As filed with the Securities and Exchange Commission on July 15, 1998
Registration No. 333-52531
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Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INFONOW CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 7371 04-3083360
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1875 Lawrence Street, Suite 1100, Denver, CO 80202 (303) 293-0212
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(Address, including zip code and telephone number,
including area code, of Registrant's principal executive offices
and place of business)
Kevin D. Andrew
Chief Financial Officer
InfoNow Corporation
1875 Lawrence Street, Suite 1100
Denver, CO 80202
(303) 293-0212
(Address, including zip code and telephone number,
including area code, of agent for service)
Copies to:
Peter J. Jensen
Chrisman, Bynum & Johnson, P.C.
1900 Fifteenth Street
Boulder, CO 80302
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
PROSPECTUS 3,485,647 Shares
InfoNow Corporation
Common Stock
(par value $.001 per share)
This Prospectus relates to up to 3,485,647 shares (the "Shares") of the
common stock, $.001 par value per share (the "Common Stock") of InfoNow
Corporation ("InfoNow" or the "Company"), which may be offered from time to time
by the Selling Stockholders named herein under "Selling Stockholders." The
Shares fall into two categories: (i) those which are now owned by the Selling
Stockholders as a result of purchases from the Company or received in connection
with mergers with the Company, in private transactions which were exempt from
registration under Section 4(2) or Regulation D of the Securities Act of 1933;
and (ii) those which may be purchased from the Company in the future upon
exercise of certain warrants held by the Selling Stockholders.
The Company will not receive any of the proceeds from the sale of the
Shares. The distribution of the Shares by the Selling Stockholders is not
subject to any underwriting agreement. The Shares offered by the Selling
Stockholders may be sold from time to time at designated prices that may be
changed, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. In addition, the Selling
Stockholders may sell the Shares through customary brokerage channels, either
through broker-dealers acting as agents or principals. The Selling Stockholders
may effect such transactions by selling Shares to or through broker-dealers, and
such broker-dealers may receive compensation in the form of underwriting
discounts, concessions, commissions, or fees from the Selling Stockholders
and/or purchasers of the Shares for whom such broker-dealers may act as agent,
or to whom they sell as principal, or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). Any broker-dealers
that participate with the Selling Stockholders in the distribution of Shares may
be deemed to be underwriters and any commissions received by them and any profit
on the resale of Shares positioned by them might be deemed to be underwriting
discounts and commissions within the meaning of the Securities Act of 1933, in
connection with such sales.
As of the close of trading on JULY 8, 1998, the closing sale price of the
Common Stock as quoted on the NASD Electronic Bulletin Board was $1.22 per
share. The Common Stock is also listed for trading on the Vancouver Stock
Exchange, under the symbol "INO.U". Total expenses of the offering are estimated
to be $15,000, all of which will be paid by the Company.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is___________, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
(the"Commission") a Registration Statement (together with all amendments,
exhibits, schedules and supplements thereto, the "Registration Statement") on
Form SB-2 under the Securities Act for registration of the shares of Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain parts of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and where such contract or other document is an
exhibit to the Registration Statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which reference is hereby made.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files periodic
reports, proxy statements and other information with the Commission. Such
periodic reports, proxy statements and other information, and a copy of the
Registration Statement can be copied and inspected at the public reference
facilities of the Commission at 450 Fifth Street, Washington, D.C. 20549, and at
the Commission's regional offices at the 75 Park Place, New York, New York
10278, and 219 South Dearborn Street, Chicago, Illinois 60604. Copies of all or
any portion of the Registration Statement may be obtained from the Public
Reference Section of the Commission, 450 Fifth St., N.W., Washington, D.C.
20549, at prescribed rates. The Company files certain of its materials with the
Commission electronically. The Commission maintains a World Wide Web site
(www.sec.gov) that contains reports, proxy and information statements and other
information regarding registrants that file electronically.
The Company intends to furnish its stockholders with Annual Reports
containing audited financial statements for each fiscal year.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise defined herein, capitalized terms
used in this summary have the respective meanings ascribed to them elsewhere in
this Prospectus. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER THE HEADING "RISK FACTORS".
THE COMPANY
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. InfoNow's primary objective
is to be the leading provider of technology-based referral management services
to corporate clients.
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 International, Inc.
("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.
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THE OFFERING
Common Stock offered by the Selling Stockholders ............. 3,485,647 shares
Common Stock offered by the Company........................... None
Common Stock to be outstanding after the offering(1) ......... 6,814,076 shares
Trading symbols:
NASD Electronic Bulletin Board.......................... "INOW"
Vancouver Stock Exchange................................ "INO.U"
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(1) Excludes up to 2,483,668 shares of Common Stock issuable upon exercise of
outstanding warrants and options. 329,055 shares of Common Stock underlying
such warrants are registered for resale pursuant to the registration
statement of which this Prospectus is a part.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ................................... $ 442 $ 226 $ 1,053 $ 1,124
Operating expenses ...................... 744 362 2,678 4,275
Net loss from continuing operations...... (297) (130) (1,609) (3,187)
Net loss................................. (297) (140) (2,361) (3,092)
Net loss per common share from
continuing operations.................... (0.06) (0.03) (0.30) (0.89)
Net loss per share....................... -- -- (0.44) (0.86)
Weighted average common shares
outstanding.............................. 5,363,886 5,509,786 5,396,024 3,587,128
March 31, 1998 December 31,
-------------- --------------------------
1998 1997 1996
---- ---- ----
BALANCE SHEET DATA:
Working capital (deficit)................ $317 $ (357) $ 1,284
Total assets............................. 1,919 1,324 4,290
Total liabilities........................ 982 926 1,118
Long term debt........................... 35 47 92
Stockholder's equity (deficit)........... 937 398 3,172
</TABLE>
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RISK FACTORS
The securities offered hereby involve a high degree of risk. Each
prospective investor should carefully consider the following risks inherent in,
and affecting the business of, the Company and this offering before making an
investment decision.
LIMITED OPERATING HISTORY; ACCUMULATED LOSS; GOING CONCERN QUALIFICATION
From the Company's inception in 1990 until May 1995, the Company was
involved in the business of distributing software using encrypted CD-ROMs.
During 1995 the Company made a strategic decision to focus its business on
providing referral management systems under the name FindNow(R). Accordingly,
the Company has only limited operating history upon which an evaluation of its
business and prospects can be based. Since adopting its current business
strategy, the Company has continued to incur net losses from operations on a
consolidated basis. The Company has incurred net losses in each year of its
existence and expects that it will continue to incur net operating losses at
least through the second fiscal quarter of 1998. These continuing losses are
attributable to increases in operational capability and marketing and sales
costs related to the Company's new focus on its FindNow system. There can be no
assurance that the Company can generate substantial revenue growth, or that any
revenue growth that is achieved can be sustained. Revenue growth that the
Company has achieved or may achieve may not be indicative of future operating
results. In addition, the Company has increased and plans to increase further,
its operating expenses in order to enhance its currents products and services
and increase its sales and marketing efforts. To the extent that increases in
such expenses precede or are not subsequently followed by increased revenues,
the Company's business, operating results and financial condition will be
materially adversely affected.
The auditors report included in the Company's annual report for the year
ended December 31, 1997 contains an explanatory paragraph which states that "the
Company has experienced recurring losses from operations and requires cash to
fund continuing operations that raise substantial doubt about its ability to
continue as a going concern." The Company will not be able to continue its
operations as a going concern or realize its business plan without achieving
increased revenues or obtaining financing to meet its working capital needs,
neither of which can be assured. In the event that the Company is unable to
continue as a going concern, an investor holding equity securities of the
Company would likely lose the value of his or her entire investment.
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The teleservices industry is characterized by rapid technological change. A
significant portion of the Company's success will depend on its ability to
design, develop, test, market, sell and support new products and enhancements of
current products on a timely basis in response to competitive products and
evolving demands of the marketplace. There can be no assurance that the
Company's financial and technological resources will permit it to develop or
market new products successfully or respond effectively to technological
changes. The Company anticipates that significant amounts of future revenue will
be derived from products and product enhancements which either do not exist
today or have not been sold in large enough quantities to ensure market
acceptance. The development of new systems is a complex, expensive and uncertain
process requiring technical innovation and the accurate anticipation of
technological and market trends. The Company will need to continue to attract
and retain appropriately skilled employees to successfully develop new systems.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful development and introduction of product
enhancements or new products, or that such enhancements or new products will
adequately meet the requirements of the marketplace or achieve market
acceptance. If the Company is unable to develop and introduce product
enhancements and new products in a timely and cost-effective manner in response
to changing market conditions or client requirements, the Company's business,
results of operations and financial condition could be materially and adversely
affected.
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DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the automation of call center activities
in order to support the market for its FindNow and other similar products and
services the Company may develop. Rapid growth in the use of and interest in the
Internet and use of the technologies similar to the Company's is a recent
phenomenon. There can be no assurance that communication or commerce over the
Internet will become widespread. The Internet may not prove to be a viable
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as reliable network backbone,
or timely development of performance improvements, including high speed modems.
Changes in or insufficient availability of telecommunications services to
support the Internet also could result in slower response times and adversely
affect usage of the Internet and FindNow. If use of the Internet does not
continue to grow, or if the Internet infrastructure does not effectively support
growth that may occur, the Company's business, results of operations and
financial condition would be materially and adversely affected.
EARLY STAGE RISKS; DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S
PRODUCTS
The Company's recent adoption of a business strategy focused on
teleservices solutions subjects the Company to the risks inherent in a
speculative new enterprise, including the absence of a lengthy operating
history, shortage of cash, technology whose application to the Internet is
relatively unproven, new untried products and competition from businesses with
considerably greater resources. The markets for products and services provided
by the Company has only recently begun to develop. As is typical in the case of
a new and rapidly evolving industry, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty and
risk. Because the market for the Company's products is new and evolving, it is
difficult to predict the future growth rate, if any, and size of this market.
There can be no assurance either that the market for the Company's products will
develop or that demand for the Company's products will emerge or become
sustainable. The Company's ability to successfully develop additional products
and services depends substantially on market acceptance of the Company's FindNow
product. If FindNow sales fail to continue to grow, the Company's ability to
establish enhancements and other products would be materially and adversely
affected. If the market fails to develop or develops more slowly than expected
or becomes saturated with competitors, or if the Company's products and services
do not achieve or sustain market acceptance, the Company's business, results of
operations and financial condition will be materially and adversely affected.
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly results of operations. Factors which
have had an influence on and may continue to influence the Company's results of
operations include the size and timing of customer orders, timing of product
introductions or enhancements by the Company or its competitors, market
acceptance of new products technology, changes in pricing strategy, and changes
status of development expenditures. As a result of the foregoing and other
factors, the Company anticipates that it may experience material fluctuation in
operating results on a quarterly basis, which may contribute to the volatility
in the price of the common stock. See "Management's Discussion and Analysis".
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS AND FUTURE SALES
As of the date of this Prospectus, the Company had contracted with over
thirty (30) customers for its FindNow service. Although the use of cash in its
operations has declined significantly, the ongoing monthly revenue from these
customers is not sufficient to cover operating costs of the Company. The success
of the Company will require that the Company increase its customer base, and its
failure to do so would materially and adversely affect its financial condition.
The Company's current FindNow customers purchase the service pursuant to
contracts with a duration of three years or less. The success of the Company is
materially dependent on the ability of the Company to attract new customers and
obtain renewal contracts with its existing customers.
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DEPENDENCE ON SINGLE PRODUCT; DEPENDENCE ON NEW PRODUCTS
The Company's primary product and service is the FindNow system. The
Company is substantially dependent on the sales and market acceptance of FindNow
to generate operating revenues and profits. Although the Company is in the
process of developing additional products and services, these development
efforts are largely focused on enhancing the functionality of the FindNow
system. The failure of the Company to successfully market and sell the FindNow
service would have a material adverse effect on the Company's business, results
of operations, and financial condition. The Company may also develop other
related products that allow customers to deliver customer service information
via the Internet in order to broaden its product line and remain competitive
with other offerings in the marketplace. The development of new products involve
many risks, including technical, financial and market acceptance risks. There
can be no assurance that the Company will be successful in developing and
marketing new products and services or that these new offerings would gain
market acceptance.
COMPETITION
The market for teleservices solutions, including the market for the
Company's products and services, is intensely competitive, fragmented and
rapidly evolving. Many of the Company's potential competitors are larger and
have substantially greater financial, technical, and marketing resources than
the Company. Competition for these services could result in price reductions for
the Company's products and services. Increased competition from existing
competitors and competing products, or the introduction of new products superior
to the Company's own products, would have a material adverse affect on the
Company's financial condition. The Company's future success will be dependent
upon its ability to remain competitive with respect to services offered and the
technical capabilities of the products offered.
