SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission file number 0-19813
InfoNow Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-3083360
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(State of Incorporation) (IRS Employer Identification No.)
1875 Lawrence Street, Suite 1100, Denver, Colorado 80202
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(Address of principal executive offices) (Zip code)
(303) 293-0212
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(Registrant?s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-K.
For the year ending December 31, 1998 the Company had $2,498,000 in revenues
from continuing operations.
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As of March 10, 1999, there were 7,009,243 common shares outstanding. The
aggregate market value of the shares held at that date by non-affiliates was
approximately $14,344,000 based on the average of the bid and ask prices as
quoted on Nasdaq?s Electronic Bulletin Board System.
For the purposes of calculating this information, affiliates are defined as
shareholders with greater than 5% beneficial ownership of the Company's stock
and all directors and officers of the Company.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on April 23,
1999 is incorporated into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated, all references to "InfoNow", "the Company", "we",
"us" or "our" refers to InfoNow Corporation. This document contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections about InfoNow and our industry. These forward-looking
statements involve risks and uncertainties. InfoNow's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of factors described in this document and other documents we have filed
with the SEC. InfoNow does not undertake any obligation to publicly update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
The Company
InfoNow provides a modular suite of web-based inquiry management services
delivered on an outsourced basis via the Internet. Our services enable companies
to respond to consumer or commercial inquiries in a targeted, one-to-one manner
and effectively integrate third-party channel resources such as dealers or
resellers into the selling process. InfoNow's services can respond to inquiries
received across a client's enterprise, including their Internet site, call
center and Interactive Voice Response (IVR) systems.
The company has approximately fifty clients consisting of primarily large
multinational companies, including American Airlines, Apple, Bank America,
Cisco, Citibank, Compaq, 3Com, FedEx, First Union, Hewlett Packard, IBM, Intel,
Maytag, NationsBank, United Health Care, UPS, and Visa.
Company History
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. Early in 1995, we fundamentally changed our
business focus and began developing Internet-based inquiry management services
for large corporate clients. As part of our strategy, we acquired Cimarron
International, Inc. and Navigist, Inc. Cimarron provided interactive media
authoring and business services. Navigist offered network engineering and
Internet consulting services. These acquisitions allowed the Company to utilize
the resources and capabilities of Navigist and Cimarron to facilitate our change
in strategic direction as well as to provide an operating infrastructure and
revenues as the Company completed its transition to selling and providing
web-based services.
After the acquisitions of Cimarron and Navigist, 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 of 1995. After the transition to its new business was completed in
1996, the Company sold Navigist on December 13, 1996, and sold Cimarron on
December 11, 1997. The company is now solely focused on the sale and provision
of inquiry management services over the Internet.
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Industry Background
The Company's services address four fundamental trends common to our targeted
customer base:
Growth of the Internet - The Internet is rapidly evolving into a principal
vehicle for company interaction with consumers. 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 and
typically represents a significant decrease in cost per transaction
relative to traditional telephone agent-based responses.
One-to-one marketing approaches - Companies are aggressively searching for
technologies and approaches that allow them to provide targeted,
individual-specific responses to their customers and prospects.
Outsourcing - Companies continue to focus on their own core competencies
and outsource activities that can be more rapidly, effectively, and
economically deployed by focused third parties.
Channel conflicts - Most major computer, electronics and manufacturing
companies, which distribute products via independent dealers or resellers,
are struggling to compete against direct sellers while continuing to
support their traditional reseller channels. This challenge is further
complicated by the fact that many of these independent distribution
channels carry competing product lines and are increasingly threatened by
manufacturers selling direct over the Internet.
Business Strategy
Companies spend billions of dollars on advertising, promotion, and brand
building. Unfortunately, traditional telephone agent-based approaches for
responding to inquiries generated by such invetments are both ineffective and
costly. The Internet now makes it possible for companies to outsource the
inquiry management process. Our objective is to be the leading provider of
web-based inquiry management services to corporate clients in the US and abroad.
