees for
the Company's FindNow services, which range in terms from one to three years
and are non-cancelable except for cause. As of February 28, 1998 the
Company had $1,459,000 of backlog which represented 32 contracts for FindNow
services.
Competition
The market for teleservices applications and services is highly
competitive and is characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions or
enhancements and rapid changes in customer requirements. As the growth
in these markets continues, the Company expects that competition will
continue to intensify. The markets for the Company's
FindNow system are in an early stage of development and no one
competitor has established a dominant position in the market. The Company
believes that the size and diversity within the teleservices markets
will allow more than one supplier of products and services similar to
those of the Company. However, it is possible that a single supplier may
dominate one or more market segments. The Company is aware of several other
providers of products and services that are in various stages of development
which may compete with the Company's own offerings. In addition, the Company
believes that as the markets continue to develop, it may face competition
from new sources of competition, including (i) Web developers, (ii) systems
integrators and consultants, (iii) call center outsourcing companies,
(iv) GIS tool providers, and (v) internal service groups within targeted
clients. In some cases, these competitors are larger, more established and
have substantially greater financial, technical and marketing resources than
the Company. There can be no assurance that the Company will be able
to compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes the principal competitive factors relative to
the FindNow(R) system are the functionality and features of the system,
ability to adapt to specific customer needs, reliability, accuracy
and "yield" of geocoding and mapping of locations, response time,
product reputation based on client referrals, pricing relative to
functionality offered, quality of customer support and the ability to develop
strong customer relationships.
Intellectual Property
The Company has received federal trademark registrations for the
names "InfoNow(R)" and "FindNow(R)" and considers its FindNow software
service, trade secrets, service marks and similar intellectual property
as proprietary. The Company relies on a combination of copyright and trademark
law, non-disclosure agreements and certain contractual provisions
within its customer agreements to establish and maintain proprietary
rights in the FindNow service and other intellectual property of the
Company. However, these measures can afford only limited protection
for the Company's intellectual property as it does not prevent competitors
from independently developing equivalent or superior technology. While the
Company may have a limited ability to prevent others from developing similar
technologies, the Company believes that such protection is less
significant to the future success of its business than other factors,
including the knowledge, ability and experience of the Company's personnel
in delivering service and support to its customers, the development of
unique information assets, the strength of its ongoing product development
activities, customer loyalty to the Company's products and the market
position of the Company's products and services.
The Company believes that its products, trademarks, service marks and
other proprietary rights do not infringe on the intellectual property rights
of others. However, there can be no assurances that third
parties will not assert infringement claims against the Company in the
future, or that such assertions will not lead to litigation and the
requirement that the Company pay a license fee or royalties to obtain
intellectual property rights needed to sell its products and services.
Such royalties or licensing agreements, if required, may be unavailable
or be available on terms unacceptable to the Company. The failure to
receive needed licensing or royalty agreements could result in delays or
interruptions in the Company's services and could have a material adverse
impact on the Company's business, operating results and financial condition.
The Company relies on certain software and geographic data that it
licenses from third parties, including software and data that is integrated
with internally developed software and used in the
Company's FindNow system. There can be no assurance that these third
party software licenses will continue to be available to the Company or will
be available on terms acceptable to the Company. In addition, the Company
is somewhat dependent upon the ability of the vendors of such third party
software and data to enhance their current products on a timely and
cost effective basis in order to meet changing customer needs. If the Company
were not able to acquire software and geographic data licenses
from its current vendors, equivalent software and geographic data
would need to be developed or purchased and integrated into the Company's
systems. Although other alternative sources exist for the technology and data
embodied in these license agreements, the Company
may not be able replace the functionality of its current systems
or may not be able to successfully integrate new software and data
into its current system. Delays and interruptions could occur in the
FindNow service which would result in a material adverse impact on the
Company's business, operating results and financial condition.
Employees
As of February 13, 1997, the Company had a total of 22 full time
employees including 5 in sales and marketing, 12 in software implementation,
development, system operations, and customer support, and 5
in finance, management and administration. Outside contractors are
used by the Company on an as-needed basis.
InfoNow considers its relations with its employees to be good and has
not experienced any interruption of operations as a result of labor
disagreements. None of the Company's employees is subject to a collective
bargaining agreement.
The Company believes that its ability to continue to attract and
retain qualified personnel will be a key factor in the success of the
Company. Competition for technical personnel with the skills required by
the Company to deliver its products and services is intense. It may be
difficult for the Company to obtain personnel with the required technical
skills and could have a material adverse effect on the
operations of the Company if it is unable to obtain additional
qualified personnel needed for the planned growth of the Company's
business or to replace existing employees in the event
that the Company had to replace several key employees within a relatively
short period of time.
ITEM 2. PROPERTIES.
The Company leases approximately 7,800 square feet of office space at
its headquarters in Denver, Colorado for its product development, marketing,
operations and administration activities. This lease is
with an unrelated party and terminates on June 30, 1999. The Company believes
that its facilities are adequate for its current needs and that suitable
additional space can be acquired if needed.
The Company's principal server equipment and operations are housed
and maintained by Rocky Mountain Internet at its operations center in Denver,
Colorado. The Company has also recently completed the installation of a
redundant operations site at Qwest Communications also located in
Denver, Colorado. The Company's operations are dependent in part upon
its ability to protect its operating systems against physical damage from
fire, floods, power loss, telecommunications failures
and similar events. Although these facilities have safeguard
protections such as a halon fire system, redundant telecommunications
access, off-site storage of backups and 24 hour systems maintenance
support, the Company still may experience outages due to multiple
failures of systems or area-wide natural disasters as both sites are
located in Denver. In addition, despite the implementation of network
security measures by the Company, its servers may still be vulnerable
to computer viruses, and similar disruptions from unauthorized tampering
with the Company's computer systems. The occurrence of any of these events
could result in interruptions or delays in service to the Company's
customers which could have a material adverse effect on the Company's
business, results of operations and financial condition.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company
is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the three
month period ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS.
The following table sets forth the high and low bid price of the
Company's Common Stock, reported for the fiscal periods indicated on
the OTC Electronic Bulletin Board system, the principal market upon
which such securities were traded under the symbol INOW. The Company's
shares are also listed on the Vancouver Stock Exchange and are traded
in US dollars under the symbol INOU.V. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions.
As of February 13, 1998, there were approximately 180 holders of record
of the Common Stock.
High Low
Year Ending December 31, 1996
First Quarter $ 3.75 $ 2.00
Second Quarter 3.00 1.38
Third Quarter 1.88 0.75
Fourth Quarter 2.13 1.25
Year Ending December 31, 1997
First Quarter $ 2.93 $ 1.50
Second Quarter 2.41 0.87
Third Quarter 0.69 0.19
Fourth Quarter 0.81 0.22
The Company has never declared or paid any cash dividends on the
Common Stock and does not currently anticipate paying any such dividends
in the foreseeable future. The Board of Directors of the
Company intends to review this policy from time to time after taking
into account various factors such as the Company's financial condition,
results of operations, current and anticipated cash needs and plans for
expansion.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Overview
The Company develops, markets, and provides a suite of technology-
based teleservices, called FindNow Referral Management Services, that
are designed to help leading companies manage consumer
and commercial referrals more efficiently and effectively.
This report includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including those discussed
below that could cause actual results to differ materially from historical
results or those anticipated. In this report, the words "anticipate,"
"believes," "expects," "future," "intends," and similar expressions
identify forward-looking statements.
The Company's sells its FindNow services under multi-year contracts.
The client pays a setup fee for the initial installation of the service,
and a monthly service fee for maintenance of the service
thereafter. The Company currently has 32 contracts in its sales
backlog, resulting in $1.459 Million in sales backlog, which is an increase
of 107% since January 1, 1997.
Although the Company has experienced a significant increase in its
backlog from sales of its FindNow service, the Company has also experienced
significantly greater operating expenses during the same period. These
increases in operating expenses are directly related to the expansion of
technical and sales capabilities through the addition of personnel during
the first half of 1997 and the establishment of the data center
infrastructure necessary to deliver its FindNow service for a
significant number of additional customers. These increases have not yet been
offset by additional revenues from new contracts. The Company believes that
most of its infrastructure costs, such as servers, technical personnel,
telecommunications and certain of its data costs are largely fixed and
are not expected to vary significantly with an increase in client contracts
in the near future. In addition, the management of the
Company believes that the majority of the infrastructure is in place
to support a sufficient number of clients for the Company to achieve
profitability. The Company's success in achieving profitability is
primarily dependent on market acceptance and future sales of its
FindNow service to additional customers to offset operating costs. Although
significant selling efforts are underway to add new customer contracts, the
limited operating history of the Company makes it difficult or impossible to
predict the timing of these future sales.