GENERAL BUSINESS RISKS
The Company has developed its business plans and strategies based on the
rapidly increasing size of the teleservices markets and the Company's
participation in those markets. In addition, the Company has made assumptions
regarding estimated sales cycle, price and acceptance of the Company's products
and services, and the costs of further developing and providing those products
and services. Although these are based on the best estimates of management,
there can be no assurance that these assumptions will prove to be correct.
Future operational results of the Company will depend on many factors including
future economic, market and competitive conditions, all of which are difficult
or impossible to predict accurately and many of which are beyond the ability of
the Company to control.
DEPENDENCE ON INTERNET AND TELECOMMUNICATION INFRASTRUCTURE AND ACCESS
The sales of the Company's products and services are dependent on reliable
access and operations of the Internet and other telecommunications networks.
Notwithstanding current interest and worldwide subscriber growth, the Internet
may not prove to be a viable commercial marketplace because of inadequate
development of the necessary infrastructure or complementary products, such as
high speed modems. Because global commerce and on-line exchange of information
on the Internet and other open area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace.
LIMITED MARKET FOR SECURITIES; POSSIBLE VOLATILITY OF SHARE PRICE
The Company's securities are traded on the NASD's "Electronic Bulletin
Board" and the Vancouver Stock Exchange. These markets have often been
characterized by low trading volume, large price fluctuations and limited
liquidity for many issuers listed on these markets. As a result, an investor may
find it more difficult to dispose of, or to obtain accurate price quotations of
the Company's securities. In addition, it may be more difficult for the Company
to obtain additional equity financing needed for expansion of its operations in
the future if the Company's stock is not traded on Nasdaq Small Cap or other
national exchange.
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POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company's cash flow from operations is not sufficient to fund the
operations of the Company. The Company is currently dependent upon cash reserves
to fund its ongoing operations as well as to execute its business plan with
respect to the development of FindNow and related products. The Company
currently projects that available cash balances together with projected cash
flow from operations will be sufficient to fund the Company's operations through
1998. 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 enhancements to existing products is
costlier or slower than expected, or that the Company's projections otherwise
prove to be inaccurate, the Company may need to seek additional financing. In
such case, the Company will generally be required to seek additional debt or
equity financing to fund the costs of daily operations. There can be no
assurance that the Company will be able to successfully obtain additional debt
or equity financing, if needed, or that such financing would not result in
substantial dilution of current shareholders.
DEPENDENCE ON THIRD PARTY TECHNOLOGY
The Company's primary product, FindNow, incorporates technology developed
and owned by third parties. The Company relies to a certain extent upon such
third parties' ability to enhance their current products, and to develop new
products on a timely and cost effective basis that will meet changing customer
needs and respond to competitive and technological changes. If the Company were
to breach its license agreements or the license agreements were terminated, the
Company could lose the right to use the licensed software. There can be no
assurance that the Company would be able to replace the functionality provided
by the third party software currently offered in conjunction with the Company's
products. In addition, if the Company were not able to obtain adequate support
for third party software or such software were to become incompatible with the
Company's software, the Company would need to redesign its software or seek
comparable replacements. There can be no assurances that the Company could
successfully redesign its software or that adequate replacements for third party
software could be located and integrated into the Company's system.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of June 15, 1998, the Company had 6,814,076 shares of Common Stock
outstanding. Of this total amount outstanding, officers, directors and those
shares holders holding more than 5% of the outstanding shares control 42.2% of
the outstanding shares, or approximately 50.5% assuming that these shareholders
were to exercise options and warrants exercisable within the next 60 days. As a
result, these shareholders acting together will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and the approval of significant corporate transactions.
DEPENDENCE UPON KEY PERSONNEL; CHANGES IN MANAGEMENT GROUP; ATTRACTION AND
RETENTION OF QUALIFIED PERSONS
The Company is substantially dependent upon the services of its senior
management and key technical personnel. The loss of the services of one or more
of such executives could have a material adverse effect on the Company. The
Company's future growth and success depends, in large part, upon its ability to
obtain, retain and expand its staff of technical and marketing personnel. There
can be no assurance that the Company will be successful in its efforts to
attract and retain such personnel. The Company has employment agreements with
its chief executive officer and certain other senior officers but does not have
employment agreements with its key technical personnel.
BUSINESS INTERRUPTIONS
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquakes, power loss,
telecommunications failures and similar events. The Company's principal Web
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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. 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 may still 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 remain 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. The Company also
carries property insurance in the event of equipment damage. However, such
safeguards and insurance may not be adequate to compensate for all losses that
may occur from business interruptions.
FORWARD LOOKING STATEMENTS
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. 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 FindNowSM service, (ii) market acceptance of the FindNowSM service,
(iii) success of the Company in forecasting and meeting the demand of the
customers of the FindNowSM service, including maintaining technical performance
of the system as new FindNowSM customers are added, (iv) ability to obtain
financing to purchase equipment needed to provide service to additional
FindNowSM customers, (v) ability to maintain pricing and adequate profit margins
on its products and services (vi) ability to retain qualified technical
personnel (vii) ability of the company to maintain current pricing and sales
volume in its operations of Cimarron (viii) ability to control development costs
of FindNowSM service within current budgeted levels, (ix) and the ability of the
Company to raise additional capital.
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 FindNowSM may not develop as expected or if it does
develop, that the Company will 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 and any
statements should not be regarded as are presentation by the Company or any
other person that the Company's objectives or plans will be achieved.
THE COMPANY
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.
In 1997 the Company generated approximately 55% and 45% of its total
revenue from the Internet products and business presentations segments of its
business, respectively. See Note 9 to the Consolidated Financial Statements
herein for financial information as to the Company's business segments.
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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 International, Inc.
("Cimarron") and Navigist, Inc. ("Navigist") in 1995. Cimarron provided
interactive media authoring and business presentation 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.
The following trademarks and servicemarks mentioned in this Prospectus are
owned by the Company: InfoNowTM and FindNow(sm). All other trademarks, service
marks, or trade names referred to in this Prospectus are the property of the
respective owners. Unless the context otherwise requires, the term "Company"
refers to InfoNow Corporation and its subsidiaries.
The Company's principal executive offices are located at 1875 Lawrence
Street, Suite 1100, Denver, Colorado 80202, its phone number is (303) 293-0212,
and its World Wide Web site is located at www.infonow.com.
USE OF PROCEEDS
The proceeds from the sale of the Shares will be received directly by
each Selling Stockholder and the Company will not receive any portion of the
proceeds.
10
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MARKET FOR THE COMPANY'S COMMON STOCK
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
MARCH 31, 1998, there were approximately 169 holders of record of the Common
Stock.
YEAR ENDING DECEMBER 31, 1996 HIGH LOW
----------------------------- ---- ---
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
YEAR ENDING DECEMBER 31, 1998
-----------------------------
FIRST QUARTER................................ $1.51 $0.25
DETERMINATION OF OFFERING PRICE
This Prospectus may be used from time to time by the Selling Stockholders
who offer the Shares registered hereby for sale. The offering price of such
Shares will be determined by the Selling Stockholders and may be based on market
prices prevailing at the time of sale, at prices relating to such prevailing
market prices, or at negotiated prices. See "Plan of Distribution".
DIVIDEND POLICY
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.
11
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CAPITALIZATION
The following table sets forth the capitalization of the Company at MARCH
31, 1998. This table should be read in conjunction with the Consolidated
Financial Statements and notes thereto included elsewhere in this Prospectus.
(US DOLLARS IN THOUSANDS)
MARCH 31, 1998
--------------
Long term debt: $ 35
Stockholder's Equity:
Preferred Stock, $.001 par value:
1,962,335 shares authorized, no shares
issued and outstanding................... 0
Common Stock, $.001 par value:
15,000,000 shares authorized, 5,364,179
shares issued and outstanding(1)........... 6
Additional paid in capital...................... 22,739
Accumulated Deficit............................. (21,808)
--------
Total stockholder's equity................ 937
--------
Total capitalization............. $ 972
--------
- --------------
(1) Excludes 3,603,063 shares of Common Stock issuable upon exercise of
outstanding options and warrants. "See Management - Employee Benefit Plans"
and "Description of Securities."
12
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SELECTED FINANCIAL DATA
The following selected financial data are for, and as of the end of, each
of the years in the two-year period ended December 31, 1997 and have been
derived from the consolidated financial statements of the Company, which for
such years were audited by Hein + Associates LLP. The report of Hein +
Associates LLP dated February 13, 1998 covering the consolidated financial
statements as of December 31, 1997 contained an explanatory paragraph concerning
the Company's ability to continue as a going concern. The Consolidated Financial
Statements as of December 31, 1997, and for each of the years in the two-year
period ended December 31, 1997, and the reports thereon, are included elsewhere
in this Prospectus. The selected financial data for the three month periods
ended March 31, 1998 and 1997 has been derived from the unaudited financial
statements of the Company and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(US dollars in thousands, except per share data)
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
1998 1997 1997 1996
------ ------ ----- ------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Sales.................................... $ 442 $ 226 $1,053 $1,124
Operating expenses ...................... 744 362 2,678 4,275
Net loss from continuing operations...... (297) (130) (1,625) (3,151)
Net loss................................. (297) (140) (2,361) (3,092)
Net loss per common share from
continuing operations ................... (0.06) (0.03) (0.30) (0.89)
Net loss per share ...................... -- -- (0.44) (0.86)
Weighted average common shares
outstanding.............................. 5,363,886 5,509,786 5,396,024 3,587,128
March 31, December 31,
--------- ------------
1998 1997 1996
------- ------- -------
BALANCE SHEET DATA:
Working capital (deficit)................ $ 317 $ (357) $1,284
Total assets............................. 1,919 1,324 4,290
Total liabilities........................ 982 926 1,118
Long term debt........................... 35 47 92
Stockholder's equity (deficit)........... 937 398 3,172
</TABLE>
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
13
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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 $1,459,000 in
sales backlog, 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
Three Months Ended March 31, 1998 compared to the results for the Three Months
Ended March 31, 1997
Net Revenues. The Company's revenues from continuing operations consist
primarily of setup and monthly service fees from ongoing contracts for its
FindNow service. Total sales increased by $216,000, or 96% for the three months
ended March 31, 1998, compared to the revenues in the prior year. The increased
revenues were generated by additional contracts sold and implemented during the
prior year. The number of active contracts at March 31, 1998 was 52 as compared
with 11 on March 31, 1997.
Cost of Sales. The cost of sales decreased from 156% of sales in the three
month period ended March 31, 1997, to 92% of sales for the three month period
ended March 31, 1998. This decrease is primarily due to the increased revenues
generated by additional contracts sold and implemented during the prior year.
The total cost of sales rose by 15% or $52,000. This increase is mainly due to
an increase in depreciation expense on equipment put into service and an
increase in the salaries and related benefits of additional employees hired
during the prior year.
Selling and Marketing. Selling and marketing expenses, as a percent of
revenues, decreased from 61% for the three months ended March 31, 1997, to 30%
for the three months ended March 31, 1998. This decrease is primarily due to the
increased revenues generated by additional contracts sold and implemented during
the prior year. Total selling and marketing expenses decreased by $6,000, or 4%
for the three months ended March 31, 1998, as compared to the three month period
ended March 31, 1997. This is primarily due to an increase in the salaries,
commission costs and benefits of additional sales personnel which were offset by
the decrease in trade show and advertising and promotion expenses. Selling and
Marketing expenses, especially sales commission expenses, which are based on a
percentage of new contracted sales, are expected to increase in relation to
increases in revenues.
General and Administrative. General and administrative expenses decreased
from 105% of sales for the three months ended March 31, 1997, to 47% of sales
for the three months ended March 31, 1998. This decrease is primarily due to
increased revenues generated by additional contracts sold and implemented during
the prior year while the total amount of general and administrative expenses has
14
<PAGE>
decreased by 12%, or $29,000. This decrease is primarily due to reduced salaries
and related costs compared to the prior year's quarter. These expenses not
expected to increase significantly as additional client contracts and related
revenues are added for the remainder of the current year.
Non-Operating Income (expense). Net non-operating income was $6,000 for the
three months ended March 31, 1997 compared to a net non-operating income of
$5,000 for the three months ended March 31, 1998. The decrease is mainly due to
reduced interest income on cash and cash equivalents partially offset by small
gains due to sales of assets and gains from debt extinguishment.