Our strategy includes the following key elements:
Extend Functionality of our Services - InfoNow intends to provide a broader
and more flexible menu of services through internally-developed
enhancements and through the integration of purchased third party
applications. During 1998, the Company introduced several extensions to its
services, including the ability to provide referral responses and maps via
fax, interfaces to wireless technologies such as cellular phones and the
Palm Pilot VII, closed loop lead management services, as well as extending
the breadth of geographies supported with high precision services to
include Europe. The Company will use a combination of customer input and
its own knowledge of using the Internet to add additional functionality to
its systems and services.
Leverage the Company's Information-Based Assets - The Company currently has
an exclusive license for certain geographic data in Canada and licenses for
geographic data for fourteen other countries covering the United States,
Western Europe and Australia. In addition, the Company has developed
unique, proprietary, and/or exclusive databases through its activities with
its current customer base including electronic reseller location databases
and ATM databases. The Company intends to utilize this information as well
as other databases it may acquire or build, to enhance and distinguish its
service offerings.
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Target Industry-Leading Corporate Customers - We plan to use our own direct
sales force and selected commercial partners to focus primarily on
corporate customers that distribute their products and services through
third party channels such as dealers and resellers.
Emphasis on Customer Support and Value Added Services - 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 - We will continue to pursue
strategic alliances that can provide additional technical, financial or
distribution resources that will allow us to develop and market our
products and services into a broader range of markets. For example, the
Company entered into alliances with Lucent, GTE, Prime Co., SignalSoft,
Visa and 3Com during 1998 to extend access of our services to wireless
devices such as cellular phones and the Palm Pilot VII. In addition, we may
seek to accelerate our growth through strategic acquisitions of
complementary businesses, products or technologies. However, the Company
currently has no plans, commitments or agreements for any such
transactions.
Products and Services
InfoNow derives its revenues from developing, implementing, hosting and
maintaining proprietary enterprise-wide web-based services. These services
enable companies to maximize the revenue associated with inquiries by existing
and potential customers by providing a highly targeted response and effectively
integrating third-party channel resources into the closing process. Once
interest in our client's products or services is generated through, for example,
advertising or promotional campaigns, InfoNow's services respond using a
five-step, Internet technology enabled process:
1. IDENTIFY: Identify the unique characteristics and needs of the inquirer
through information he or she provides, combined with information from
client and other internal and external databases.
2. MATCH: Create a high quality match between the inquirer's unique needs
and requirements and the reseller or other channel partner, incentives, and
buying method most appropriate for them.
3. ENGAGE: Immediately provide the inquirer with the information,
incentives and access to the buying method most likely to result in a sale.
For example, a referral can be provided to the location that can meet the
customer's needs and is most likely to have the product desired in stock.
An incentive, such as a discount or rebate form, can be provided to
encourage the prospect to act. A lead can also be captured and provided to
the most appropriate dealer or reseller in real time allowing them to
immediately and proactively pursue the inquirer's business. The ability to
make an immediate, on-line purchase can also be facilitated via access to a
client's existing eCommerce system.
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4. TRACK: Track and capture key information about the inquiry throughout
the inquiry and closing process (e.g., did the reseller sell our client?s
product or a competitor's).
5. INFORM: Provide insight to our client through on-line reporting
capabilities regarding the effectiveness of their inquiry management and
advertising/promotional efforts as well as determining the effectiveness of
channel partners in capturing business that lead to more effective
advertising and promotion programs.
These capabilities are marketed and delivered to our clients as a modular set of
turnkey services, e.g., Referral Management, Lead Management, and Integrated
Promotion Support (see below), and outsourced via the public Internet or private
intranets. InfoNow's services support inquiries received through all major
customer "touch points" across a client's enterprise, including a client?s
Internet site, call center and IVR systems.
Our services are sold on the basis of multi-year service contracts. The initial
term of these contracts are one to three years and are renewable upon mutual
agreement of InfoNow and the client. A typical contract fee includes two
components, a setup fee and a recurring service fee. The setup fee covers the
development of a customized, client-specific access to the service, and the
design and implementation of client databases. The recurring monthly service fee
covers hosting of the service and performance of recurring maintenance to the
client databases and core applications.