Results of Operations
The results for the year ended December 31, 1996 include the sales and
related costs of its FindNow operations and the results of its subsidiaries,
Navigist and Cimarron. The Company sold the assets and
operations of Cimarron on December 11, 1997 and it has been classified
as discontinued operations for the years ended December 31, 1997 and 1996.
In addition, the Company sold its Navigist operations on
December 13, 1996. The statement of operations for the year ended
December 31, 1997 does not include the operations of Navigist and is not
comparable with the operating results for the year ended December
31, 1996. The following pro forma statement of operations was prepared
showing the effect of excluding the results of Navigist operations for the
year ended December 31, 1996 and will be used in the analysis
of the operations discussion that follows.
(dollars in thousands)
Year Ended December 31,
1997 1996
(Pro forma)
Revenues $1,053 $ 345
Cost of Sales 1,501 238
Administrative and Selling 1,540 1,265
Impairment of Asset (363) -
Other (income) expense (16) 23
Net Loss from continuing
operations (1,609) (1,181)
Discontinued Operations (752) 95
Net Loss $(2,361) $(1,086)
Comparison of Year Ended December 31, 1997 with Pro forma Year Ended
December 31, 1996
Net Revenues. The Company's revenues from continuing operations
consist primarily of setup and monthly fees from ongoing contracts for
its FindNow service. Total sales from the Company's FindNow
service increased by $708,000, or 205% for the year ended December 31,
1997, compared to the pro forma period in the prior year. The increased
revenues were generated by additional contracts sold and implemented during
the year. The Company recognized substantially no revenues from ongoing
FindNow services prior to July 1996. During 1997 the number of FindNow
contracts increased from two (2) active contracts at the beginning of 1997
to 21 active contracts as of December 31, 1997.
Cost of Sales. The cost of sales, as a percent of revenues, increased
from 69% for the year ended December 31, 1996 to 142% for the year ended
December 31, 1997. The total cost of sales also rose by
531% or $1,263,000. This increase is a result of increased costs in
creating an infrastructure for delivering its FindNow service. These costs
include technical personnel payroll, contract labor, data
acquisition costs, depreciation and amortization for server equipment
and capitalized software development, telecommunications and other costs
related to operating the Company's data center.
Selling, General and Administrative. Selling, general and administrative
expenses, as a percent of revenues, decreased from 367% of sales for the
year ended December 31, 1996 to 146% of sales for the
year ended December 31, 1997. The total amount of selling, general
and administrative expenses increased by 21% or $275,000. This overall
increase is primarily the result of the addition of sales
personnel and other marketing and promotion costs in 1997. A portion
of the increase can also be attributed to approximately $60,000 in expensed
costs related to a proposed financing undertaken by the Company in the
second quarter of 1997 which was not completed. General and
administrative expenses are expected to decline as a percentage of revenues
while selling and marketing expenses are expected to increase proportionately
with revenues.
Non-operating Income (expense). Net non-operating income was $16,000
for the year ended December 31, 1997 compared to a net non-operating expense
of $23,000 for the year ended December 31, 1996. The increase in interest
income is primarily due to interest income on cash and cash equivalents.
Net Loss from continuing operations. The reported net loss of the
Company for the year ended December 31, 1997 increased by approximately
$428,000, or 36%, as compared to the pro forma results in the prior year.
The results for the year ended December 31, 1997 include a non-cash gain of
$363,060 related to the retirement of common shares originally issued in
conjunction with the acquisition of Navigist. Without this non-cash charge,
the net loss of the Company increased by 67% or $791,000
compared to the pro forma loss in the prior year. This increase is due
primarily to additional cost of sales, and increases in selling and marketing
expenses which increased faster than revenues during 1997.
Discontinued Operations. The results of operations of Cimarron have
been classified as discontinued operations after its sale on
December 11, 1997. The Company reported income from discontinued operations of
$95,000 for the year ended December 31, 1996 compared to a loss of
$752,000 for the year ended December 31, 1997. The figure for 1997
includes a charge for impairment of the goodwill related to the acquisition
of Cimarron in 1995 and the gain recognized on the sale of Cimarron assets
in December 1997. Without this charge, the Company would have reported income
from discontinued operations of $86,000, or a decrease of 9% from the prior
year which reflects declining revenues from the operations of Cimarron for
the year ended December 31, 1997 as compared to the year ending
December 31, 1996. The declining revenues are a result of a shift away from
35mm slide productions and towards electronic presentations on programs
such as Powerpoint which generally are produced in-house rather than
outsourced.
Liquidity and Capital Resources; Possible Need for Additional Financing
The Company had cash and equivalents of $325,000 at December 31, 1997,
compared to $2,050,000 at December 31, 1996. Of this $1,725,000 decrease
in cash, $1,205,000 was utilized in the operations of the Company,
$314,000 was utilized in purchase of data and computer equipment,
$100,000 was used to retire debt to a related party and $171,000 was used
to service third party debt and pay financing acquisition costs.
The Company has made significant progress in commercializing its
FindNow service during 1997. The Company has 32 clients in backlog as of
February 28, 1998 compared to two (2) implemented contracts as of
December 31, 1996. As a result of the implementation of these
additional contracts, the Company significantly reduced the amount of cash
utilized throughout 1997. Cash utilized during the year was $769,000, $652,000,
$205,000 and $99,000 in the first, second, third and fourth quarters,
respectively. The Company expects continued operating losses during
the first two quarters of 1998, but anticipates that revenues from additional
sales of its FindNow service will continue to reduce the amount of cash
utilized in its operations.
The Company currently projects that available cash balances, together
with projected cash flow from operations, will be sufficient to fund the
Company's operations into 1998. These projections assume that the Company can
continue to reduce cash used in its operations through additional revenues
from new FindNow contracts and that overall operating costs of the
Company will not change significantly as new client contracts are added.
However, the timing or amount of new sales can not be accurately determined
due to the limited operating history of the Company. Accordingly, an
explanatory paragraph in the auditors report describing uncertainties
concerning the Company's ability to continue as a going concern was included
in the Company's audited financial statements dated December 31, 1997.
The Company has recently completed enhancements to its FindNow
technology that it believes will broaden market acceptance of its offerings
and enhance its ability to sell its FindNow technology to customer service
and call center markets. The Company is currently in negotiations with several
potential customers for this new expanded FindNow service. In addition, to
these sales efforts, the Company is currently evaluating several other
options to raise additional capital and is considering changes in its
operations in the event that new sales do not materialize as anticipated or
additional capital cannot be obtained externally. Options being considered
include a small private placement, proceeds from the exercise of expiring
"in-the-money" warrants, the sale-leaseback of certain owned equipment
and reduction of operating costs of the Company.
The Company believes that its success in obtaining new contracts for
its FindNow service will determine its need to raise additional capital from
external sources. As the Company is not able to accurately predict the timing
of new sales, it has not yet determined what action or combination of actions
the Company may take to assure continuation of operations. However, in the
event that the market acceptance of the Company's products and services is
not as robust as anticipated, competition is greater than anticipated,
development of new products or enhancement of existing products is costlier
or slower than expected, or the Company's projections otherwise prove to
be inaccurate, the failure to obtain needed financing would have a material
adverse effect on the Company's business.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of certain computer programs being
written using two digits rather than four to indicate the applicable year.
As a result, computer programs with date-sensitive software
may incorrectly recognize a date using "00" as the year 1900 rather
than the year 2000. Such an error could result in a system failure or
miscalculations resulting in disruptions of operations, including a
temporary inability to process normal business transactions.
The Company has recently examined its production and internal
administrative systems for year 2000 issues. As a result of that review,
the Company has determined that no significant modifications
will be required to make their systems year 2000 compliant and does
not expect that any modifications required will have a material impact on
its business, operations or financial condition.