Net Loss from Continuing Operations. The reported net loss of the Company
for the three months ended March 31, 1998 increased by approximately $167,000 or
128%, as compared to the results of the three months ended March 31, 1997. The
results of the three months ended March 31, 1997 include a non-cash gain of
$364,710 related to the retirement of common shares originally issued in
conjunction with the acquisition of Navigist. Without the non-cash gain in the
three months ended March 31, 1997, the net loss of the Company for the three
months ended March 31, 1998 decreased by 40% or $198,000 compared to the prior
year period. This decrease is primarily due to increased revenues generated by
additional contracts sold and implemented during the prior year without
corresponding increases in operating expenses.
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.
15
<PAGE>
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.
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.
(US 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)
======= =======
LIQUIDITY AND CAPITAL RESOURCES; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company had cash and equivalents of $972,000 at March 31, 1998,
compared to $325,000 at December 31, 1997, or a net increase of $647,000. This
increase was largely due to a private equity financing on March 27, 1998 which
resulted in gross proceeds of $787,500. This increase was offset by $115,000 of
cash utilized in the operations of the Company, $14,000 used to purchase of data
and computer equipment and $12,000 net debt service costs.
The Company has made significant progress in commercializing its FindNow
service with 52 contracts in backlog as of March 31, 1998. Cash utilized in
operations was $115,000 for the three months ended March 31, 1997 compared to
$524,000 used for operations in the three months ended March 31, 1997. This
improvement is due to additional sales of its FindNow RMS without corresponding
increases in operating expenses of the Company.
16
<PAGE>
The Company currently projects that available cash balances together with
projected cash flow from operations will be sufficient to fund the Company's
operations through 1998 without additional external financing. These projections
assume that the Company does not substantially increase cash used in its current
operations and that overall operating costs of the Company will not change
significantly as new client contracts are added.
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.
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
17
<PAGE>
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 - 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.
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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.
19
<PAGE>
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.
20
<PAGE>
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 H&R Block
Apple Computer IBM
BancOne Kenwood USA
Bank of America Lexmark International
Canadian Airlines NationsBank
Cisco Systems Royal Bank of Canada
Citibank 3Com Corporation
Compaq Computers Toronto Dominion Bank
Federal Express of Canada United Healthcare
First Union Bank Visa International
Fujitsu
21
<PAGE>
The Company has approximately 51 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.
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
22
<PAGE>
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 May 31, 1998, the Company had a total of 26 full time employees
including 6 in sales and marketing, 15 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.
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 Web server equipment and operations are housed and
maintained by Rocky Mountain Internet at its operations center 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 does not presently have redundant multiple site
capability to maintain uninterrupted operation in the event of any such
occurrence. In addition, despite the implementation of network security measures
by the Company, its servers are 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.
23
<PAGE>
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.
CHANGES IN COMPANY'S CERTIFYING ACCOUNTANT
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 had 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.
MANAGEMENT
DIRECTORS
The directors of the Company and their ages as of February 28, 1997 are as
follows:
<TABLE>
<CAPTION>
All Positions Year first
and Offices held became
Name Age with the Company Director
- ---- --- ---------------- --------
<S> <C> <C> <C>
Michael W. Johnson 36 President, Chief Executive
Officer, Director 1995
Donald E. Cohen (A)(C) 43 Vice Chairman, Director 1995
Nahum Rand (A) 60 Chairman, Director 1991
Duane Wentworth(A)(C) 68 Director 1997
Michael Basch(A)(C) 60 Director 1998
</TABLE>
- -----------------------
(A) Member of the Audit Committee
(C) Member of the Compensation Committee
The principal occupation and business experience of each director is set forth
below:
24
<PAGE>
Michael W. Johnson has been Chief Executive Officer and President and a
director of the Company since October 1995. From 1990 to October 1995, Mr.
Johnson was a consultant with McKinsey & Company, an international management
consulting firm, where he served leading technology companies in the United
States and Europe on issues of growth, strategy, customer service, and mergers
and acquisitions. Mr. Johnson received a Bachelor of Science degree in Applied
and Engineering Physics, and a Bachelors of Arts degree in English from Cornell
University, a Diplome in French Literature from Universite de Paris, and a
Masters of Business Administration degree from Stanford University Graduate
School of Business.
Donald E. Cohen has been a director and Vice Chairman of the Company since
May 1995 and served as President and Chief Executive Officer of the Company from
May 1995 until October 1995. Mr. Cohen is President and Chief Executive Officer
of Cimarron, an interactive media company he founded in 1978. Cimarron was a
subsidiary of the Company from May 1995 to December 1997. Under Mr. Cohen's
leadership, Cimarron has won several awards including an EMMY, TELLY, DAF Alfie,
and B/PAA Gold Spike. Mr. Cohen earned a Bachelor of Arts degree in Mass
Communications from the University of Denver.
Nahum Rand has been a director since April 1991 and was elected Chairman of
the Board in October 1994. He served as a consultant to the Company from April
1991 through December 1992. From November 1990 to the present, he has served as
the chairman and chief executive officer of Regions, Inc., an investment company
which he founded.
Duane Wentworth has been a director since July 1997 and has served as a
management consultant to various businesses since 1992. Mr. Wentworth has over
41 years of business experience, including serving in management positions with
IBM and Control Data. During his tenure at Control Data, from 1976 to 1982, he
was responsible for the formation of Professional Services division, which
provided world-wide consulting services for Control Data. Mr. Wentworth has also
served as chairman and owner of Data Decisions, Inc., a supplier of specialized
data processing services.
Michael Basch has been a director since February 1998. Mr. Basch founded
and has served as President of Service Impact since 1989 which was established
to advance the art, science and practice of leadership. Mr. Basch was Senior
Vice President and a founding officer of Federal Express Corporation, for the
first ten years of its existence, from 1972 to 1982. During his tenure at
Federal Express, Mr. Basch established and led a number of key functions,
including Sales, Customer Service, Personnel, Corporate Development, the Federal
Express Southern Division, PartsBank, and Hub Distribution Services. He also
conceived of the Federal Express tracking and tracing system and designed, built
and managed the $100 million Superhub, which remains the largest system of its
kind in the world.
There are presently five directors serving on the Company's Board of
Directors. Directors are elected annually to serve until the next annual meeting
of stockholders or until their successors are duly elected.
25
<PAGE>
EXECUTIVE OFFICERS
Set forth below is certain information relating to the current executive
officers and key employees of the Company. Biographical information with respect
to Michael W. Johnson is included under "Directors" above.
NAME AGE POSITION(S)
- ---- --- -----------
Michael W. Johnson 36 Chief Executive Officer and President
Kevin D. Andrew 39 Vice President and Chief Financial Officer,
Secretary and Treasurer
W. Brad Browning 33 Vice President
Donald Kark 34 Vice President, Engineering and Technology
Information concerning the business experience of Mr. Johnson is provided
under the section entitled "Election of Directors."
Kevin D. Andrew was elected to his current positions in March 1996. Prior
to joining InfoNow, Mr. Andrew was President of Andrew Consulting, LLC, a
financial management services firm. From 1992 to 1995 he served as Chief
Financial Officer of Air Methods Corporation, a publicly held provider of
emergency air ambulance services, and from 1983 to 1991 served in various senior
financial management positions at CRSS, Inc., a diversified services company
listed on the New York Stock Exchange. During his tenure at CRSS, Mr. Andrew
served as chief accountant, director of general accounting, director of internal
audit and Vice President and controller of Natec Resources, Inc., a 50%-owed
affiliate of CRSS, Inc. Prior to 1983, Mr. Andrew was with KPMG Peat Marwick.
Mr. Andrew has held CPA certificates in both Colorado and Texas. He earned his
Bachelor of Science degree in Business from Arizona State University.
W. Brad Browning has been a Vice President and General Manager of the
Company since January 1996. From 1990 to 1995, Mr. Browning was a consultant
with McKinsey & Company, an international management consulting firm. Mr.
Browning joined McKinsey & Company in June 1990 after obtaining an Masters of
Business Administration degree from Harvard University Graduate School of
Business. While with McKinsey, he led technology and consumer clients on major
marketing and sales initiatives focused on driving growth and significant profit
improvement. He earned his Bachelor of Business Administration degree in
Marketing from the University of Georgia.
Donald Kark was elected to his position as Vice President, Engineering and
Technology in May 1997. Prior to joining InfoNow in December 1996, Mr. Kark was
with Welkin Associates, Ltd., from June 1995 to December 1996, where he was a
consultant and advisor to high technology clients on advanced technology
information systems. From June 1985 to June 1995, Mr. Kark worked with TRW,
Inc., as a chief engineer, project manager, hardware engineer and software
developer. He holds a B.S.C.E.E. from Purdue University and has won numerous
awards for his professional accomplishments, including TRW's most prestigious
engineering award, the TRW Chairman's Award for Innovation.
All executive officers are appointed by the Board of Directors and serve at
the Board's discretion.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee and a Compensation Committee. The Audit
Committee is responsible for (i) reviewing the scope of, and the fees for, the
annual audit, (ii) reviewing with the independent auditors the corporate
accounting practices and policies, (iii) reviewing with the independent auditors
26
<PAGE>
their final report, and (iv) being available to the independent auditors during
the year for consultation purposes. The Audit Committee met one time in the
fiscal year ended December 31, 1997. The Compensation Committee determines the
compensation of the officers of the Company and performs other similar
functions. The Compensation Committee met one time in the fiscal year ended
December 31, 1997. The Board of Directors may, from time to time, establish
certain other committees to facilitate the management of the Company.
Directors are reimbursed for expenses incurred for attending any Board or
committee meeting. There is no family relationship between any current or
prospective director of the Company and any other current or prospective
executive officer of the Company except for Michael Basch, who is the
father-in-law of Michael Johnson, the Chief Executive Officer and a director of
the Company.
During the fiscal year ended December 31, 1997, there were ten meetings of
the Board of Directors. All directors attended at least 75% of the meetings of
the Board and committees of the Board on which they were members.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and holders of more than 10% of the
Company's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
of the Company. Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to the Company during the fiscal year ended December 31, 1997
and Forms 5 and amendments thereto furnished to the Company with respect to the
fiscal year ended December 31, 1997, to the best of the Company's knowledge, the
Company's directors, officers and holders of more than 10% of its Common Stock
complied with all Section 16(a) filing requirements.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no additional
compensation for service on the Board of Directors. Each director who is not a
full-time employee of the Company is reimbursed expenses for attendance at Board
and Committee meetings. Effective July 2, 1997, a retainer fee of $1,000 per
month is also paid to each non-employee director. This monthly retainer has been
voluntarily deferred by the current directors. As of December 31, 1997, the
Company had accrued $20,000 for this obligation. In addition, each non-employee
director is awarded an option to purchase 20,000 shares of the Company's common
stock on a bi-annual basis. The options are exercisable at the fair market value
of the Company's common stock on the date of issuance and are exercisable over a
24 month period. Options expire ten (10) years from date of issuance. The
options are forfeited upon resignation from the Board of Directors.
The Company issued options to non-employee directors to purchase an
aggregate of 60,000 shares of the company's common stock for their services
during 1997 at exercise prices ranging from $0.81 to $1.84.
On May 22, 1997, Directors Nahum Rand, Donald Cohen, Michael Johnson and
Gene Copeland were each awarded non-statutory options to purchase 8,500 shares
of the Company's common stock at an exercise price equal to the fair market
value of the Company's stock which was $1.84 per share for their service as
directors in 1996. One- third of the underlying shares were exercisable at the
date of issuance. The remaining underlying shares vest over 24 months. The
options expire ten (10) years from the date of issuance. The options are
forfeited upon resignation from the Board of Directors.
All options granted to former director, Gene Copeland, were forfeited upon
his resignation from the Board of Directors on December 10, 1997.
27
<PAGE>
In addition to the above, non-employee director Nahum Rand is entitled to
receive a commission of 15% of the contracted total value of sales initiated and
closed by him.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the cash compensation
earned for the fiscal years ended December 31, 1997, 1996 and 1995 by the
Company's Chief Executive Officer and by the highest compensated executive
officers who were serving as executive officers at the end of the 1997 fiscal
year whose individual total cash compensation for the 1997 fiscal year exceeded
$100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- ----------------------
Restricted
Name and Principal Stock Options/ All Other
Position Year Salary Bonus Awards SARS Compensation
-------- ---- ------ ----- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Johnson(1) 1997 110,000 -0- -0- 582,493 -0-
Chief Executive Officer, 1996 101,778(4) -0- -0- 105,705 -0-
President 1995 22,372 -0- -0- 170,038 (2) -0-
W. Brad Browning (3) 1997 110,000 1,500 -0- 170,000 -0-
Vice President 1996 103,918 -0- -0- 85,000 15,000(5)
Internet Products Group
</TABLE>
- --------------------
(1) Mr. Johnson joined the Company in October 1995.