Currently, the combined fees for the initial year of service typically range
from $45,000 for a simple installation to greater than $750,000 for a complex
application involving multiple services across several customer "touch points"
and geographies. The actual setup and monthly service fees are determined based
on a variety of factors, including the type(s) of service selected, the number
of client locations supported, anticipated transaction volumes, geographic
coverage of the service and the level of service customization requested by the
client. We also may charge transaction fees for some elements of our services
depending upon the specific client configuration such as fax transactions, voice
recordings and dedicated telecommunication lines.
Our services are modular and all or a portion of the services can be selected
depending on client requirements. We currently offer, or plan to offer, the
following suite of services:
Referral Management - When an inquiry is made, InfoNow servers gather data
from the inquirer and combine it with InfoNow's databases that contain
demographic and other information. InfoNow servers then apply business
rules defined by our clients to select the most applicable reseller or
dealer in real-time. These business rules may base referrals on such
factors as geographic location of the dealer, inquirer profile, anticipated
availability of the product requested, and status of the dealer within the
clients reseller network. The system then responds with a referral
indicating the most appropriate dealers or resellers and their locations,
phone numbers, or other information defined by the client, including a map
of the locations. The referral can be delivered via a response over the
client's Internet site, via fax, via voice response or delivered via
wireless devices such as cellular phones or wireless personal digital
assistants.
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Lead Management - InfoNow servers gather demographic information and ask
the prospect additional questions to further qualify the prospect?s
interest and needs. The servers then immediately forward this information
to the best matched reseller or dealer which enables the reseller to
immediately and proactively contact and close the prospect. After the lead
has been passed to the reseller, InfoNow provides closed loop follow up
reporting to allow the client to monitor the outcome of the lead.
Integrated Promotion Support- This service is based on the inquirer profile
and provides real time incentives (e.g., rebates, coupons, merchandise
upgrades, benefits statements). These incentives are integrated into the
response given to the inquirer to maximize the potential that they will act
on their original buying intention.
Reprospecting- This service uses captured prospect information to market
new products and services to an established audience at a future date.
The targeted, one-to-one nature of InfoNow's responses is facilitated by the use
of a wide range of proprietary and third-party provided databases (e.g.,
geographic, demographic, industry-specific) and advanced, real-time searching
and matching systems using comprehensive business rules customized to a client?s
specific distribution system and business needs.
InfoNow's services can be deployed across a company in support of all potential
customer inquiry "touch points" including:
Internet site
Interactive voice response systems (IVRs)
Call Center telephone agents
Company specific intranets or extranets
InfoNow's services are seamlessly integrated into the client's existing Internet
site, call center or IVR and then outsourced via the Internet or a dedicated
intranet connection to one of InfoNow's redundant server centers. This
comprehensive capability to provide an enterprise-wide solution gives our
clients the ability to provide a consistent response regardless of the way the
inquiry is initially received by our client.
InfoNow services utilize precision GIS (Geographic Information Systems)
technology that use latitude and longitude to pinpoint locations, calculate the
"true" location proximity, and generate dynamically scaled maps for fifteen
countries in the following geographies:
United States and Canada
United Kingdom and Major European countries
Australia
Asia and Latin America (in development)
InfoNow's services can also provide world-wide coverage via text based and
postal code searching methods for all areas not currently covered by GIS
technology.
Research and Development
We believe that our success will largely be dependent on our ability to enhance
the functionality of our services and to develop other related products and
services to meet the changing needs of our customers. Our research and
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development efforts at the current time are influenced significantly by customer
requirements. New features are initially configured for delivery to a single
customer and then incorporated into future versions of our products and
services. We continually evaluate our products and services to determine what
additional products or enhancements are required by our customers and plan to
utilize both purchased and internally developed technologies, software, and
information assets to enhance our product offerings.
The custom installation and service nature of the Company's services was such
that we did not incur direct research and development expense for the years
ended December 31, 1998 and 1997. However, we expect to incur direct research
and development expenses in the future as we develop new capabilities for our
inquiry management system beyond those deployed to address immediate customer
needs.