FORWARD LOOKING STATEMENTS AND RELATED BUSINESS RISKS AND
ASSUMPTIONS
The Company's actual results may vary materially from the forward
looking statements made above. The Company intends that such statements be
subject to the safe harbor provision of the Securities Act of 1933 and the
Securities Exchange Act of 1934. The Company's forward-looking statements
include the plans and objectives of management for future operations and
relate to: (i) the ability of the Company to generate future sales of the
Company's FindNow service, (ii) market acceptance of the FindNow service,
(iii) success of the Company in forecasting and meeting the demands
of the customers of the FindNow service, including maintaining
technical performance of the system as new FindNow customers are added,
(iv) ability to obtain financing to purchase equipment needed to
provide service to additional FindNow customers, (v) ability to
maintain pricing and thereby maintain adequate profit margins on its
products and services, (vi) ability to retain qualified technical personnel
(vii) ability to control development costs of FindNow service within
current budgeted levels, (viii) and the ability of the Company to raise
additional capital if needed to fund current operations.
The foregoing assumptions are based on judgments with respect to,
among other things, future economic, competitive and market conditions,
and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the
Company's ability to control. There are also other risks which could cause
the Company's revenues or costs to vary markedly from the forward-looking
statements made above, such as the risk that the market demand for the
FindNow may not develop as expected or if it does develop, that the Company
will not be able to generate sufficient sales to fund its operations.
Accordingly, although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove
to be inaccurate and therefore there can be no assurance that the results
contemplated in forward-looking statements will be realized. Any statements
should not be regarded as presentation by the Company or any other person
that the Company's objectives or plans will be achieved.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F- 20 of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On January 27, 1997, the Company engaged the accounting firm of Hein +
Associates LLP ("Hein") as its principal independent accountants to audit
the Company's financial statements for its fiscal year ending
December 31, 1996. The appointment of new independent accountants
was approved by the Audit Committee and Board of Directors of the Company.
The Company dismissed its former independent public accountants, Arthur
Andersen LLP, effective with the appointment of Hein.
Prior to the appointment of Hein, management of the Company has not
consulted with Hein except that, at the Company's request, Hein read the
Company's reports filed on Form 10-Q for the quarterly periods ending
June 30, 1996 and September 30, 1996.
During the two fiscal years ended December 31, 1995 and 1994, and the
interim period subsequent to December 31, 1995, there were no disagreements
with the former accountants on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure
which would have caused the former accountants to make reference in their
report to such disagreements if not resolved to their satisfaction.
Arthur Andersen's reports on the financial statements for the years
ended December 31, 1995 and 1994 contained no adverse opinion or disclaimer
of opinion and were not modified as to audit scope or accounting principles
except for an explanatory paragraph regarding the Registrant's ability to
continue as a going concern. Arthur Andersen LLP furnished the Company with a
letter addressed to the Commission stating that it agreed with the above
statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference from the portion of the proxy statement
entitled "Proposal 1-Election of Directors".
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference from the portion of the proxy statement
entitled "Executive Compensation".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the portion of the proxy statement
entitled "Security Ownership of Certain Beneficial Owners and Management".
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the portion of the proxy statement
entitled "Certain Transactions"
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Included as exhibits are the items listed on the Exhibit Index.
The Registrant will furnish a copy of any of the exhibits listed
below upon payment of $5.00 per exhibit to cover the costs to the
Registrant of furnishing such exhibit.
(b) Reports on Form 8-K filed during the quarter ending December
31, 1997.
Form 8-K dated December 11, 1997, relating to the sale of assets
from Cimarron International, Inc., to Cimarron Dog and Pony
Company, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 6, 1998
INFONOW CORPORATION
By: /s/ Michael W. Johnson, President
Michael W. Johnson, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
Title
Date
/s/_Michael W. Johnson
Michael W. Johnson
Chief Executive Officer,
President and Director
(Principal Executive Officer)
March 6, 1998
/s/ Kevin D. Andrew
Kevin D. Andrew
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
March 6, 1998
/s/ Nahum Rand
Nahum Rand
Chairman and Director
March 6, 1998
/s/ Donald E. Cohen
Donald E. Cohen
Vice Chairman and Director
March 6, 1998
/s/ Duane H. Wentworth
Duane H. Wentworth
Director
March 6, 1998
/s/ Michael D. Basch
Michael D. Basch
Director
March 6, 1998
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of the Company, as Amended. (A)
3.3 Bylaws of the Company, as Amended. (B)
4.1 Form of Common Stock Certificate for the Registrant's Common Stock,
$.001 par value per share. (B)
4.4 Form of Class C Warrant. (C)
10.3 Conversion Agreement by and between the Registrant and Gilman
Securities Corporation dated as of August 19, 1993. (D)
10.14 InfoNow Corporation 1990 Stock Option Plan, as amended. (A)
10.27 Opus Agreements to Provide Financial Advisory Services dated May 23,
1995, July 17, 1995, August 2, 1995 and October 10, 1995. (E)
10.29 Employment Agreement between the Company and W. Brad Browning dated
January 9, 1996. (E)
10.30 Employment Agreement between the Company and Kevin D. Andrew dated
March 1, 1996. (E)
10.32 Agreement between the Company and Environmental Systems Research
Institute, Inc. ("ESRI") dated March 6, 1996. (E)
10.33 Stock Purchase and Sale Agreement by and among VDC Paradigms,
Inc., Craig Michaelis, David Wertzberger and InfoNow Corporation dated
December 13, 1996. (A)
10.35 Asset Sale Agreement for sale of assets to Cimarron Dog and Pony
Company, Inc., dated December 11, 1997.
10.36 Employment Agreement between the Company and Michael W. Johnson
dated January 1, 1998.
10.37 Agreement for incentive payment in the event of sale of the Company
between the Company and Michael W. Johnson dated October 23, 1997.
16.1 Letter from Arthur Andersen LLP dated January 27, 1997.(F)
23.1 Consent of Hein + Associates LLP
27.1 Financial Data Schedule
_______________________
(A) Incorporated by reference from the Company's Annual Report or Form 10-K
for the year ended Decemeber 31, 1996.
(B) Incorporated by reference from Registration Statement No. 33-43035 on
Form S-1 dated February 14, 1992.
(C) Incorporated by reference from Post-Effective Amendment No. 2 to
Registration Statement No. 33-43035 on Form S-1 dated July 13, 1993.
(D) Incorporated by reference from Post-Effective Amendment No. 3 to
Registration Statement No. 33-43035 on Form S-1 dated September 30,
1996.
(E) Incorporated by reference from the Company's Annual Report on Form 10-K
for year ended December 31, 1995.
(F) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 27, 1997.