(2) Includes warrants to purchase 8,500 shares of Common Stock, issued to Mr.
Johnson in connection with his service as a director of the Company. See
"Management - Director Compensation".
(3) Mr. Browning joined the Company in January 1996.
(4) The Company accrued and deferred $72,611 of Mr. Johnson's 1996 salary, of
which $58,000 was satisfied by way of issuance on September 13, 1996 of
51,555 shares of Common Stock at a price of $1.12 per share.
(5) Represents reimbursement of relocation expenses.
28
<PAGE>
The following table presents information concerning individual grants of
options to purchase Common Stock of the Company made during the fiscal year
ended December 31, 1997, to each of the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or
Options/SARs Employees Base Price
Name Granted (#) in Fiscal Year ($/Sh.) Expiration Date
- ---- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Michael W. Johnson 8,500 (1) 0.5% 1.84 5/22/07
573,993 (2) 35.7% 1.40 10/23/07
W. Brad Browning 70,000 (3) 4.4% 2.11 1/9/06
5,000 (4) .3% 2.11 1//06
80,000 (5) 5.0% 1.40 10/23/07
15,000 (6) .9% .79 10/23/07
</TABLE>
- --------------------
(1) Immediately exercisable as to 1/3 of the shares as of the grant date of May
22, 1997, with the remainder vesting at 1/36 of the total shares each month
thereafter.
(2) Immediately exercisable as to 2/3 of the shares as of the grant date of
October 23, 1997, with the remaining 1/3 vesting at 1/18 each month
thereafter. These options cancel and replace certain options ranging in
price from $1.38 to $4.43. Agreement provides anti-dilution provisions. See
"Employment Contracts."
(3) Issued as repricing of earlier issued options. Vests over 36 months from
the grant date of 1/9/96, with 7/36 vesting seven months after grant, and
an additional 1/36 vesting each month thereafter.
(4) Issued as repricing of earlier issued options. Immediately exercisable in
full.
(5) Vests over eighteen months from the grant date of October 23, 1997, with
1/18 vesting each month after the grant.
(6) Vests over twelve months from the grant date of October 23, 1997, with 1/12
vesting each month after the grant.
The following table sets forth the fiscal year-end value of unexercised
options to purchase Common Stock of the Company for each Named Executive
Officer. No options or SARs were exercised by the Named Executive Officers
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)(1)
-------------------------- ----------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael W. Johnson 418,407 174,086 0 0
W. Brad Browning 68,333 111,667 0 0
</TABLE>
- -------------------
(1) Based upon the difference between the exercise price and the fair market
value of the Common Stock for those options which at December 31, 1997 had
an exercise price less than the fair market value of the Common Stock on
such date. The fair market value of Company Common Stock at December 31,
1997, measured as the mean of the closing bid and asked prices of the
Common Stock on such date, was $0.29 per share.
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
The Compensation Committee of the Board of Directors (the "Committee") has
furnished the following report on repricing of employee stock options. The
Committee has responsibility for making recommendations for compensation and
compensation policy. In carrying out this responsibility, an objective of the
Committee is to structure compensation programs that will promote long-term
stable growth and development within the Company. The Committee believes that
corporate development at InfoNow, an innovative technology company, is dependent
on its ability to attract and retain high quality people and operates to ensure
that goal.
29
<PAGE>
The Committee believes that stock options are a critical component of the
compensation offered by the Corporation to promote long-term retention of key
employees, motivate high levels of performance and recognize employee
contributions to the success of the Company. The market price of the
Corporation's common stock decreased substantially from a high of $5.00 in the
fourth quarter of 1995 to a low of $0.21 in the fourth quarter of 1997. In light
of this substantial decline in the market price, the Committee believed that the
outstanding stock options held by the Named Executive Officers with an exercise
price far in excess of the actual market price were no longer an effective tool
to encourage employee retention or to motivate high levels of performance. As a
result, on April 25, 1997, the Committee approved the repricing of stock options
held by the Named Executive Officers.
On April 25, 1997, the Committee recommended and the Board of Directors
approved the repricing of incentive options granted to Michael Johnson, Chief
Executive Officer and President of the Company. The repricing affected options
to purchase 162,288 common shares of the Company. The options were exercisable
at prices ranging from $2.81 to $4.43 per share. All options were repriced to be
exercisable at $2.11 per share, which was the fair market value of the Company's
common stock at the date of the repricing. All other terms and conditions of the
options remained unchanged. On October 23, 1997, Mr. Johnson exchanged all
incentive options, including the repriced options, representing the right to buy
257,243 share of the Company's common stock, for a single option to purchase
573,993 shares of common stock at $1.40 per share. Such option was immediately
exercisable as to two-thirds of the shares, with the remaining one-third vesting
at one-eighteenth of the total per month thereafter.
On April 25, 1997, the Committee recommended and the Board of Directors
approved the repricing of incentive options grated to W. Brad Browning, Vice
President--Internet Products Group of the Company. The repricing affected
options to purchase 75,000 common shares of the Company. The options were
exercisable at $3.625 per share. All options were repriced to be exercisable at
$2.11 per share, which was the fair market value of the Company's common stock
at the date of the repricing. All other terms and conditions of the options
remained unchanged.
In making its determination, the committee reviewed compensation of
executives with comparable backgrounds in similar companies and believes that
the Company's cash compensation is less than that paid to executives in other
companies. This action reflects the Committee's evaluation that the Company's
future lies in long-term development of new products and product lines,
retention of high quality people, and promotion of long-term growth with the
Company.
COMPENSATION COMMITTEE
Donald E. Cohen
Duane Wentworth
Michael Basch
EMPLOYMENT AGREEMENTS
On January 1, 1998, the Company entered into a eighteen month employment
agreement with Michael W. Johnson, Chief Executive Officer and President of the
Company. The agreement provides for an annual base salary of $110,000 and cash
performance bonuses of up to $130,000 based on defined financial performance
targets. The agreement provides for the acceleration of the vesting of all
options awarded to him in the event that there is a change in control of the
Company. If Mr. Johnson is terminated without cause, he is entitled to a 90 day
advance notice and a severance payment equal to 75% of his annual base salary
then in effect. In addition, the Company will accelerate vesting of 50% of all
unvested options held by him at the date of his termination.
30
<PAGE>
On October 23, 1997, the Company entered into an agreement with Michael
Johnson which 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%
to 12% of the transaction value. No compensation will be paid for transactions
valued less than $7.5 million.
A provision in the option agreement between the Company and Mr. Johnson
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, there were 962,000 shares subject to unexercised options.
On March 15, 1998, the Company entered into a two-year employment agreement
with W. Brad Browning, Vice President and General Manager of the Company's
Internet Products Group. The agreement provides for an annual base salary of
$110,000. Pursuant to the employment agreement, the Company is required to grant
to Mr. Browning options to purchase an additional 70,000 shares of Common Stock.
The options vest over a 24 month period from date of grant. All options are to
be issued at the fair market value of the date when the options are awarded. All
options vest immediately upon a change of control of the Company. If Mr.
Browning is terminated without cause, he is entitled to a severance payment
equal to 50% of his annual base compensation then in effect.
1990 STOCK OPTION PLAN
The Company's 1990 Stock Option Plan (the "Plan") was adopted by the Board
of Directors on February 22, 1990 and approved by the Company's stockholders in
October 1990. The Plan permits the granting of both incentive stock options
("ISOs") and non-statutory stock options ("NSOs") with respect to Company Common
Stock. Options may only be granted to persons who are employees of the Company,
which may include officers, directors and consultants. A total of 2,200,000
shares of the Company's Common Stock is reserved for issuance pursuant to awards
granted under the Plan and options for an aggregate of 1,554,579 shares are
outstanding as of March 31, 1998 at exercise prices ranging from $0.29 to $2.56.
61,587 options have been exercised since inception of the Plan. The Plan is
required to be administered by the Board of Directors or by a committee of two
or more directors of the Company. It is currently administered by the
Compensation Committee which determines the terms and conditions of options
granted under the Plan, including the exercise price. The exercise price of
incentive stock options granted under the Plan must be at least 100% (or 110% in
the case of a holder of 10% or more of the voting power of all classes of stock
of the Company) of the fair market value of the Company's Common Stock at the
date of grant while the exercise price of non-qualified options is at the
discretion of the Committee. Each option must expire within 10 years of the date
of grant. Options granted under the 1990 Plan are not transferable other than by
will or the laws of descent and distribution unless the Board of Directors or
Compensation Committee at the time an option is granted provides that such
option may be assigned or transferred. Securities subject to options granted
under the 1990 Plan that lapse or terminate may again be subject to options
granted under such Plan. The Plan provides that all options become fully
exercisable upon a merger of the Company, the sale of substantially all of the
Company's assets or the termination of an option holder's employment following a
change in control of the Company.
Certain Federal Income Tax Consequences of Options. Certain of the federal
income tax consequences to optionees and the Company of options with respect to
Company stock granted under the 1990 Plan should generally be as set forth in
the following summary.
An employee to whom as ISO which qualifies under Section 422 of the Code is
granted will not recognize income at the time of grant or exercise of such
option. However, upon the exercise of an ISO, any excess in the fair market
price of the Common Stock over the option price constitutes a tax preference
item which may have alternative minimum tax consequences for the employee. If
the employee sells such shares more than one year after the date of transfer of
such shares and more than two years after the date of grant of such ISO, the
employee will generally recognize a long-term capital gain or loss equal to the
difference, if any, between the sale prices of such shares and the option price.
31
<PAGE>
The Company will not be entitled to a federal income tax deduction in connection
with the grant or exercise of an ISO. If the employee does not hold such shares
for the required period, when the employee sells such shares the employee will
recognize ordinary compensation income and possibly capital gain or loss
(long-term or short-term, depending on the holding period of the stock sold) in
such amounts as are prescribed by the Code and the regulations thereunder and
the Company will generally be entitled to a federal income tax deduction in the
amount of such ordinary compensation income recognized by the employee.
An employee to whom an NSO is granted will not recognize income at the time
of grant of such option. When such employee exercises such NSO, the employee
will recognize ordinary compensation income equal to the excess, if any, of the
fair market value, as of the date of the option exercise, of the shares that the
employee receives upon such exercise over the option price paid. The tax basis
of such shares to such employee will be equal to the option price paid plus the
amount, if any, includable in the employee's gross income, and the employee's
holding period for such shares will commence on the date on which the employee
recognizes taxable income in respect of such shares. Gain or loss upon a
subsequent sale of any Company Common Stock received upon the exercise of a NSO
generally would be taxed as capital gain or loss (long-term or short-term,
depending upon the holding period of the stock sold). Certain additional rules
apply if the employee pays the option price in shares previously owned by the
employee. Subject to the applicable provisions of the Code and regulations
thereunder, the Company will be entitled to a federal income tax deduction in
respect of a NSO in an amount equal to the ordinary compensation income
recognized by the employee. This deduction will, in general, be allowed for the
taxable year of the Company in which the optionee recognizes such ordinary
income.
PRINCIPAL STOCKHOLDERS
The following table and notes set forth as of June 15, 1998, the number of
shares of the Company's outstanding Common Stock beneficially owned by (i) the
Company's Chief Executive Officer and by the highest compensated executive
officers who were serving as executive officers at the end of the 1997 fiscal
year whose individual total cash compensation for the 1997 fiscal year exceeded
$100,000 (the "Named Executive Officers"), (ii) each director of the Company,
(iii) all executive officers and directors of the Company as a group and (iv)
each person or group of persons known by the Company to beneficially own more
than five percent (5%) of the outstanding Common Stock. All information is taken
from or based upon ownership filings made by such persons with the Commission or
upon information provided by such persons to the Company.