Sales and Marketing
Our sales efforts rely primarily on direct sales contact, promotional
presentations delivered via notebook computers and requests from existing
customers for new sales. The Company utilizes a staff of sales professionals
headquartered in Denver, Colorado that sell to national and international
accounts. The Company's primary sales and marketing efforts have been directed
at increasing the visibility of our services through the use of direct sales
efforts. Although we have focused our initial efforts on high tech manufacturing
and financial services we believe that any company that spend large sums on
direct response promotions and adverstising or distributes its products or
services through a large reseller network or service organization could benefit
from our services.
Customers
InfoNow serves clients in fifteen countries, including eight of the largest
global computer and networking firms and six of the largest banks in North
America. As of February 28, 1999 InfoNow had contracted with approximately 50
customers. During the year ended December 31, 1998 we received 33% of our
revenues from two customers accounting for 17% and 16% of our revenues in 1998,
respectively. The Company anticipates that its revenues per customer will become
less concentrated as additional customers are added to our revenue base and
projected revenues from new installations in 1998 produce revenues for a full
year in 1999.
The table below is a representative list of our current clients:
Computer/Networking Financial Services Other
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Apple Computer Allstate American Airlines
Cisco Bank of America FedEx
Compaq BankOne Kenwood
Fujitsu Citicorp Maytag
Hewlett Packard First Union Meredith
IBM The Hartford Shell
Intel NationsBank Suzuki
Novell Transamerica United Healthcare
3Com Visa UPS
As of February 28, 1999 the Company had $4.9 million of revenue backlog which is
composed of contracted set up and monthly service fees for work or services not
yet performed. The Company estimates that approximately $3.4 million in revenues
will be recognized in 1999 from backlog contracted as of December 31, 1998.
<PAGE>
Competition
The market for web-based inquiry management services is in an early stage of
development and no one competitor has established a dominant position in the
market. However, we believe that these markets will be highly competitive and
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, we expect competition
will intensify. InfoNow believes that the size and diversity within these
markets will allow more than one supplier of products and services similar to
those of the Company. We are aware of several other providers of products and
services that are in various stages of development which may ultimately compete
with our own offerings. In addition, we may face competition from new sources,
including (i) Web developers, (ii) systems integrators and consultants, (iii)
call center outsourcing companies, (iv) GIS tool providers, (v) lead management
software companies, and (vi) 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. We may not be able to compete successfully against our current or
future competitors, which will have a material adverse effect on the Company's
business, results of operations and financial condition.
We believe the principal competitive factors that will determine success in the
market for our services include the functionality and features of the system,
the ability to adapt to specific customer needs, the reliability and accuracy of
the inquiry management services, response time, implementation time, product
reputation based on customer's served and 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 a federal trademark registration for the name InfoNow
(R) and considers its software service, trade secrets, service marks and similar
intellectual property as proprietary. We rely on a combination of copyright and
trademark law, non-disclosure agreements and certain contractual provisions
within our customer agreements to establish and maintain proprietary rights in
our services and other intellectual property of the Company. However, these
measures can afford only limited protection for our intellectual property, as it
does not prevent competitors from independently developing equivalent or
superior technology. While we may have a limited ability to prevent others from
developing similar technologies, we believe such protection is less significant
to the future success of our business than other factors, including the
knowledge, ability and experience of our personnel in delivering service and
support to its customers, the development of unique information assets, the
strength of our ongoing product development activities, customer loyalty to
InfoNow's products and the market position of our products and services.
InfoNow believes that our products, trademarks, service marks and other
proprietary rights do not infringe on the intellectual property rights of
others. However, third parties may assert infringement claims against us in the
future which may lead to litigation that could require us to pay a license fee
or royalties to obtain intellectual property rights which are needed to continue
to sell our products and services. Such royalties or licensing agreements may be
unavailable or may be offered at terms unacceptable to the Company. Delays or
interruptions in our services to our clients may occur if we are unable to
obtain the necessary licensing or royalty agreements which could have a material
adverse impact on the Company's business, operating results and financial
condition.