INFONOW CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets -- December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders Equity for the years ended
December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
INDEPENDENT AUDITOR'S REPORT
Board of Directors
InfoNow Corporation and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of
INFONOW CORPORATION and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
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
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall 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 InfoNow Corporation and subsidiaries, as of December 31, 1997 and
1996, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. As discussed in Note 11 to the
financial statements, the Company has experienced recurring losses
from operations which raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 11. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 13, 1998
F-2
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US Dollars in Thousands, except per share information)
December 31,
ASSETS 1997 1996
---- ----
Current Assets:
Cash and equivalents $ 325 $ 2,050
Accounts receivable 177 161
Prepaids and other current assets 20 99
-------- -------
Total current assets 522 2,310
Property and equipment, net 647 693
Capitalized software development costs, net
of accumulated amortization of $384
and $141 in 1997 and 1996 repectively 146 363
Goodwill, net of accumulated amortization
of $108 in 1996 - 913
Other assets and deferred charges 9 11
------- ------
Total Assets $ 1,324 $ 4,290
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion $ 209 $ 210
Convertible notes payable to related party - 100
Accounts payable and accrued expenses 402 412
Unearned revenue and prepaid service fees 263 228
Deferred compensation 5 76
------- -------
Total current liabilities 879 1,026
NOTES PAYABLE, net of current portion 47 92
COMMITMENTS AND CONTINGENCIES
(Notes 10 and 11)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,962,335
shares authorized, none issued or outstanding - -
Common stock, $.001 par value; 15,000,000
shares authorized, 5,364,179 and 5,515,164
issued and outstanding at December 31, 1997
and 1996 respectively 5 6
Additional paid-in capital 21,904 22,316
Accumulated deficit (21,511) (19,150)
-------- --------
Total stockholders' equity 398 3,172
Total Liabilities and Stockholders' -------- --------
Equity $ 1,324 $ 4,290
======= ========
The accompanying notes are an integral part of these financial statements
F-3
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US Dollars in Thousands, except per share information)
For the Years Ended December 31,
1997 1996
---- ----
SALES $ 1,053 $ 1,124
OPERATING EXPENSES:
Cost of sales and direct project related costs 1,501 732
Selling and marketing 575 231
General and administrative 965 1,772
Impairment of long-lived assets (363) 1,540
------- -------
Total operating expenses 2,678 4,275
------- -------
Loss from operations (1,625) (3,151)
OTHER INCOME (EXPENSE):
Gain (Loss) on disposition of assets 2 (15)
Interest income 40 13
Interest expense (26) (34)
------ -----
16 (36)
Loss from continuing operations (1,609) (3,187)
Discontinued operations
Income from operations of Cimarron Int'l 86 95
Loss on disposal of Cimarron (838) -
------- -------
Net loss $(2,361) $(3,092)
======== ========
Basic and Diluted EPS per common share:
Continuing operations $ (0.30) $ (0.89)
Discontinued operations (0.14) 0.03
-------- -------
Net loss $ (0.44) $ (0.86)
======== ========
The accompanying notes are an integral part of these financial statements
F-4
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1997 and 1996
(US Dollars in Thousands, except per share information)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
--------- -------- -------- -----------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1996 3,183,567 $ 3 $ 19,478 $ (16,058)
Issuance of common stock
in conjunction with the
exercise of employee stock
options 15,708 - 20 -
Issuance of common stock
in conjunction with the
exercise of warrants 469,554 - 188 -
Return of common stock
to treasury from escrow,
subsequently retired (92,000) - - -
Non-cash charge related
to the issuance of
warrants to purchase
115,000 shares of common
stock to ESRI - - 253 -
Common stock issued to
three officers of the
Company valued at $1.12
per share in exchange
for $95,000 cash, and
$93,000 in deferred
salaries and expenses 167,112 - 188 -
Common stock valued at
$1.40 per share for cash
in December 1996 private
placement net of cash
offering costs of
$57,868. Includes 50,000
shares issued to
placement agent as
compensation for
services rendered in
placement 2,045,273 2 2,712 -
Shares retired in
conjunction with sale of
Navigist, Inc. (274,050) - (523) -
Net loss - - - (3,092)
BALANCES, December 31,
1996 5,515,164 $ 5 $ 22,316 $(19,150)
Issuance of common
stock in conjunction
with the exercise of
employee stock options 2,819 - 4 -
Retirement of common
stock (153,804) - (364) -
Offering costs and
expenses for
December 6, 1996 private
placement - - (55) -
Non-cash charge
related to the issuance
of options to purchase
common stock issued to a
consultant to company - - 3 -
Net loss - - - (2,361)
BALANCES, December 31,
1997 5,364,179 $ 5 $ 21,904 $(21,511)
========= ==== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US Dollars in Thousands)
For the Years Ended December 31,
1997 1996
---- ----
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (2,361) $ (3,092)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 619 508
Loss on disposal of
business segment 838 -
Impairment of long-lived
asset (363) 1,540
Loss on disposal of
property and equipment (1) 15
Compensation expense
recognized in connection
with stock option and
warrant issuances 3 -
Other - (8)
Changes in operating assets
and liabilities:
Accounts receivable (74) 204
Other current assets 137 (64)
Other assets and deferred charges 2 (8)
Accounts payable and
other liabilities (57) 365
Unearned revenues 52 175
Net cash used in ------ -------
operating activities (1,205) (365)
INVESTING ACTIVITIES:
Purchase of property and equipment (134) (693)
Disposition of subsidiaries 85 (97)
Acquisition of geographic data (180) -
Additions to capitalized software (26) (250)
Proceeds from sale of property
and equipment 6 2
----- -----
Net cash flows used in
investing activities (249) (1,038)
FINANCING ACTIVITIES:
Net proceeds from issuance of
common stock (55) 2,809
Proceeds from exercise of
options and warrants 4 209
Proceeds from notes payable - 417
Proceeds (payment) of related
party note (100) 100
Principal payments on
debt obligations (120) (314)
Net cash provided by ------- -------
(used in) financing activities (271) 3,221
Net increase (decrease)
in cash and equivalents (1,725) 1,818
-------- -------
CASH AND EQUIVALENTS,
beginning of period 2,050 232
-------- -------
CASH AND EQUIVALENTS, end of period $ 325 $ 2,050
The accompanying notes are an integral part of these financial statements
F-6
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and Business Activity
The Company was incorporated under the laws of the State of Delaware on
October 29, 1990, and was initially focused on the sale of software through
the use of encrypted CD-ROM technology. In 1995, the Company fundamentally
changed its business and began developing its FindNow system to provide
referral management services to large corporate clients which can be deployed
through their Internet sites and call centers via the Internet or private
frame relay connection. The Company ceased selling software using encrypted
CD-ROM technology in September 1995.
As part of its strategy, the Company acquired Cimarron
International, Inc. ("Cimarron") and Navigist ("Navigist") in 1995 in
order to utilize resources and capabilities of these companies to
complete the Company's change in strategic direction as well as to
provide an operating infrastructure and revenues as the Company
completed its transition. The Company sold Navigist on December 13,
1996, and completed the sale of Cimarron on December 11, 1997. A full
discussion of the sale of these two subsidiaries is contained in "Note
2. Discontinued Operations" of these financial statements.
b. Basis of Presentation
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
c. Revenue Recognition
The Company derives revenue by providing implementation and hosting
services for its FindNow service. Prior to its divestiture of Cimarron
and Navigist, the Company also generated revenues from several other
sources including the production of Multimedia and 35mm slide
presentations, and the provision of network engineering and consulting
services.
The Company recognizes revenue using the percentage-of-completion
method on its FindNow implementations. Revenues are recognized based
on labor costs incurred and total expected labor costs as well as
engineering estimates of percent complete. Revenue is recognized upon
completion, delivery and acceptance by the customer for design and
imaging services as such services are of short duration from order to
completion. For certain projects, the Company invoices for work yet to
be performed. These prebillings, together with cash received prior to
performing services, are reflected as unearned revenue and prepaid
service fees in the accompanying balance sheets.
d. Property and Equipment
Property and equipment are stated at cost. Replacements, renewals
and improvements are capitalized and costs for repairs and maintenance
are expensed as incurred. Depreciation is computed using the
straight-line method over estimated useful lives of three to five
years.
e. Consolidation
As of December 31, 1997, the financial statements include all
accounts of InfoNow Corporation. The operating results of Cimarron
are included through December 11, 1997 and the operating results of
its former subsidiary, Navigist, were included through December 13,
1996. All significant intercompany accounts and transactions have been
eliminated in consolidation.
f. Software Development Costs
In accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased
or Otherwise Marketed" ("SFAS 86"), software development costs, which
consist primarily of salaries and related costs, purchased software,
contract labor costs and other direct expenses, are expensed as
research and development costs prior to the establishment of
technological feasibility. Technological feasibility for the Company's
software products is generally based upon achievement of a detailed
program design free of high risk development issues. After
technological feasibility is established for a product, all software
development costs are capitalized until the product is ready for
delivery. Subsequent software maintenance costs are expensed as
operating costs as incurred. Amortization of capitalized computer
software cost is provided on a product-by-product basis at the greater
of the amount computed using the ratio of current gross revenues for a
product to the total of current and anticipated future gross revenues
or the straight line method over the remaining useful economic life of
the product (generally for two years). Approximately $529,981 in
software development costs have been capitalized in conjunction with
the development of the Company's FindNow system at December 31, 1997,
including a $253,382 non-cash provision related to the fair value of
options issued to ESRI (Note 8). The Company amortized $243,583 and
$140,871 of these capitalized costs for the years ended December 31,
1997 and 1996, respectively.
g. Research and Development Costs
The Company's current research and development efforts are
influenced significantly by customer requirements. New features are
customized initially for delivery to a single customer and then
incorporated into future versions of its service. As a result, all
development costs were recorded as cost of sales and the Company did
not record any research and development expense in 1997 or 1996.
h. Goodwill
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 121")
for its fiscal year ended December 31, 1995, for the purpose of
evaluating its long lived assets which consist principally of
goodwill. The Company evaluates its goodwill at each financial
reporting date to determine if events or circumstances indicate that
an impairment has occurred. In accordance with SFAS 121, management
has estimated expected future undiscounted cash flows from identified
assets and compared those values to the related carrying value of
those assets to determine if an asset impairment has occurred. During
1996, as a result of its review of long-lived assets as required by
SFAS 121, the Company took a non-cash charge against operating
results in the amount of $1,539,806 as a write down of all goodwill
related to its acquisition of Navigist, Inc. The Company sold this
subsidiary on December 13, 1996.