<TABLE>
<CAPTION>
Shares
Amount and Beneficially Owned
Nature of Which May be
Name and Address of Beneficial Percent of Class Acquired Within
Beneficial Owner Ownership Beneficially Owned(1) 60 Days(4)
- ----------------- --------- --------------------- -------------------
Officers and Directors:
<S> <C> <C> <C>
Donald E. Cohen 553,967 8.1% 64,633
1875 Lawrence, Suite 1100
Denver, CO 80202
Michael W. Johnson 964,035 12.9% 650,599
1875 Lawrence, Suite 1100
Denver, CO 80202
Nahum Rand 354,048(3) 4.9% 17,804
1875 Lawrence St., Suite 1100
Denver, CO 80202
32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares
Amount and Beneficially Owned
Nature of Which May be
Name and Address of Beneficial Percent of Class Acquired Within
Beneficial Owner Ownership Beneficially Owned(1) 60 Days(4)
- ----------------- --------- --------------------- -------------------
<S> <C> <C> <C>
W. Brad Browning 241,111 3.5% 174,444
1875 Lawrence St., Suite 1100
Denver, CO 80202
Duane Wentworth 10,833 -- 10,833
1875 Lawrence St., Suite 1100
Denver, CO 80202
Michael D. Basch 4,867 -- 4,167
1875 Lawrence St., Suite 1100
Denver, CO 80202
All Officers and Directors 2,369,024 29.8% 1,144,870
as a Group (8 persons)
Principal Stockholders:
Dieter Heidrich 350,597(2) 5.1% --
1113 Spruce Street
Boulder, CO 80302
Robertson Stephens 498,615 7.3% --
Orphan Fund
555 California Street, Suite 2600
San Francisco, CA 94104
Stuart Fullinwider 400,000 5.9% --
24768 Foothills Dr. N
Golden, CO 80401
Joren Peterson 400,000 5.9% --
P.O. Box 3750
Telluride, CO 81435
</TABLE>
- -------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of Common Stock subject to options or
warrants which are currently exercisable or exercisable within 60 days are
deemed outstanding for computing the percentage of the person holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, the
Company understands that the persons named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Includes 149,557 shares of common stock held by Opus Capital Fund, LLC,
which is managed by Opus Capital, LLP. Mr. Heidrich is a managing director
of Opus Capital, LLP.
(3) Includes 336,244 shares of common stock held by the Rand Family Trust. Mr.
Rand and his wife Jane Rand are the trustees of the trust and have sole
voting and disposition power of the Trust.
33
<PAGE>
(4) Represents the number of common shares set forth in column 1 that can be
obtained through the exercise of warrants or options that are currently
exercisable or that are exercisable within the next 60 days from June 15,
1998.
CERTAIN TRANSACTIONS
On March 29, 1996, the Company borrowed $100,000 from Kevin Andrew, Vice
President and Chief Financial Officer of the Company. In consideration therefor,
the Company issued Mr. Andrew a promissory note in the principal amount of
$100,000, due March 29, 1997, bearing interest at the prime rate plus 2.75%, and
secured by all of the accounts receivable of the Company. The promissory note
was convertible at the option of the holder at any time into shares of Common
Stock of the Company at the rate of $3.00 per share. The note was subsequently
extended to June 30, 1997, and was repaid on that date.
On September 13, 1996, the Company issued shares of Common Stock to three
officers of the Company as follows: (i) the Company issued 82,667 shares of
Common Stock at a price of $1.12 and warrants to purchase 41,333 shares at $1.50
per share to Michael Johnson, President and Chief Executive Officer of the
Company, in consideration for $20,000 in cash and $73,000 in accrued salary and
expense obligations; (ii) the Company issued 17,778 shares of Common Stock at a
price of $1.12 and warrants to purchase 8,889 shares at $1.50 per share to Kevin
Andrew, Vice President and Chief Financial Officer of the Company in
consideration for $20,000 in accrued salary obligations; (iii) the Company
issued 66,667 shares of Common Stock at a price of $1.12 and warrants to
purchase 33,333 shares at $1.50 per share to W. Brad Browning, Vice President of
the Company, in consideration for $75,000 in cash. All such warrants are
exercisable until September 13, 1998.
On December 11, 1997, the Company sold all the assets of its wholly-owned
subsidiary, Cimarron International, Inc. ("Cimarron"), to Cimarron Dog and Pony,
Inc. ("Dog and Pony"). Dog and Pony is owned by Donald Cohen, a director of the
Company and the former owner of Cimarron prior to its acquisition by the Company
in 1995. After execution of the Transaction, the Company ceased all operations
of its Cimarron subsidiary and liquidated the subsidiary on December 19, 1997.
Because the Transaction did not involve a substantial part of the Company's
assets, it was not submitted to the Stockholders for approval prior to
consummation. Prior to its disposal on December 11, 1997, Cimarron had sales of
$852,000 and lost $792,000 from operations which included a charge to impairment
of long-lived assets of $863,000.
Cimarron provides comprehensive business presentation services that range
from simple graphic design to complete productions and presentations utilizing
sophisticated multimedia presentations, multimedia authoring, production and
project management. The Company acquired Cimarron in May 1995 to facilitate a
change in the Company's strategy. From the Company's inception until 1995, the
Company was focused on the distribution of software via encrypted CD-ROM. In
1995, the Company fundamentally changed its business and began to develop its
Referral Management Services for large corporate clients. The acquisition of
Cimarron allowed the Company to utilize resources and capabilities of Cimarron,
such as multimedia authoring capability and its existing client contacts, to
facilitate its change in strategic direction as well as to provide an operating
infrastructure and revenues as the Company completed this transition. The
Company paid total consideration of $1,348,000 to acquire Cimarron in 1995 of
which Mr. Cohen received $1,100,000 of the total proceeds which included common
stock of the Company valued at $640,000.
The Board of Directors unanimously approved the sale of Cimarron assets on
December 11, 1997, with the exception of Mr. Cohen, who abstained from voting in
this matter. The Board of Directors believe this sale has two major benefits to
the Company and its shareholders; first, it allows the Company to focus
exclusively on developing its FindNow Referral Management Services business
which the Company believes has a much higher growth potential than the Cimarron
business. Second, the sale provides significant additional cash to invest in
this core business. In addition, the Board of Directors believe that a sale of
Cimarron is desirable because substantial management attention will be required
in the future to reverse a three year trend of declining revenues and profits
due to changing market conditions in Cimarron's core business.
34
<PAGE>
The Company estimates the total value of the sale transaction (the
"Transaction") be $321,000, including $100,000 of contingent consideration. The
Transaction included assets of approximately $63,000 consisting of specialized
computer equipment and software, of which the Company recognized a book gain of
approximately $24,000. Also included in the Transaction were approximately
$58,500 of accounts receivable which were transferred at full value as recorded
on Cimarron's books with no offset for bad debt. Approximately $66,000 of
intangible assets related to the business tradename, customer lists, in-process
contracts and related unbilled revenues were also included in the Transaction.
Dog and Pony also assumed all recorded liabilities of Cimarron which amounted to
approximately $51,000, consisting of approximately $13,000 of accounts payable
and $37,000 of other accrued liabilities. The Company believes substantially all
of these liabilities have been satisfied. Mr. Cohen also agreed to terminate his
own employment agreement with the Company. As part of the Transaction, the
Company executed an earnout 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.
In connection with the Transaction, the Company executed a cost sharing
agreement with Dog and Pony which provides that the Company shall provide
certain administrative services for $12,000 per month. This agreement expires
March 31, 1998, and can be extended by mutual agreement of both parties.
The Company submitted the Transaction to the Vancouver Stock Exchange
("VSE") for approval in accordance with the rules and regulations of the VSE.
The Company obtained VSE approval of the Transaction subject to ratification by
the shareholders of the Company. The Transaction was ratified at the May 8, 1998
annual meeting of shareholders.
The total consideration paid including contingent consideration equals 5.2
times 1997 cash flow of approximately $62,400 and represents 3.5 times 1997 cash
flow if contingent consideration is excluded. The Board of Directors determined
that this valuation was consistent with a business in a mature or declining
market such as Cimarron. Revenues from Cimarron have been declining over the
last three years due to a shift away from 35mm slides to electronic
presentations and a trend towards in-house production of many types of business
presentations.
SELLING STOCKHOLDERS
The following tables set forth certain information with respect to the
Common Stock beneficially owned by each Selling Stockholder as of June 15, 1998,
and as adjusted to give effect to the sale of such securities. The Shares are
being registered to permit public secondary trading of such securities, and the
Selling Stockholders may offer such securities for resale from time to time. See
"Plan of Distribution."
The Shares of Common Stock being offered by the Selling Stockholders fall
into two categories: (i) 3,156,592 Shares acquired from the Company in various
private transactions in 1995, 1996 and 1997 in reliance on Section 4(2) of the
Securities Act and Regulation D promulgated thereunder as the basis for an
exemption from registration; and (ii) 329,055 Shares that may be purchased by
the Selling Stockholders upon exercise of warrants ("Warrants") held by such
persons to purchase Common Stock. In connection with such private transactions,
the Company agreed to register all such shares of Common Stock and the shares of
Common Stock issuable upon exercise of the Warrants. Except as set forth below,
35
<PAGE>
none of such Selling Stockholders has had a material relationship with the
Company within the past three years other than as a result of ownership of the
securities of the Company. The Shares may be offered from time to time by the
Selling Stockholders named below or their nominees, and this Prospectus may be
required to be delivered by persons who may be deemed to be underwriters in
connection with the offer or sale of such securities. See "Plan of
Distribution". In accordance with the rules of the Commission, the columns
"Common Stock Owned After Offering" show the amount of securities owned by
Selling Stockholders after the offering. The numbers in such columns assume all
Shares registered and offered by this Prospectus, shown in the column "Common
Stock Offered" are sold by the Selling Stockholders. However, the Selling
Stockholders are not required to sell any of the Shares offered, and the Selling
Stockholders may sell as many or as few Shares as they choose. See "Plan of
Distribution".
<TABLE>
<CAPTION>
Name of Common Stock Common Stock Common Stock
Selling Stockholders Owned Prior to Offering(1) Offered Owned After Offering(1)
-------------------- -------------------------- ------- -----------------------
Amount Percent(3) Amount(4) Percent(3)(5)
------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Rand Family Trust(6) 336,244 4.9% 128,000 208,244 --
Nahum Rand 17,804 -- 8,500(2) 0 --
OPUS Capital Fund LLC(7) 149,557 2.2% 149,557(2) 0 --
Environmental Systems Research 115,000 1.7% 115,000(2) 0 --
Institute, Inc.
Donald Cohen(8) 553,967 8.1% 497,834(2) 56,133 --
Copeland Consulting Group, Inc.(9) 146,157 2.2% 96,517(2) 50,000 --
Michael Johnson(10) 964,035 12.9% 363,269(2) 600,766 8.4%
Paul Stapleton 37,500 -- 37,500 0 --
Kevin Andrew(11) 142,585 2.1% 26,667(2) 115,918 1.6%
W. Brad Browning(12) 241,111 3.5% 100,000(2) 141,111 2.0%
David Honan 48,040 -- 7,143 40,897 --
Joren Peterson 400,000 5.9% 325,000 75,000 1.0%
Stuart Fullinwider 400,000 5.9% 325,000 75,000 1.0%
Pfeiffer Public Relations 75,000 1.3% 75,000(2) 0 --
Robert Louthan 30,000 - 30,000(2) 0 --
Robertson Stephens Diversified Growth 271,415 4.0% 271,415(2) 0 --
Fund
Robertson Stephens Orphan Fund 498,615 7.3% 498,615 0 --
Robertson Stephens Orphan Offshore Fund 287,130 4.2% 287,130 0 --
Larry Baratz 28,500 - 28,500 0 --
Dennis DeCoste 105,000 1.5% 105,000 0 --
Bud Zuckerman 10,000 - 10,000 0 --
All Selling Stockholders as a Group 5,186,742 64.3% 3,485,647 1,363,069 19.1%
36
</TABLE>
<PAGE>
- -----------------
(1) Includes shares underlying options and Warrants to purchase Common Stock
which are currently exercisable or are exercisable within 60 days.
(2) Includes the following Shares which may be purchased by Selling
Stockholders upon exercise of Warrants: Nahum Rand - 8,500 Shares; Pfeiffer
Public Relations - 75,000 Shares; Michael W. Johnson - 49,833 Shares;
Donald Cohen - 8,500 Shares; Kevin Andrew - 8,889 Shares; W. Brad Browning
-33,333 Shares; ESRI - 115,000 Shares; Robert Louthan - 30,000 Shares.
(3) No percent of class is shown for holders of less than 1%. Percentage
computations are based on 6,814,076 shares of Common Stock outstanding as
of June 15, 1998.
(4) Assumes sale of all Common Stock offered hereby. See "Plan of Distribution".
(5) Assumes issuance of 329,055 shares of Common Stock issuable upon exercise
of shares of Common Stock underlying the Warrants registered hereby, and is
therefore based on 7,143,131 shares of Common Stock outstanding. No percent
of class is shown for holders of less than 1%.