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We rely on certain software and data that we license from third parties,
including software and data that is integrated with internally developed
software used in providing our services. These third party software licenses may
not continue to be available or may be available on terms unacceptable to us. We
are also dependent upon the ability of the vendors of such third party software
and data to enhance their current products in order to meet the changing needs
of our customers. If we are not able to acquire software and data licenses and
needed enhancements from our current vendors, equivalent software and data will
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, we may not be able to replace the functionality of our
current systems or be able to successfully integrate new software and data into
our current systems. Delays and interruptions could occur in our service to our
customers that could result in a material adverse impact on the Company's
business, operating results and financial condition.
Employees
As of February 28, 1999, the Company had a total of 34 full time employees
including 9 in sales and marketing, 20 in software implementation, development,
system operations, and customer support, and 5 in finance, management and
administration. The Company uses outside contractors 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
We believe that we must continue to attract and retain qualified personnel so
that we may successfully deliver services to our clients. The competition for
technical personnel with the skills that we require for successful operation of
the Company's business is intense. It could have a material adverse effect on
our operations if we are unable to retain key technical personnel or obtain
additional qualified personnel needed for the planned growth of the Company's
business.
ITEM 2. PROPERTIES.
The Company leases approximately 7,800 square feet of office space at its
headquarters in Denver, Colorado for its product development, marketing,
operations and administration activities. This lease is with an unrelated party
and terminates on June 30, 2005. We believe that the facilities are adequate for
our current needs and that suitable additional space can be acquired if needed
to accommodate growth in the number of personnel planned in the foreseeable
future.
Our principal server equipment and operations are housed and maintained by Qwest
Communications at its operations center in Denver, Colorado. The Company also
has a redundant operations site at Inflow that is also located in Denver,
Colorado. Our operations are dependent in part upon our ability to protect our
systems against physical damage from fire, floods, power loss,
telecommunications failures and similar events. 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. However, we
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still may experience service 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, our
servers may still be vulnerable to computer viruses, and similar disruptions
from unauthorized tampering with our computer systems. The occurrence of any of
these events could result in interruptions or delays in service to our customers
that could have a material adverse effect on our business, results of operations
and financial condition.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material current or pending legal matters
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the three-month
period ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS.
The following table sets forth the high and low bid price of the Company's
Common Stock, reported for the fiscal periods indicated on the OTC Electronic
Bulletin Board system, the principal market upon which such securities were
traded under the symbol INOW. The Company's shares are also listed on the
Vancouver Stock Exchange and are traded in US dollars under the symbol INOU.V.
On March 1, 1999, the Vancouver Stock Exchange approved the Company's request to
delist our shares effective on the close of trading on March 15, 1999. The
quotations in the table below reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions. As of March 10, 1999 there were approximately 1,100 beneficial
shareholders.
High Low
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Year Ending December 31, 1997
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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
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First Quarter $ 1.56 $ 0.22
Second Quarter 1.59 1.13
Third Quarter 1.39 0.88
Fourth Quarter 2.50 0.75
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. Our Board of Directors intends to review this policy from time to time
after taking into account various factors such as the Company's financial
condition, results of operations, current and anticipated cash needs and plans
for expansion.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Overview
InfoNow provides a modular suite of web-based inquiry management services
delivered on an outsourced basis via the Internet. Our services enable companies
to respond to consumer or prospect inquiries in a targeted, one-to-one manner
and effectively integrate third-party channel resources such as dealers or
resellers into the selling process. InfoNow's services can respond to inquiries
received across a client's enterprise, including their Internet site, call
center and Interactive Voice Response (IVR) systems.
During the last 12 months, the Company has experienced a significant increase in
its backlog and revenues from sales of its services. We believe that a
substantial portion of our infrastructure costs, such as servers, technical
personnel, telecommunications and certain of our data costs are largely fixed
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and are not expected to vary significantly with an increase in client contracts
in the near future. We believe 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 services to additional
customers to offset operating costs. Although significant selling efforts are
under way to add new customer contracts, the limited operating history of the
Company makes it difficult or impossible to predict the exact timing and amount
of these future sales.