During 1997, the Company sold Cimarron resulting in a write-off of
all goodwill related to its acquisition in the amount of $861,921. The
Company no longer carries any goodwill or records any related to
amortization as a result of this transaction.
i. Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly liquid investments with original maturity dates of three
months or less to be cash equivalents.
j. Net Loss Per Common Share
The loss per share is presented in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per
Share (FAS 128). FAS 128 replaced the presentation of primary and
fully diluted earnings (loss) per share (EPS) with a presentation of
basic EPS and diluted EPS. Basic EPS is calculated by dividing the
income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. 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. Basic and Diluted EPS were the same for 1997 and 1996
because the Company had losses from operations and therefore, the
effect of all potential common stocks was anti-dilutive.
Options to purchase 1,478,579 shares of common stock, and warrants
to purchase, 2,033,888 shares of common stock were outstanding at
December 31, 1997. See Note 8, Stockholders' Equity, for a detailed
discussion of the options and warrants issued by the Company.
k. Stock Compensation Expense.
The Company records its stock compensation expense in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires all
companies to adopt a fair value based method to measure compensation
cost of issued stock options and similar instruments issued to
employees using a Black-Scholes model or other comparable method. The
Company has elected an option under SFAS 123 that allows a Company to
continue to recognize compensation cost for employees in accordance
with the guidance in APB No. 25 and disclose the proforma results of
operations as if SFAS 123 been applied to the financial statements.
Transactions in which the Company issues stock options or other equity
instruments to acquire goods or services from nonemployees are
accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more
reliably measurable.
l. Impact of recently issued accounting standards.
Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards
131 "Disclosures About Segments of an Enterprise and Related
Information" were recently issued. Statement 130 establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, Statement 130
requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that displays with the same
prominence as other financial statements. Statement 131 supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting
for Segments of a Business Enterprise," Statement 131 establishes
standards on the way that public companies report financial
information about operating segments in annual financial statements
and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. Statement 131 defines operating
segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
Statements 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, the standards may have on the future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these
standards.
m. Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year classifications. Such
reclassifications had no effect on net loss.
Note 2. DISCONTINUED OPERATIONS
a. Cimarron International, Inc.
On December 11, 1997, the Company sold the operations of its
wholly-owned subsidiary, Cimarron International, Inc. ("Cimarron"), to
Cimarron Dog and Pony, Inc. ("Dog and Pony") through an asset sale for
total proceeds of $85,000 in cash. After execution of this
transaction, the Company ceased all operations of Cimarron and
liquidated the subsidiary on December 19, 1997.
As part of the sale transaction, the Company executed an agreement
which provides that Dog and Pony shall pay 25% of all quarterly gross
profits in excess of $116,500 to the Company until the earlier of: (i)
March 31, 2001, or (ii) until payments total $100,000. Dog and Pony is
owned by a director of the Company and the former owner of Cimarron
prior to its acquisition by the Company in 1995.
The results of Cimarron's operations have been classified as
discontinued operations in the accompanying financial statements. The
recorded loss on the sale includes a non-cash charge to impairment of
goodwill of $861,921. Cimarron recorded sales of approximately
$852,000 during its 1997 fiscal year prior to its sale on December 11,
1997 and $1,082,000 in 1996.
b. Navigist, Inc.
On December 13, 1996, the Company sold all the common shares of
Navigist to VDC Paradigms, Inc., which is owned by two of the
principal operating managers of Navigist. The Company received 274,050
shares of InfoNow common stock and the surrender of notes held by the
buyers amounting to $27,940 in consideration for the sale of Navigist.
As part of the transaction, the Company also made a cash payment of
$97,000 to the buyers, canceled all intercompany balances owed by
Navigist to InfoNow and Cimarron International, Inc., amounting to
approximately $490,400 and forgave a note owed by Navigist to InfoNow
in the amount of $142,500. In addition, the Company also retired the
remaining notes payable, amounting to $22,060 issued in the original
acquisition of Navigist by the Company in August 1995 in order to
facilitate the completion of the transaction.
c. Unaudited Pro Forma Financial Information
The following pro forma information for the years ended December
31, 1997 and 1996 assumes that the disposition of Navigist and
Cimarron took place on January 1, 1996. As the results presented are
prepared on a pro forma basis, they do not necessarily represent what
the Company's results would actually have been if such transactions
had in fact occurred on that date. The consolidated financial
statements of the Company for the year ended December 31, 1996,
include a provision of $1,539,806 for the impairment of goodwill
relating to the acquisition of Navigist.
1997 1996
(In thousands, except per share amounts)
Revenues $1,053 $345
Net loss (1,547) (1,181)
Net loss per share $(0.29) $(0.34)
Note 3. INCOME TAXES
The Company accounts for its tax liabilities in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future income tax
consequences of transactions. Under this method, deferred tax assets
and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Net deferred tax assets are then reduced by a
valuation allowance for amounts which do not satisfy the realization
criteria of SFAS 109.
At December 31, 1994, the Company had a net operating loss
carryforward for income tax purposes of approximately $14,350,000.
Because the Company experienced a significant change in control and
substantially changed its business on May 22, 1995 as described in
Note 1, the Company believes that, under current tax regulations, the
utilization of tax loss carryforwards will be limited to loss
carryforwards generated after May 23, 1995, which amount to
approximately $5,935,000 as of December 31, 1997.
The significant components of the net deferred tax asset consist of
the following:
December 31,
1997 1996
(In thousands)
Capitalized software $ (54) $ (40)
Net operating loss carryforwards 2,200 706
Deferred compensation 2 28
_______ _______
Deferred tax asset, net 2,148 694
------- -------
Less - valuation allowance (2,148) (694)
$ -- $ --
======= =======
The benefits of the Company's net operating loss carryforwards and
other temporary differences as of December 31, 1997 and 1996, do not
satisfy the realization criteria set forth in SFAS No. 109 and
accordingly, the Company has recorded a valuation allowance for the
entire net deferred tax asset. The valuation allowance increased by
$1,453,000 due to the current year loss.
Note 4. PROPERTY AND EQUIPMENT
Property and Equipment consist of the following:
December 31,
1997 1996
(In thousands)
Computer equipment $ 773 $ 763
Furniture and fixtures 90 110
Computer software and geographic
data licenses 334 167
------- -------
1,197 1,040
Less accumulated depreciation
and amortization (550) (347)
------- -------
Property and equipment, net $ 647 $ 693
======== =======
In connection with the sale of Cimarron International (Note 2), the
Company sold and wrote-off certain property which resulted in the
reduction of approximately $119,919 of property cost and $76,946 of
accumulated depreciation in 1997.
Note 5. LONG TERM DEBT
a. Summary of Long Term Debt
December 31,
1997 1996
(In Thousands)
Term loan payable to a bank, collateralized by all
property and equipment, bearing interest at prime
plus 1.25% (total of 9.75% at 12/31/97) due in
monthly installments of $3,817 to December 1999. $ 81 $ 117
Capital lease obligation bearing interest rate at 15%,
due in monthly installments of $497 to November 1999,
collateralized by equipment under the lease. 10 14
Non-interest bearing short term obligation payable
to ESRI in connection with development of FindNow
system, without collateral. This obligation is currently
in dispute andthe payment date, if any, has not been
determined. See Note 6. 150 150
Promissory note payable to officer of Company,
collateralized by all accounts receivable, bearing interest
at prime plus 2.75% (total of 11.25% at 12/31/96), interest
only payments due monthly, principal paid in full during
1997. Convertible into 33,333
shares of common stock. - 100
Notes payable to suppliers, at varying interest
rates and maturities ranging from January 1997
to June 2000 15 21
----- -----
256 402
Less current portion (209) (310)
------ ------
Long-term portion $ 47 $ 92
====== ======
b. Maturities of Long Term Debt
Future minimum lease payments under capital leases and annual maturities
of other long-term debt at December 31, 1997 are as follows:
Year ending December 31,
1998 $ 209
1999 47
---------
$ 256
=========
The Company paid $26,000 and $34,000 for interest during the years
ended December 31, 1997 and 1996 respectively, including $6,000 and
$14,000 paid to related parties in the years ended December 31, 1997
and 1996, respectively.
Note 6. SUPPLEMENTAL CASH FLOW INFORMATION
The Company had the following significant non-cash transactions:
During 1997, the Company completed a non-cash transaction in which
the Company financed its Directors and Officers insurance premium with
a note from AFCO Credit Corporation ("AFCO") for approximately
$61,000. The Company also completed a non-cash transaction in which
the Company financed the purchase of certain computer equipment with a
note from Sun Microsystems Finance for approximately $13,000.