(6) Nahum Rand, a director of the Company, and his wife are the trustees of the
trust and have sole voting and disposition power over the trust.
(7) OPUS Capital Fund, LLC is managed by OPUS Capital, Inc. OPUS Capital Inc.
("OPUS") has provided financial and strategic consulting services to the
Company. Dieter Heidrich is a managing director of OPUS.
(8) Mr. Cohen is Vice-Chairman of the Company, and has served as a director of
the Company since May 1995.
(9) Mr. Copeland is a former director of the Company.
(10) Mr. Johnson is the President, Chief Executive Officer and a director of the
Company.
(11) Mr. Andrew is a Vice President and Chief Financial Officer of the Company.
(12) Mr. Browning is a Vice President of the Company.
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Stockholders is not subject
to any underwriting agreement. The Shares offered by the Selling Stockholders
may be sold from time to time at designated prices that may be changed, at
market prices prevailing at the time of sale, at prices relating to such
prevailing market prices or at negotiated prices. In addition, the Selling
Stockholders may sell the Shares through customary brokerage channels, either
through broker-dealers acting as agents or principals. The Selling Stockholders
may effect such transactions by selling Shares to or through broker-dealers, and
such broker-dealers may receive compensation in the form of underwriting
discounts, concessions, commissions, or fees from the Selling Stockholders
and/or purchasers of the Shares for whom such broker-dealers may act as agent,
or to whom they sell as principal, or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). Any broker-dealers
that participate with the Selling Stockholders in the distribution of Shares may
be deemed to be underwriters and any commissions received by them and any profit
on the resale of Shares positioned by them might be deemed to be underwriting
discounts and commissions within the meaning of the Securities Act of 1933, in
connection with such sales. The Company has entered into a Selling Agreement
with holders of all of the Shares offered hereby, which contains the Company's
agreement to indemnify the Selling Stockholders for losses or damages, including
losses or damages under the Securities Act, to which the Selling Stockholders
may become subject arising out of or based upon untrue statements of fact
contained in the registration statement of which this Prospectus is a part.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of an aggregate of
15,000,000 shares of Common Stock, $.001 par value, and 1,962,335 shares of
Preferred Stock, $.001 par value. As of the date hereof, 6,814,076 shares of
Common Stock, and no shares of Preferred Stock, are outstanding.
COMMON STOCK
Subject to preferences that may apply to any Preferred Stock outstanding at
the time, the holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the Board of Directors may from time to time determine. Each
stockholder is entitled to one vote for each share of Common Stock held on all
matters submitted to a vote of stockholders. Cumulative voting for the election
of directors is not provided for in the Company's Certificate of Incorporation,
which means that the holders of a majority of the shares voted can elect all of
37
<PAGE>
of the directors then standing for election. The Common Stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon
liquidation, dissolution or winding-up of the Company, the assets legally
available for distribution to stockholders are distributable ratably among other
holders of the Common Stock and any participating Preferred Stock outstanding at
that time after payment of liquidation preferences, if any, on any outstanding
Preferred Stock and payment of other claims of creditors. Each outstanding share
of Common Stock is, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Of the 1,962,335 shares of authorized Preferred Stock, 213,483 shares are
designated Series A Convertible Preferred Stock, and 1,748,852 shares are
without designation.
Each share of Series A Convertible Preferred Stock is convertible into four
shares of Common Stock. The Series A Convertible Preferred Stock has a
liquidation preference of $1.593 per share, and is entitled to dividends when,
as and if declared, and is entitled to dividends in preference to dividends on
any junior securities of the Company. The Series A Convertible Preferred Stock
has voting rights on all matters subject to stockholder voting, and votes on an
as-converted-to Common Stock basis. There are no shares of Series A Convertible
Preferred Stock outstanding and the Company has no plans to issue such stock.
The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, to provide for the issuance of 1,748,852 shares of Preferred
Stock in one or more series, to establish from time to time the number of shares
to be included in each such series, to fix the powers, designations, preferences
and rights of the shares of each wholly unissued series and any qualifications,
limitations or restrictions thereon and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding) without any further vote or action by the stockholders. The
Board of Directors may authorize the issuance of Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Common Stock. Thus, the issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. See "Risk Factors--Future Issuance of Stock by Company Without
Shareholder Approval". The Company has no current plan to issue any shares of
Preferred Stock.
STOCK OPTIONS AND WARRANTS
The 1990 Plan provides for the grant of options to acquire a maximum of
2,200,00 shares of Common Stock. As of June 15, 1998, options for an aggregate
of 173,579 shares are outstanding at exercise prices ranging from $0.29 to
$2.56. 61,587 options have been exercised since inception of the Plan. See
"Management-- 1990 Stock Option Plan".
As of June 15, 1998, warrants to purchase 641,815 shares of Common Stock
are outstanding, and of such number 610,732 are currently exercisable or are
exercisable within 60 days from such date. The warrants were issued between 1993
and 1998 in financing transactions, as director compensation, and for other
purposes. The warrants are exercisable at prices ranging from $.29 to $56.90.
108,952 of the warrants expire in 1998, 200,000 of the warrants expire in 1999,
200,000 of the warrants expire in 2000, 105,000 expire in 2001 and 27,863 of the
warrants expire in 2005. Certain of the warrants which expire in 1998 contain
ratcheting provisions which act to protect the warrant holder from issuances of
Company securities below market value.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American
Securities Transfer & Trust, Inc.
38
<PAGE>
INDEMNIFICATION
Article VII of the Registrant's Certificate of Incorporation provides that
the personal liability of the directors of the Registrant to the Registrant or
its stockholders for monetary damages for a breach of fiduciary duty as a
director is eliminated to the maximum extent permitted by Delaware law. Article
V of the Registrant's Bylaws provides for the indemnification of the
Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933 (the "Securities Act").
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the registrant,
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 6,814,079 shares of
Common Stock outstanding based upon the number of shares outstanding as of June
15, 1998. Of the 3,485,647 Shares offered pursuant to this Prospectus, 3,156,592
are shares of Common Stock which prior to this offering were outstanding but not
freely tradeable, but which are now freely tradeable without restriction or
further registration under the Securities Act unless acquired by an "affiliate"
of the Company as that term is defined in Rule 144 ("Rule 144") under the
Securities Act, which shares will be subject to the resale limitations of Rule
144 described below. Of the 3,485,647 Shares offered pursuant to this
Prospectus, the remaining 329,055 Shares represent shares of Common Stock
underlying Warrants which have not been exercised. If all of such Warrants are
exercised, the total number of shares of Common Stock outstanding would increase
from 6,814,079 to 7,143,134.
In general, under Rule 144 as currently in effect, a stockholder who has
beneficially owned for at least one year shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company who have acquired the shares in registered
transactions, will be entitled to sell within any three month period a number of
shares that does not exceed the greater of: (i) 1% of the outstanding shares of
the Common Stock (approximately 68,140 shares immediately after completion of
the offering); or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements relating to the manner and notice of sale
and the availability of current public information about the Company.
In general under Rule 144(k), as currently in effect, a stockholder, who is
not an affiliate of the Company, and who has beneficially owned such shares for
at least two years, may sell all of such stockholder's shares without the volume
limitations of Rule 144 described above.
The Company has reserved 2,200,000 shares of Common Stock for issuance
under the 1990 Plan. At appropriate times subsequent to completion of the
offering, the Company intends to file registration statements under the
Securities Act to register the Common Stock to be issued under those plans.
After the effective date of such registration statements, shares issued under
these plans will be freely tradable without restriction or further registration
under the Securities Act, unless acquired by affiliates of the Company.
Prior to this offering, the market for the Company's securities has been
characterized by volatility and small trading volume. No predictions can be made
with respect to the effect, if any, that public sales of shares of the Common
Stock or the availability of shares for sale will have on the market price of
the Common Stock after the offering. Sales of substantial amounts of Common
Stock in the public market following the offering, or the perception that such
sales may occur, could adversely affect the market price of the Common Stock or
the ability of the Company to raise capital through sales of its equity
securities. See "Risk Factors--Securities Eligible for Future Sale."
39
<PAGE>
CERTAIN U.S. TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
holder who is not a U.S. person (a "Non-U.S. Holder"). For this purpose, the
term "Non-U.S. Holder" means any person who or that is, for United States
federal income tax purposes, a foreign corporation, a non-resident alien
individual, a foreign estate or trust, or a foreign partnership one or more of
the members of which is a Non-U.S. Holder. This discussion does not deal with
foreign, state and local tax consequences and does not address all aspects of
U.S. federal income and estate taxes that may be relevant to Non- U.S. Holders
in light of their personal circumstances. (In particular, the discussion does
not discuss the treatment of Non-U.S. Holders subject to special tax treatment
under the federal income tax laws, including banks, insurance companies, dealers
in securities, and holders of securities as part of a "straddle", "hedge", or
"conversion transaction".) Furthermore, this discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, all of which are subject to change (possibly
with retroactive effect). Each prospective purchaser of Common Stock is advised
to consult a tax advisor with respect to current and possible future tax
consequences of acquiring, holding and disposing of Common Stock.
An individual will be deemed to be a resident alien for U.S. tax purposes
if the individual is treated as a permanent U.S. resident under U.S. immigration
laws or, subject to certain exceptions, if the individual is present in the
United States on at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three- calendar year period ending with the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to U.S. federal tax as if they were U.S. citizens; they are also subject
to the U.S. estate tax (generally without benefit of the marital deduction for a
non-citizen spouse).
DIVIDENDS
The gross amount of any dividends paid by the Company to a Non-U.S. Holder
of Common Stock will generally be subject to withholding of U.S. federal income
tax at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty, unless the dividends are effectively connected with the conduct of a
trade or business of the Non-U.S. Holder within the United States. If a dividend
is effectively connected with the conduct of a trade or business of the Non-U.S.
Holder within the United States (and if a tax treaty applies, is attributable to
a "permanent establishment" in the United States, through which such trade or
business is conducted), the dividend would be subject to U.S. federal income tax
on a net income basis at applicable graduated individual or corporate rates, as
the case may be, and, provided that the applicable certificate is provided,
would be exempt from the 30% withholding tax described above. Any such dividends
received by a corporate Non-U.S. Holder may be eligible for the 70%
dividends-received-deduction. Any effectively connected dividend may under
certain circumstances, also be subject to an additional "branch profits tax" at
a 30% rate or at such lower rate (including zero) as may be specified by an
applicable income tax treaty.
Under current U.S. Treasury regulations, dividends paid to an address
outside the United States are presumed to be paid to a resident of such country
(unless the payor has knowledge to the contrary) for purposes of determining the
applicability of a tax treaty rate. Under proposed U.S. Treasury regulations not
currently in effect, however, a Non-U.S. Holder of Common Stock who wishes to
claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification and other requirements.
40
<PAGE>
A Non-U.S. Holder of Common Stock eligible for a reduced rate of U.S.
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts of U.S. tax withheld by the Company by filing an appropriate claim for
refund with the U.S. Internal Revenue Service (the "Service").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and generally no tax will be withheld) with respect to gain recognized on a
sale or other disposition of Common Stock unless (i) the gain is effectively
connected with the conduct of a trade or business of the Non-U.S. Holder within
the United States and, where a tax treaty applies, is attributable to a United
States permanent establishment of the Non-U.S. Holder, (ii) in the case of a
Non-U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, or (iii) the Company is or has been a "U.S. real property holding
corporation" for U.S. federal income tax purposes. The Company has not been and
does not anticipate becoming a "U.S. real property holding corporation" for U.S.
federal income tax purposes. Non-U.S. Holders who fall under clause (i) or (ii)
above, should consult their tax advisors regarding the tax treatment applicable
to them.
FEDERAL ESTATE TAXES
Common Stock owned, or treated as owned, by a non-resident alien individual
(as specifically determined for U.S. Federal estate tax purposes) at the time of
death will be included in such holder's gross estate for U.S. federal estate tax
purposes, unless an applicable tax treaty provides otherwise.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the Service and to each Non-U.S. Holder
the amount of dividends paid to such holder and the tax withheld with respect to
such dividends. These information reporting requirements apply whether or not
withholding is required. Copies of the information returns reporting such
dividends and tax withheld may also be made available to the tax authorities in
the country in which the Non-U.S. Holder resides under exchange- of-information
provisions of an applicable income tax treaty.
U.S. backup withholding tax (which generally is a withholding tax imposed
at the rate of 31% on certain payments to persons not otherwise exempt who fail
to furnish certain information under U.S. information reporting requirements)
generally will not apply to (a) dividends paid to a Non-U.S. Holder that is
subject to U.S. withholding at the 30% rate (or such lower rate provided under
an applicable treaty) or (b) under current law dividends paid to a Non-U.S.
Holder at an address outside the U.S. However, under proposed regulations, in
the case of dividends paid after December 31, 1997 (December 31, 1999 in the
case of dividends paid to accounts in existence on or before the date that is 60
days after the proposed regulations are published as final regulations), a
Non-U.S. Holder generally would be subject to backup withholding at a 31% rate,
unless certain certification procedures (or, in the case of payments made
outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, either directly or indirect
through an intermediary.
The backup withholding and information reporting requirements will not
apply with respect to the proceeds paid to a Non-U.S. Holder upon the sale of
Common Stock to or through the foreign office of a broker. In the case of the
payment of proceeds from such a sale of Common Stock through a foreign office of
a broker that is a U.S. person or a "U.S. related person", however, information
reporting (but not backup withholding) is required with respect to the payment
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and certain other requirements are met or the Holder otherwise
establishes an exemption. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for U.S. federal income tax purposes, or (ii) a
foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
41
<PAGE>
is derived from activities that are effectively connected with the conduct of a
U.S. trade or business. The payment of the proceeds of a sale of shares of
Common Stock to or through a U.S. office of a broker is subject to information
reporting and possible backup withholding unless the owner certifies its
non-U.S. status under penalties of perjury or otherwise establishes an
exemption. Any amounts withheld under the backup withholding rules from a
payment to a Non-U.S. Holder will be allowed as a refund or a credit against the
Holder's U.S. federal income tax liability, provided that required information
is furnished to the Service.
These information reporting and backup withholding rules are under review
by the U.S. Treasury, and their application to the Common Stock could be changed
prospectively by future regulations. The U.S. Treasury has recently issued final
regulations requiring Non-U.S. Holders to acquire U.S. taxpayer identification
numbers in situations where they are obligated to file certain U.S. tax returns
and where they file refund claims. This provision is not applicable with respect
to information returns.
THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT WITH HIS TAX ADVISOR
WITH RESPECT TO THE INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF UNITED
STATES FEDERAL LAWS AND THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed upon
for the Company by Chrisman, Bynum & Johnson, P.C., Boulder, Colorado.
EXPERTS
The Consolidated Financial Statements of the Company for the years ended
December 31, 1997 and 1996 appearing in this Prospectus and Registration
Statement have been audited by Hein + Associates LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The report of Hein+Associates LLP dated February 13,
1998 contained an explanatory paragraph concerning the Company's ability to
continue as a going concern.
42
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ....................................... F-2
Consolidated Balance Sheets - March 31, 1998 (unaudited)
and December 31, 1997 and 1996 ................................... F-3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 (unaudited) and for the
years ended December 31, 1997 and 1996 ........................... F-4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 1998 (unaudited) and for the years
ended December 31, 1997 and 1996 ................................. F-5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited) and for the years ended
December 31, 1997 and 1996 ....................................... F-7
Notes to Consolidated Financial Statements ........................... F-8
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US Dollars in Thousands, except per share information)
March 31, December 31,
--------- ---------------------------
ASSETS 1998 1997 1996
------ ---- ---- ----
(Unaudited)
Current Assets:
<S> <C> <C> <C>
Cash and equivalents $ 972 $ 325 $ 2,050
Accounts receivable 254 177 161
Prepaids and other current assets 38 20 99
-------- -------- --------
Total current assets 1,264 522 2,310
Property and equipment, net 566 647 693
Capitalized software development costs, net
of accumulated amortization of $450, $384
and $141 in March 31, 1998, 1997 and 1996
respectively 80 146 363
Goodwill, net of accumulated amortization
of $108 in 1996 -- -- 913
Other assets and deferred charges 9 9 11
-------- -------- --------
Total Assets $ 1,919 $ 1,324 $ 4,290
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion $ 210 $ 209 $ 210
Convertible notes payable to related party -- -- 100
Accounts payable and accrued expenses 443 402 412
Unearned revenue and prepaid service fees 262 263 228
Deferred compensation 32 5 76
-------- -------- --------
Total current liabilities 947 879 1,026
NOTES PAYABLE, net of current portion 35 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, 5,816,179; 5,364,179
and 5,515,164 issued and outstanding
at March 31, 1998, December 31, 1997
and 1996 respectively 6 5 6
Additional paid-in capital 22,739 21,904 22,316
Accumulated deficit (21,808) (21,511) (19,150)
-------- -------- --------
Total stockholders' equity 937 398 3,172
-------- -------- --------
Total Liabilities and Stockholders' Equity $ 1,919 $ 1,324 $ 4,290
======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US Dollars in Thousands, except per share information)
Three Months Ended March 31, For the Years Ended December 31,
---------------------------- --------------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
SALES $ 442 $ 226 $ 1,053 $ 1,124
OPERATING EXPENSES:
Cost of sales and direct project
related costs 405 353 1,501 732
Selling and marketing 131 137 575 231
General and administrative 208 237 965 1,772
Impairment of long-lived assets -- (365) (363) 1,540
----------- ----------- ----------- -----------
Total operating expenses 744 362 2,678 4,275
----------- ----------- ----------- -----------
Loss from operations (302) (136) (1,625) (3,151)
OTHER INCOME (EXPENSE):
Other non-operating income (loss) 1 -- 2 (15)
Interest income 1 14 40 13
Interest expense (2) (8) (26) (34)
----------- ----------- ----------- -----------
-- 6 16 (36)
Loss from continuing operations (297) (130) (1,609) (3,187)
Discontinued operations
Income from operations of Cimarron Int'l -- (10) 86 95
Loss on disposal of Cimarron -- -- (838) --
----------- ----------- ----------- -----------
Net loss and comprehensive loss $ (297) $ (140) $ (2,361) $ (3,092)
=========== =========== =========== ===========
Basic and Diluted EPS per common share:
Continuing operations $ (0.06) $ (0.03) $ (0.30) $ (0.89)
Discontinued operations -- -- (0.14) 0.03
----------- ----------- ----------- -----------
Net loss and comprehensive loss $ (0.06) $ (0.03) $ (0.44) $ (0.86)
=========== =========== =========== ===========
Weighted Average Common
Shares Outstanding 5,363,886 5,509,786 5,396,024 3,587,128
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1997 and 1996 (Audited)
and for the Three Months ended March 31, 1998 (Unaudited)
(US Dollars in Thousands, except per share information)
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)
---------- ---------- ---------- ----------
(continued)
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1997 and 1996 (Audited)
and for the Three Months ended March 31, 1998 (Unaudited)
(US Dollars in Thousands, except per share information)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
(unaudited)
Issuance of common stock
in exchange for note 2,000 -- 1 --
Common shares valued at US$1.75
per share for cash in March 27, 1998
private placement 450,000 1 787 --
Non-cash charge related to the issuance of
warrants to purchase common stock issued
to a consultant -- -- 47 --
Net loss -- -- -- (297)
--------- --------- --------- ---------
BALANCES, March 31, 1998 (Unaudited) 5,816,179 $ 6 $ 2,739 $ (21,808)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INFONOW CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US Dollars in Thousands)
For the Three Months For the Years Ended
Ended March 31, December 31,
-------------------- -------------------
(Unaudited)
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (297) $ (140) $(2,361) $(3,092)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 161 121 619 508
Loss on disposal of business segment -- -- 838 --
Impairment of long-lived asset -- (365) (363) 1,540
Loss on disposal of property and equipment -- -- (1) 15
Compensation expense recognized in connection
with stock option and warrant issuances 47 -- 3 --
Other 6 -- -- (8)
Changes in operating assets and liabilities:
Accounts receivable (85) (32) (74) 204
Other current assets (16) (21) 137 (64)
Other assets and deferred charges -- 3 2 (8)
Accounts payable and other liabilities 69 (20) (57) 365
Unearned revenues and prepaid service fees -- (120) 52 175
------- ------- ------- -------
Net cash used in operating activities (115) (574) (1,205) (365)
INVESTING ACTIVITIES:
Purchase of property and equipment (14) (49) (134) (693)
Disposition of subsidiaries -- -- 85 (97)
Acquisition of geographic data -- (100) (180) --
Additions to capitalized software -- -- (26) (250)
Proceeds from sale of property and equipment -- -- 6 2
------- ------- ------- -------
Net cash flows used in investing act (14) (149) (240) (1,038)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 788 (21) (55) 2,809
Proceeds from exercise of options and warrants -- 1 4 209
Proceeds from notes payable 9 -- -- 417
Proceeds (payment) of related party note -- -- (100) 100
Principal payments on debt obligations (21) (26) (120) (314)
------- ------- ------- -------
Net cash provided by (used in) financing
activities 776 (46) (271) 3,221
Net increase (decrease) in cash and equivalents 647 (769) (1,725) 1,818
------- ------- ------- -------
CASH AND EQUIVALENTS, beginning of period 325 2,050 2,050 232
------- ------- ------- -------
CASH AND EQUIVALENTS, end of period $ 972 $ 1,281 $ 325 $ 2,050
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-7
</TABLE>
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information for periods subsequent to December 31, 1997 is unaudited
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.
F-8
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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.
F-9
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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
F-10
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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. The Company adopted statements 130 and 131 effective for its fiscal
year ended December 31, 1998.
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.
n. Unaudited Information
The information set forth in these financial statements as of March 31,
1998 and for the three-month period ended March 31, 1998, is unaudited. This
information reflects all adjustments, consisting only of normal recurring
adjustments, that, in the opinion of management, are necessary to present fairly
the financial position and results of operations of the Company for these
periods. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full fiscal year.
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
F-11
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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.
F-12
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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.
F-13
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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
========
F-14
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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%. 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.
F-15
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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 27, 1998, the Company completed a private placement of 450,000
shares of common stock at $1.75 per share, which was above the market price of
the Company's common stock at the date of the transaction. Total gross proceeds
from the sale of the stock were $787,500. The company served as its own
placement agent and no significant transaction costs were incurred in the
placement other than incidental legal fees.
On March 18, 1997, the Company retired 153,804 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 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.
F-16
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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.
F-17
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
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
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
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
$.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.
F-18
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
During the three months ended March 31, 1998, the Company issued options to
purchase 139,000 shares of the Company's common stock. The options are
exercisable at prices ranging from $0.29 to $1.09 per share. The stock options
initially have ten-year terms. However, the option terms provide that the
options shall expire five years from the date of issuance in the event that the
company does not achieve Advance Board status on the Vancouver Stock Exchange
within five years.
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:
1997 1996
----------------------- -----------------------
Weighted- Weighted
Average -Average
Exercise Exercise
Warrants Shares Price Shares Price
- -------- ------ ----- ------ -----
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
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.
F-19
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
During the three months ended March 31, 1998, the Company issued warrants to
purchase 105,000 shares of the company's common stock. The warrants have
three-year terms and are exercisable at prices from $0.29 to $1.20 per share.
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)(2)
Identifiable Assets 1,324 3,156
Discontinued operations:
Sales $ 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 long-lived asset of $1,540,000 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.
F-20
<PAGE>
INFONOW CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for periods subsequent to December 31, 1997 is unaudited
b. Contingent Issuance of Stock Options
In connection with an employment agreement, for an officer of the Company,
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. Subsequent to December 31, 1997,
the Company negotiated a new employment agreement with the officer which
eliminated the provision of contingent options.
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.
F-21
<PAGE>
======================================== =====================================
No person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and, if
given or made, such information or 3,896,430 Shares
representations must not be relied upon
as having been authorized. This
Prospectus does not constitute an offer
to sell or the solicitation of any offer
to buy any securities other than the
securities to which it relates or an InfoNow Corporation
offer to sell or the solicitation of an
offer to buy such securities in any
circumstances in which such offer or
solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale
made hereunder shall, under any Common Stock
circumstances, create any implication (par value $.001 per share)
that there has been no change in the
affairs Common Stock of the Company
since the date hereof or that the (par
value $.001 per share) information
contained herein is correct as of any
time subsequent to its date. ------------
TABLE OF CONTENTS
Page [GRAPHIC]
InfoNow Company Logo
Available Information...................2
Prospectus Summary......................3
Risk Factors............................5
The Company.............................9
Use of Proceeds........................10
Market for the Company's InfoNow
Common Stock.........................11 Corporation
Determination of Offering Price........11
Dividend Policy........................11
Capitalization.........................12
Selected Financial Data................13
Management's Discussion and Analysis...13
Business...............................17
Changes in Company's Certifying
Accountant...........................23
Management.............................24
Principal Stockholders.................32
Certain Transactions...................34
Selling Stockholders...................35
Plan of Distribution...................37
Description of Securities..............37
Indemnification........................39
Shares Eligible for Future Sale........39
Certain U.S. Tax Consequences
to Non-U.S. Holders
of Common Stock......................40
Legal Matters..........................42
Experts................................42
Consolidated Financial Statements.....F-1
========================================= ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The information in this Item gives retroactive effect to a 1-for-25 reverse
stock split of the Company's Common Stock which was effective April 7, 1995.