During 1996, the Company completed a non-cash transaction with
Environmental Research Institute, Inc. ("ESRI"), in which the Company
received computer equipment and software licenses from ESRI in
exchange for an obligation. The remaining obligation, amounting to
$150,000, as of December 31, 1996 and 1997, has been recorded in the
notes payable-current portion caption on the balance sheets. This
obligation is currently in dispute as the Company believes that
certain requirements of the original agreement have not yet been met.
The Company also recorded a non-cash charge of $253,000 related to a
warrant to purchase 115,000 common shares of the Company stock issued
to ESRI in accordance with the guidance of SFAS 123. This charge was
recorded as capitalized software and $53,000 and $126,000 of this
charge was amortized in 1996 and 1997 respectively. The Company also
issued 167,112 shares of common stock in exchange for cash and
cancellation of $143,000 in current liabilities (Note 8).
Note 7. RELATED PARTY TRANSACTIONS
On March 29, 1996, the Company executed a promissory note to the
Chief Financial Officer of the Company in the amount of $100,000
collateralized by all the receivables of the Company. The note was due
in March 1997 bearing interest at prime plus 2.75 percent. The note
was subsequently extended to June 30, 1997, and was then paid on June
30, 1997.
In a separate transaction, a vice-president of the Company advanced
$50,000 to the Company as a short term non-interest bearing loan. On
September 13, 1996, this loan was exchanged for 44,444 shares of
common stock valued at $1.12 per share.
Note 8. STOCKHOLDERS' EQUITY
a. Preferred Stock
Shares of preferred stock may be issued from time to time in one or
more series, with the rights and powers of each series set by the
Board of Directors. Of the 1,962,335 authorized shares, 213,483 have
been designated as Series A Convertible Preferred Stock.
The Series A Convertible Preferred Stock is convertible to common
at the rate of four shares of common for one share of preferred. The
Series A Convertible Preferred Stock has a liquidation value of $1.593
per share and the holders have voting rights on an as-converted basis.
No preferred stock was outstanding as of December 31, 1997 or 1996.
b. Significant Equity Transactions
On March 18, 1997, the Company retired 153,562 shares of the
Company's stock in exchange for modifications to the provisions of an
agreement with a former officer and director of the Company. The
returned shares were valued at $2.38, which represented the
approximate fair value of the stock at the transaction date. The gain
was recorded as a reduction of impairment of long-lived assets.
On December 6, 1996, the Company completed a private placement of
1,995,273 Units at $1.40 per Unit, each Unit consisting of one share
of Common Stock, par value $.001 per share (the "Shares"), and one
share purchase warrant (the "Warrants"). Two warrants entitle the
holder to acquire one additional share of Common Stock at $1.40 per
share (the "Warrants") during the eighteen (18) month term of the
Warrant.
Total gross proceeds from the sale of Units were $2,793,000. Total
cash commissions paid or to be paid in conjunction with the placement
amounted to $50,000. In addition, 50,000 shares of common stock were
issued to Haywood Securities for corporate financial services rendered
in conjunction with the private placement. The Company also issued
305,000 warrants to purchase common stock at $1.40 per share and
expense reimbursements amounting to $15,000 will be paid to two
parties which facilitated the sale of the Units in conjunction with
the placement.
On September 13, 1996, the Company completed a private placement of
common shares to three officers of the Company in which the Company
issued 167,112 shares of common stock valued at $1.12 and granted
warrants to purchase 83,556 shares at $1.50 per share, exercisable
until September 13, 1998. In consideration for these shares, the three
officers provided $45,000 in cash and reduced obligations owed to them
including a $50,000 short term advance and $93,000 in deferred
salaries and other expenses.
In conjunction with the Company's initial public offering, the
Company's common shareholders agreed to escrow a portion of their
holdings amounting to 92,000 shares. The escrowed shares would be
released to the stockholders in the event certain conditions were met
by February 7, 1996. None of the stated conditions were met at that
date and as a result, all escrowed shares were forfeited and returned
to authorized, but unissued common shares.
c. Stock and Warrant Compensation
The Company applies APB Opinion No. 25 and related interpretations
in accounting for options and warrants issued to employees.
Accordingly, no compensation cost has been recognized for issuances of
options and warrants to employees at exercise prices not less than the
market value of the Company's common stock on the grant dates. Had
compensation cost for the Company's plans been determined consistent
with FASB Statement No. 123, the Company's net loss and loss per share
would have been increased to the pro forma amounts indicated below:
1997 1996
(In thousands, except per share amounts)
Net Loss As Reported $(2,361) $(3,092)
Pro Forma (2,962) (3,474)
Primary Earnings
Per Share As Reported $ (0.44) $ (0.86)
Pro Forma $ (0.55) $ (0.97)
The fair value of each grant was determined using the Black-Scholes
option pricing model with the following assumptions used for grants
for 1997 and 1996: risk free interest rate of 6.50%; no expected
dividend yield; expected lives of 5 years or the contractual term of
the option or warrant, whichever is less and assumed volatility of
approximately 242% and 133% in 1997 and 1996, respectively. The
weighted average contractual term of the options was 10 years compared
to a weighted average expected term of 5 years.
During 1996, the Company capitalized $253,000 into software
development costs related to the issuance of warrants to ESRI in
accordance with SFAS 123 which is being amortized over two years. The
Company recorded $126,00 and $53,000 of amortization expense related
to this charge for the year ended December 31, 1997 and 1996
respectively.
d. Stock Option Plan
The Company has a Stock Option Plan (the "Plan") to provide
officers and other key employees options to purchase shares of the
Company's common stock. On March 28, 1997, the Board of Directors
approved an increase in the amount of shares issuable under the plan
from 1,000,000 to 1,700,000. Under the terms of the Plan, the Board of
Directors may grant officers and key employees either "non-qualified"
or "incentive stock options" as defined by the Internal Revenue
Service code and regulations and may grant non-qualified options to
non-employee directors. Under the terms of the Plan, the purchase
price of the shares subject to an option will be the fair market value
of the Company's common stock on the date the option is granted. If
the grantee owns more than 10% of the total combined voting power or
value of all classes of stock on the date of grant, the purchase price
shall be at least 110% of the fair market value at the date of grant
and the exercise term shall be up to five years from the date of
grant. All other options granted under the Plan are exercisable up to
10 years from the date of the grant. Options issued under the Plan
generally vest over a three year period.
A summary of the status of the Company's stock option plan as of
December 31, 1997 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Weighted Weighted
-Average -Average
Fixed Exercise Exercise
Options Shares Price Shares Price
------ -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 720,745 $ 2.40 503,501 $ 3.06
Granted 1,606,281 1.59 474,842 2.25
Exercised (2,819) 1.30 (15,708) 1.30
Forfeited (845,628) 2.49 (241,890) 3.55
Outstanding at ---------- ---------
end of year 1,478,579 1.47 720,745 2.40
Options exercisable at ========= ========
year-end 770,978 235,258
Weighted-average
fair value $1.58 $2.23
of options
granted during the year
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------- --------------------
Weighted Weighted- Weighted
Range of Number Average Average Number -Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$.45 to 1.30 263,584 7.5 years $ .95 107,542 $1.15
1.40 811,993 9.8 1.40 430,365 1.40
1.50 to 1.88 170,717 9.0 1.77 104,563 1.79
1.91 to 2.56 232,285 8.4 2.09 128,508 2.14
--------- -------
.45 to 2.56 1,478,579 9.1 1.47 770,978 1.54
========= =======
</TABLE>
In April 1997, the Board of Directors of the Company repriced the
options held by certain employees. A total of 277,288 employee options
ranging in exercise prices from $2.56 to $4.43 were repriced at $2.11
per share which approximated the estimated fair market value of the
Company's common stock on the date of repricing.
In October 1997, the Board of Directors of the Company issued to
the President of the Company options to purchase 573,993 shares of the
Company's common stock for $1.40 per share in exchange for the
surrender of all current compensations-related options representing
the right to buy 257,243 shares of the Company's common stock.