The Registrant sold the following unregistered securities during 1995:
(1) On March 30, 1995, the Company delivered to Sigma Security (Europe
LTD.) a convertible promissory note in the amount of $50,000, convertible into
Common Stock for $.80 per share. The note was subsequently converted into 64,401
shares of Common Stock in May 1995. In connection with such conversion, the
Company issued a warrant to purchase 62,500 shares of Common Stock at $1.30 per
share.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(2) On May 9, 1995 the Company issued to the Lenders 299,028 shares of
Common Stock and warrants to purchase 299,028 shares of Common Stock at prices
ranging from $1.30 to $2.60 in exchange for all remaining principal and accrued
interest through April 30, 1995 on the Master Note ($458,046) and 37,665 shares
of Series A Preferred Stock.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(3) On May 22, 1995, the Company sold an aggregate of 1,039,846 shares of
Common Stock to 13 accredited investors (9 Canadian residents and 4 United
States residents), for an aggregate purchase price of $1,351,800. In connection
with such transaction, the Company issued to a placement agent a warrant to
purchase 100,000 shares of Common Stock at $1.30 per share.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemptions provided by Regulation D and Regulation S of the Securities Act.
(4) On May 22, 1995, the Company issued 533,334 shares of Common Stock
(aggregate value of $693,334) to Donald Cohen and a secured convertible
promissory note in the aggregate principal amount of $300,000 to Therese Cohen
in exchange for all of the outstanding capital stock of Cimarron International,
Inc. In connection with the acquisition, the Company issued warrants to purchase
107,844 shares of Common Stock, exercisable at $.40 per share, to Opus Capital,
Inc. for its advisory services in connection with the transaction.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(5) On May 22, 1995, Nahum Rand, Chairman of the Board of the Company, was
issued 48,077 shares of Common Stock valued at $1.30 per share, as well as a
warrant to purchase 125,000 shares of Common Stock at $0.40 per share, in
consideration for services as Chairman of the Company.
II-1
<PAGE>
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(6) On May 22 1995, in consideration for financial advisory services, the
Company issued warrants to purchase Common Stock at an exercise price of $.40
per share to the following persons in the following amounts: --Dieter Heidrich,
170,065 shares, Daryl Yurek, 170,065 shares, and Copeland Consulting Group,
Inc., 120,043 shares. Gene Copeland, a director of the Company is a principal of
Copeland Consulting Group, Inc.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(7) On May 22 1995, in consideration for marketing consulting, the Company
issued to a consultant warrants to purchase 37,500 shares of Common Stock at
exercise prices ranging from $.40 to $.80 per share.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(8) On June 19, 1995, the Company issued warrants to purchase 16,650 shares
of Common Stock at $2.25 to director Nahum Rand in consideration for services as
Chairman of the Company.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(9) On July 17, 1995, the Company issued to each of Dieter Heidrich and
Daryl Yurek warrants to purchase 25,000 shares of Common Stock at $2.25 per
share for financial advisory services.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(10) On June 30, 1995, the Company issued 16,737 shares of Common Stock to
certain vendors of the Company in consideration for the cancellation of Company
accounts payable of approximately $38,511.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(11) On August 21, 1995, the Company issued 67,731 shares of Common Stock
to an existing stockholder in consideration for $39,961.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption provided by Regulation S of the Securities Act.
(12) On August 23, 1995, the Company issued 498,621 shares of Common Stock
(aggregate value of $2,119,139) and promissory notes in the aggregate principal
amount of $50,000 to Paul D. Barker ($2,500); Craig Michaelis ($23,970); David
Wertzberger ($13,970); and Michael Yates ($19,560) in exchange for all of the
outstanding capital stock of Navigist, Inc. In connection with the acquisition,
the Company issued to Opus Capital, Inc. and Copeland Consulting Group, Inc.
warrants to purchase an aggregate of 91,920 shares of Common Stock at exercise
prices ranging $.40 to $3.25 per share, for advisory services in connection with
the transaction. In addition, the Company issued a warrant to purchase 24,000
shares of Common Stock at $4.25 to a consultant of Navigist, Inc.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
II-2
<PAGE>
(13) On October 10, 1995, for management advisory services performed, the
Company issued warrants to purchase Common Stock at $.40 per share to Copeland
Consulting Group, Inc., Dieter Heidrich and Daryl Yurek, in the amounts of
23,486, 35,229 and 35,229 shares respectively.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(14) On December 1, 1995, Michael Johnson, assignee of Therese Cohen,
converted a convertible promissory note in the principal amount of $300,000 into
230,769 shares of Common Stock.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(15) In June 1995 the Company issued to Mark Bronder, former Chief
Executive Officer of the Company, 14,072 shares of the Company's Common Stock,
valued at $2.38 per share for accrued salary and expenses of approximately
$33,474.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
The Registrant sold the following unregistered securities during 1996:
(1) On March 29, 1996 the Company executed a promissory note to Kevin
Andrew, the Company's Chief financial Officer, in the amount of $100,000,
secured by all the receivables of the Company. The note can be converted into
common stock at $3.00 per share at any time prior to maturity.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(2) On March 5, 1996, the Company issued a warrant to Environmental Systems
Research Institute, Inc. to purchase 115,000 shares of Common Stock at $2.63 per
share in connection with an agreement to provide services to the Company.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(3) On September 13, 1996, the Company issued an aggregate of 167,111
shares of Common Stock and warrants to purchase an aggregate of 83,556 shares of
Common Stock at a purchase price of $1.50 each in return for $188,000 net
proceeds as follows:
Michael Johnson contributed $93,000 in cash, deferred salary and
deferred expenses for 82,667 shares and 41,333 warrants; W. Brad
Browning contributed $75,000 in cash for 66,667 shares and 33,333
warrants; and Kevin Andrew contributed $20,000 in deferred salary for
17, 778 shares and 8,889 warrants
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(4) On December 6, 1996, the Company sold an aggregate of 2,014,723 Units,
each Unit consisting of one share of Common Stock and one non-transferrable
share purchase warrant, to 17 accredited investors (9 nonUnited States residents
and 8 United States residents), for an aggregate purchase price of $2,820,612.
Two share purchase warrants entitle the holder to acquire one additional Common
share at $1.40 per share. In connection with the transaction, the Company issued
a warrant to purchase 105,000 shares of Common Stock at $1.40 to Cruttenden
Roth, Inc. for services rendered in connection with the placement.
II-3
<PAGE>
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemptions contained in Section 4(2) and provided by Regulation S of the
Securities Act.
The Registrant sold no unregistered securities during 1997.
The Registrant sold the following unregistered securities during 1998:
(1) On January 23, 1998, the Company issued warrants to purchase 30,000
shares of Common Stock to a consultant who performed recruiting consulting
services for the Company. The warrant has an exercise price of $.29 per share
and expires January 23, 2001.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(2) On March 2, 1998, the Company issued 2,000 shares of Common Stock with
an aggregate value of $1,660 to a non-U.S. resident in connection with a loan to
the Company.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemptions provided by Regulation S of the Securities Act.
(3) On March 27, 1998, the Company sold an aggregate of 450,000 shares of
Common Stock to two accredited investors for an aggregate purchase price of
$787,500.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemptions provided by Regulation D of the Securities Act.
(4) On April 9, 1998, the Company issued 37,500 shares of Common Stock to
an existing shareholder upon exercise of warrants to purchase Common Stock, in
consideration for payment of an aggregate price of $22,000, the exercise price
of the warrants.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(5) On May 22, 1998, the Company issued 224,517 shares of Common Stock to
existing shareholders upon exercise of warrants to purchase Common Stock, in
consideration for payment of an aggregate price of $89,807, the exercise price
of the warrants.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(6) On May 22, 1998, the Company issued 50,000 shares of Common Stock to an
existing shareholder upon exercise of warrants to purchase Common Stock, in
consideration for payment of an aggregate price of $65,000, the exercise price
of the warrants.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemptions provided by Regulation S of the Securities Act.
II-4
<PAGE>
(7) On June 5, 1998, the Company issued 551,630 shares of Common Stock to
existing shareholders upon exercise of warrants to purchase Common Stock, in
consideration for payment of an aggregate price of $772,281, the exercise price
of the warrants.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemption contained in Section 4(2) of the Securities Act.
(8) On June 5, 1998, the Company issued 134,250 shares of Common Stock to
existing shareholders upon exercise of warrants to purchase Common Stock, in
consideration for payment of an aggregate price of $188,949, the exercise price
of the warrants.
The Company believes this transaction was private in nature and was exempt from
the registration requirements of Section 5 of the Securities Act by virtue of
the exemptions provided by Regulation S of the Securities Act.
II-5
<PAGE>
ITEM 27. EXHIBITS
(a) The following documents are filed herewith and made a part of this
Registration Statement:
Exhibit
Number Description of Exhibit
- ------ ----------------------
1.1* Form of Selling Agreement
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)
5.1* Opinion of Chrisman, Bynum & Johnson, P.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 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)
10.34 Employment Agreement between the Company and Donald E. Cohen dated
May 22, 1995, as amended.(A)
10.35 Asset Sale Agreement for sale of assets to Cimarron Dog and Pony
Company, Inc. dated December 11, 1997.(F)
10.36 Michael W. Johnson employment agreement dated January 1, 1998.(F)
10.37 Agreement dated October 23, 1997 between the Company and Michael W.
Johnson regarding sale of the Company.(F)
16.1 Letter from Arthur Andersen LLP dated January 27, 1997.(G)
23.1 Consent of Hein + Associates LLP.
23.2* Consent of Chrisman, Bynum & Johnson, P.C. (included in its opinion
filed as Exhibit 5.1).
24.1* Power of Attorney (included in signature page of original filing).
- -----------------------
* Previously filed.
(A) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 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 Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(G) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 27, 1997.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City and County of Denver, State of Colorado, on the 13th
day of July, 1998.
INFONOW CORPORATION
By: /s/ Michael W. Johnson
---------------------------------------
Michael W. Johnson, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Michael W. Johnson President, Chief Executive Office July 13, 1998
- ------------------------------ (Principal Executive Officer)
Michael W. Johnson and Director
/s/ Kevin D. Andrew Vice President, Chief Financial July 13, 1998
- ------------------------------ Officer, Secretary and Treasurer
Kevin D. Andrew (Principal Financial and Accounting
Officer)
* Director July 13, 1998
- ------------------------------
Michael D. Basch
* Vice Chairman and Director July 13, 1998
- ------------------------------
Donald E. Cohen
* Chairman and Director July 13, 1998
- ------------------------------
Nahum Rand
* Director July 13, 1998
- ------------------------------
Duane H. Wentworth
* By: /s/ Michael W. Johnson
- ------------------------------
Michael W. Johnson,
Attorney in Fact
II-7
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
<S> <C>
1.1* Form of Selling Agreement
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)
5.1* Opinion of Chrisman, Bynum & Johnson, P.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 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)
10.34 Employment Agreement between the Company and Donald E. Cohen dated May 22, 1995, as
amended.(A)
10.35 Asset Sale Agreement for sale of assets to Cimarron Dog and Pony Company, Inc. dated December
11, 1997.(F)
10.36 Michael W. Johnson employment agreement dated January 1, 1998.(F)
10.37 Agreement dated October 23, 1997 between the Company and Michael W. Johnson regarding sale
of the Company.(F)
16.1 Letter from Arthur Andersen LLP dated January 27, 1997.(G)
23.1 Consent of Hein + Associates LLP
23.2* Consent of Chrisman, Bynum & Johnson, P.C. (included in its opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included in signature page of original filing).
</TABLE>
- -----------------------
* Previously filed.
(A) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 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 Annual Report on Form 10-KSB
for the year ended December 31, 1997.
(G) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 27, 1997.
II-8
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement and Prospectus of InfoNow
Corporation of our report dated February 13, 1998, accompanying the consolidated
financial statements of InfoNow Corporation contained in such Registration
Statement, and to the use of our name and the statements with respect to us, as
appearing under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
Hein + Associates LLP
Denver, Colorado
July 13, 1998