In November 1997, the Board of Directors of the Company awarded
options to a consultant as compensation for his services in locating
additional sales personnel. A non-qualified option to purchase 7,500
shares of the Company's common stock was issued with an exercise price
of $.453, which approximated the estimated fair market value of the
Company's common stock on the date of issuance.
e. Stock Warrants
A summary of the status of the Company's Warrants as of December
31, 1997 and 1996 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Weighted Weighted
-Average -Average
Exercise Exercise
Warrants Shares Price Shares Price
- -------- ------ ------- ------- ------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 2,666,759 19.01 1,865,318 $ 26.88
Granted - - 1,586,194 1.65
Exercised - - (469,554) 1.30
Forfeited (632,871) 66.80 (315,199) 6.01
---------- ------ ---------- ------
Outstanding at
end of year 2,033,888 4.14 2,666,759 19.01
========= ====== ========= ======
Warrants
exercisable
at year-end 2,029,167 2,648,523
Weighted-average
fair value of
warrants granted
during the year -0- $0.88
</TABLE>
The following table summarizes information about Warrants
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
- -------------------------------------------------------- --------------------
Weighted Weighted- Weighted
Range of Number Average Average Number -Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$.40 to .80 259,030 .4 $ .43 259,030 $ .43
1.30 to 1.40 1,419,639 .6 1.39 1,417,278 1.39
1.50 to 3.68 207,055 1.8 2.22 204,695 2.20
4.25 to 121.13 148,164 1.6 39.66 148,164 39.66
--------- ------- ---------
.40 to 121.13 2,033,888 1.3 4.14 2,029,167 4.15
========= =========
</TABLE>
The Company completed an initial public offering (the "Offering")
for 52,900 Units (the "Units") in March 1992. Each Unit consists of
two shares of common stock, two redeemable Class A Warrants, and one
redeemable Class B Warrant. The Class A and Class B Warrants are
transferable separately. These warrants expired on February 6, 1997.
The Company sold an option to purchase up to 4,600 units, at 140% of
the initial public offering price, to the Underwriter for $115. These
units are identical to the Units sold to the public, except that the
Class A and Class B Warrants are not redeemable by the Company.
Certain of these warrants contain ratcheting provisions within the
warrants which act to protect the warrant holder from below market
financings by the Company. These warrants expired on February 6, 1997.
Note 9. BUSINESS SEGMENT INFORMATION
After the sale of Cimarron on December 11, 1997, the Company now
operates one business segment. The segment information presented below
reflects continuing operations which contains the Company's FindNow
business and the Internet consulting business of Navigist which was
sold on December 13, 1996. Discontinued operations contains Cimarron's
business presentation services which were sold on December 11, 1997.
1997 1996
(US dollars in thousands)
Continuing Operations:
Sales (1) $ 1,053 $ 1,124
Income (loss) from operations (1,569) (2,978)
Identifiable Assets 1,324 3,156
Discontinued operations:
Sales (2) $ 852 $ 1,082
Income (loss) from operations (792)(3) (113)
Identifiable Assets - 1,135
(1) Intersegment sales are immaterial
(2) Includes charge for impairment of asset of $1,540,000 for
impairment of long-lived
asset and $290,000 operating losses from Navigist
(3) Includes charge to impairment of long-lived asset of $863,000
Note 10. COMMITMENTS AND CONTINGENCIES
a. Operating Lease Commitments
The Company has noncancelable leases for its facilities and certain
office equipment. At December 31, 1997, the Company was obligated
under non-cancelable operating leases for its office facilities and
equipment as follows:
Year ending
December 31, (In thousands)
1998 $ 89
1999 41
-----
$ 130
=====
Rent expense related to operating leases was $124,000 and $201,000
for the years ended December 31, 1997 and 1996 respectively.
b. Contingent Issuance of Stock Options
In connection with an employment agreement, the Company has agreed
to grant additional options to purchase 10,000 shares of common stock
in the first fiscal quarter in which the cumulative gross sales of the
Internet Products Group is equal to or greater than $1,600,000. All of
the awarded options will be issued at the fair market value on the
date the option is earned and will vest over a 12 month period.
A provision in the option agreement between the Company and the
Company's President and CEO, provides for dilution protection. The
agreement provides that additional options to purchase common shares
shall be issued to Mr. Johnson equal to 10.7% of options exercised
that were outstanding as of October 23, 1997.
On October 23, 1997, the Company entered into an agreement with
Michael Johnson, President and Chief Executive Officer of the Company.
This agreement expires on April 23, 1999, and provides compensation to
Mr. Johnson in the event the Company is sold while he is President of
the Company or within 120 days after Mr. Johnson ceases to be
President. The compensation to be paid is based on a varying
percentage of the transaction value ranging from 4% of transaction
values to 12% of transaction values. No compensation will be paid for
transactions valued less than $7.5 million.
Note 11. RISKS AND UNCERTAINTIES
a. Credit Concentration and Dependence upon Certain Customers
As of December 31, 1997, the Company had approximately 21
implemented long term service contracts for its FindNow service which
contribute approximately equally to revenues. In addition the Company
may perform specialized services on a contract basis which may account
for a significant portion of the Company's revenue in a given period.
In 1997, two customers accounted for 29% of the Company's total
revenues. A single customer accounted for 16% of the Company's total
revenue in 1996.
b. Continuing Operating Losses
The Company has experienced recurring losses from operations since
inception and incurred a net loss from continuing operations of
$1,609,000 for the year ended December 31, 1997. Further, the Company
required cash to fund operations of $1,205,000 and $365,000 for the
years ended December 31, 1997 and 1996 respectively. The Company
expects to continue to incur operating losses throughout the first
half of 1998 due to the continued development, sales and
administrative costs related to the development of its FindNow system.
Although the Company believes that it has sufficient cash to operate
its business during the next twelve months, the Company's continuing
losses raise substantial doubt about the Company's ability to continue
as a going concern because it has not yet demonstrated the ability to
generate positive cash flows from operations. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amount and
classification of liability carrying amounts that might result should
the Company be unable to continue as a going concern.
In addition to current sales efforts, the Company is currently
evaluating several other options to raise additional capital and is
considering changes in its operations in the event that additional
capital cannot be obtained externally. Options being considered
include a small private placement, potential proceeds from the
exercise of expiring "in-the-money" warrants, the sale-leaseback of
certain owned equipment and reduction of operating costs of the
Company.
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
October 23, 1997
Mr. Michael W. Johnson
987 Lost Angel Road
Boulder, Colorado 80302
Re: Incentive Compensation
Dear Michael:
This letter (the "Agreement") sets forth the terms pursuant to
which InfoNow Corporation (the "Company") agrees to compensate
you ("Johnson"), in connection with the sale of all or
substantially all the assets, business or equity securities of
the Company (the "Transaction"). The term of this Agreement
shall commence as of the date hereof and shall expire upon the
later of (i) 18 months from the date hereof or (ii) the date
on which Johnson is no longer President or CEO of the Company.
This Agreement and the compensation specified herein is in
addition to and supplements any and all other compensation to
be paid to Johnson in connection with his employment by the
Company.
For purposes of this Agreement, a Transaction, whether
affected in one Transaction or in a series of Transactions,
means (i) any merger, consolidation, reorganization or
combination pursuant to which the business of the Company is
directly or indirectly acquired by another party, (ii) the
acquisition by another party directly or indirectly of more
than 51% of the common stock or other class of capital stock
or equity interest in the Company, or all or a substantial
portion of the assets of the Company, in each case whether by
tender or exchange offer, negotiated purchase or otherwise,
(iii) the acquisition, through a proxy contest or through
another method not involving the acquisition of the Company's
voting capital stock, or by another party with the power to
directly or indirectly direct or cause the direction of the
management and policy of the Company.
If the Transaction is closed during the term of this Agreement
or within 120 days after Johnson has ceased to be President or
CEO of the Company, then upon closing the Transaction, the
Company shall pay to Johnson or cause Johnson to be paid a
transaction fee (the "Transaction Fee") calculated as follows:
If the transaction is completed at a transaction value (the
"Transaction Value") of less than $7.5 million, then
Johnson will receive no Transaction Fee; or
If the transaction is completed at a Transaction Value of $7.5
million but less than $14.0 million, then the Company
shall pay or cause Johnson to be paid four percent of the
total proceeds received for the Company; or
If the transaction is completed at a Transaction Value of
$14.0 million but less than $20.0 million, then the
Company shall pay or cause Johnson to be paid eight
percent of the total proceeds received for the Company;
or
If the transaction is completed at a Transaction Value of
$20.0 million or greater, then the Company shall pay or
cause Johnson to be paid twelve percent of the total
proceeds received for the Company.
Any cash received by the Company for the issuance of InfoNow
equity after the date of this Agreement will be added to the
above threshold values.
For purposes of this Agreement, the Transaction Value shall
mean the sum of (i) with respect to each class of capital
stock of the Company the product of (a) the highest
consideration paid or payable for a share of such class of
capital stock of the Company determined as described in the
following paragraph and (b) the sum of (1) the total number of
shares of such class of capital stock of the Company plus (2)
the number of shares of such class issuable upon exercise of
options, warrants or other rights, or conversion or exchange
of securities, all as outstanding on the date of this letter
and, without duplication, as thereafter issued or granted;
(ii) the aggregate face amount of any debt (including capital
lease obligations) of the Company which is assumed,
refinanced, repaid, or remaining outstanding or otherwise
borne by the purchaser; (iii) without duplication the
aggregate liquidation value of any preferred stock or other
preferential interests redeemed or remaining outstanding; and
(iv) the fair market value of any assets of any of the
shareholders of the Company that are purchased. Transaction
Value excludes working capital items (including the Company's
normal levels of accounts payable, accruals, and income taxes
payable).
The determination of the "consideration paid or payable for a
share of such class of capital stock" in connection with a
Transaction shall include cash, securities (valued in
accordance with the following paragraph), or other assets or
consideration paid or payable by the purchaser or any of its
affiliates, as the case may be, determined without regard to
any allocations between the Company or its affiliates,
including but not limited to but without duplication (i)
assets (net of debt or payables) of the Company retained by
the Company or its stockholders and affiliates, (ii) any
deferred installments of the purchase price, (iii) any portion
of the purchase price held in escrow subsequent to closing
which is payable pursuant to the terms of the escrow
arrangement, irrespective of whether such amounts are in fact
paid, (iv) any extraordinary compensation paid directly or
indirectly by the purchaser to principals, management or
employees of the Company or affiliates of the Company in
connection with or in anticipation of the Transaction,
including but not limited to cash payments, stock or option
grants, consulting arrangements and non-competition
arrangements, (v) any payments to the Company or affiliates of
the Company for non-competition agreements, (vi) any payments
pursuant to earn-outs, royalties or other similar
arrangements, (vii) any payments payable after closing upon
the occurrence of certain contingencies or conditions or the
satisfaction of certain earnings, sales levels or other
performance objectives which are agreed to on or before the
closing, irrespective of whether such amounts are in fact
paid, and (viii) the amount of any dividends or other
extraordinary payments or distributions to stockholders of the
Company in connection with or in anticipation of the
Transaction, and (ix) consideration paid by the purchaser or
its affiliates to the Company or its affiliates as a deposit,
reimbursement of expenses, liquidated damages, walk-away fee,
or other arrangement.
In the event that all or a portion of the Transaction Value
for a Transaction is paid in stock or other securities,
deferred installments or other non-cash consideration, the
amount of the Transaction Fee payable with respect to such
items shall be determined on the basis of the fair market cash
equivalent value of such non-cash consideration as of the date
preceding the date of the Transaction as reasonably determined
by Johnson and the Company, provided that the value of
securities (received as consideration) which have an existing
public trading market shall be determined by the mean of the
closing bid and ask price for such securities during the 20
trading days prior to the closing date.
Any portion of the Transaction Fee which is payable with
respect to any earn-out, royalty or similar arrangement where
the amount payable is not a certain amount, shall be
calculated and paid at the closing based upon the estimated
net present value thereof as reasonably determined by Johnson
and the Company.
If a Transaction takes the form of a purchase of assets and an
assumption of liabilities, then the "Transaction Value" of the
Company shall be deemed to include the amount of cash,
securities, or other consideration paid to the Company, its
shareholders, and affiliates in respect of the assets, plus
the aggregate face amount of all liabilities, including
accounts payable, accruals, and income taxes payable, assumed
by the purchaser and its affiliates.
Unless other terms or arrangements are approved in writing by
Johnson, the Transaction Fee shall be based upon and payable
out of the total proceeds of a Transaction prior to any
distribution to shareholders or fees paid to any other party.
This Agreement is governed by the laws of the State of
Colorado, without regard to principles of conflicts of laws.
The parties hereby submit to the exclusive jurisdiction of,
and waive any venue objections against, District Court in and
for Boulder County, Colorado, and consent to the personal
jurisdiction of such court for the purposes of this Agreement.
This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and
except as otherwise explicitly provided, supersedes all prior
understandings, written or oral, with respect to the subject
matter hereof.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed to be an original
but all of which shall constitute one and the same instrument.
If the terms set forth herein are acceptable to you, please so
indicate by executing a copy of this letter in the space
provided below and returning an executed counterpart to the
undersigned.
Very truly yours,
InfoNow Corporation
By:/S/ Nahum Rand
-----------------
Nahum Rand, Chairman
Accepted and agreed to this
23 day of October, 1997
By:/s/ Michael W. Johnson
_____________________________
Michael W. Johnson
Mr. Michael W. Johnson
October 23, 1997
Page 4
January 1, 1998
Mr. Michael W. Johnson
987 Lost Angel Road
Boulder, CO 80302
Dear Michael:
The Board of Directors of InfoNow Corporation (hereafter
referred to as "the
Company") is pleased to offer you the opportunity to
continue in the position of
President and Chief Executive Officer of InfoNow
Corporation. This letter
embodies the terms of our offer of employment to you:
TERM
The term of this agreement shall be 18 months.
BASE SALARY
Your base annual compensation will be $110,000 to be paid in
24 equal semi-
monthly installments. At the end of 12 months, you will be
granted a minimum
raise of not less than 10 percent of your base annual
compensation.
PERFORMANCE BONUS
Effective January 1, 1998, you will continue to be included
in the Company's
executive compensation program which will pay you a bonus
based on defined
financial performance targets as set forth in this
agreement. The bonus will be
based on the Company's earnings before interest, taxes,
depreciation,
amortization, and any other non-cash or non-operating
extraordinary charges
(hereafter referred to as "modified EBITDA"), and Net Income
(excluding
extraordinary charges), unless changed by mutual consent.
Bonus will be earned quarterly and paid in the month
following the quarter close
subject to available cash, as follows:
$15,000 for achieving positive, quarterly modified EBITDA
$25,000 for achieving positive, quarterly Net Income
$40,000 for achieving quarterly Net Income of $200,000 or
greater
$50,000 for achieving quarterly Net Income of $400,000 or
greater
EQUITY
You shall be eligible to receive options to purchase common
stock of the
Company as authorized from time to time by the Board of
Directors. All equity
options shall be based on the incentive stock option plan of
the Company in
effect on March 1, 1996, or as subsequently modified.
All options granted to you during your employment and any
performance based
options not yet granted shall vest immediately upon a change
in control of the
Company. A change of control includes, but is not limited
to, the sale of assets or
other reorganization, acquisition by an independent third-
party of a controlling
interest of the Company's stock, or a merger or
consolidation in which the
Company is not the surviving or controlling entity.
In the event of a conflict between this document and your
specific option
agreements, such option agreements will take precedence.
BENEFITS
The standard InfoNow benefits package will be extended to
you.
LIFE INSURANCE
The Company will pay for a $500,000 term life policy payable
to your estate in
the event of your death during the term of this agreement,
the premium of which
is not to exceed $500.00 per year.
VACATION
The maximum allowed under current Company policy as amended
from time to
time following CEO recommendation and Board approval.
TERMINATION
The Company may terminate your employment for cause. The
term "cause" in
this agreement means your conviction of a felony or acts of
fraud or flagrant
dishonesty. In the event that the Company terminates you
without cause, you
will receive a one-time severance payment on the date of
your termination equal
to 75 percent of your annual base compensation under this
Agreement and the
Company will immediately vest 50 percent of all unvested
options granted to you.
Should the Company choose to not continue your employment on
a basis
acceptable to you beyond 18 months from the date of this
Agreement, (1) you
will be given notice of the Company's intent to not continue
your employment at
least 3 months prior to the end of this Agreement, and (2)
you will be given a
one-time severance payment equal to 50 percent of your
annual base compensation
under this Agreement.
BOARD POSITION
You shall maintain your position as a Director of the
Company through the term
of this Agreement, unless terminated for cause.
For the Board of Directors,
/s/ Duke Wentworth
Duke Wentworth, Chairman of
Compensation Committee
I have read and accept the terms and conditions of
employment contained
herein.
/s/ Michael W. Johnson January 1, 1998
------------------ ---------------
Michael W. Johnson Date