Results of Operations
The results from continuing operations for the year ended December 31, 1998 and
1997 reflect the revenues and expenses of the Company's service operations. The
Company sold all the assets of its Cimarron subsidiary, which produced
interactive media and other business presentations, on December 11, 1997. The
results of Cimarron's business have been classified as discontinued operations
for the year ended December 31, 1997.
(dollars in thousands)
Year Ended December 31,
1998 1997
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Revenues $2,498 $1,053
Cost of Sales 1,754 1,501
Administrative and Selling 1,905 1,540
Impairment of Asset 0 (363)
Other (income) expense (51) 16
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Net Loss from continuing operations (1,110) (1,609)
Discontinued Operations 0 (752)
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Net Loss $ (1,110) $ (2,361)
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Comparison of Year Ended December 31, 1998 with Year Ended December 31, 1997
Net Revenues. The Company's revenues from continuing operations consist
primarily of setup fees from new contracts and monthly fees from ongoing
contracts for its services. Total sales from the Company's inquiry management
services increased by $1,445,000, or 137% for the year ended December 31, 1998,
compared to the same period in the prior year. The increased revenues were
generated by additional contracts sold and implemented during the year. During
1998, the number of inquiry management contracts increased from 32 active
contracts at the beginning of 1998 to 66 active contracts as of December 31,
1998.
Cost of Sales. The cost of sales, as a percent of revenues, decreased from 143%
for the year ended December 31, 1997 to 70% for the year ended December 31,
1998. The total cost of sales increased by 17% or $253,000. This increase is a
result of increased costs in creating an infrastructure for delivering InfoNow's
services. 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.
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Selling, General and Administrative. Selling, general and administrative
expenses, as a percent of revenues, decreased from 146% of sales for the year
ended December 31, 1997 to 76% of sales for the year ended December 31, 1998.
The total amount of selling, general and administrative expenses increased by
24% or $365,000. This overall increase is primarily the result of the addition
of sales personnel and other marketing and promotion costs in 1998. General and
administrative expenses, as well as selling and marketing expenses, are expected
to decline as a percentage of revenues.
Non-operating Income (expense). Net non-operating income was $51,000 for the
year ended December 31, 1998 compared to a net non-operating expense of $16,000
for the year ended December 31, 1997. The increase is primarily due to interest
income on cash and cash equivalents.
Net Loss from continuing operations. The reported net loss of the Company for
the year ended December 31, 1998 decreased by approximately $499,000, or 31%, as
compared to the results in the prior year. This decrease is due primarily to
additional contracts sold and implemented during 1998 without corresponding
increases in selling, general and administrative expenses.
Liquidity and Capital Resources
The Company had cash and equivalents of $1,303,000 at December 31, 1998,
compared to $325,000 at December 31, 1997, or a net increase of $978,000. The
increase was due to a private equity financing on March 27, 1998 which resulted
in net proceeds of $781,000, the exercise of stock options and warrants during
the second quarter which resulted in net proceeds of $1,126,000, and loan
proceeds on March 4, 1998 of $9,000. The increase was offset by net cash used in
operating activities of $428,000, purchases of property and equipment of
$359,000, principal payment on debt obligations of $76,000, and an increase in
restricted cash of $76,000.
The Company made significant progress in commercializing its services during
1998. The Company had 66 contracts in backlog as of December 31, 1998 compared
to 32 contracts as of December 31, 1997. As a result of the implementation of
these additional contracts, the Company significantly reduced the amount of cash
used throughout 1998. Cash used in operating activities during the year was
$115,000, $195,000, $105,000 and $13,000 in the first, second, third and fourth
quarters, respectively. The Company expects continued operating losses during
the first quarter of 1999, but anticipates that revenues from additional sales
of its services will result in positive cash flow from its operations by the
second quarter of 1999.
The Company currently projects that available cash balances, together with
projected cash flow from contracted backlog and anticipated new sales, will be
sufficient to fund the Company's operations for at least the next twelve months.
These projections assume that revenues from new sales and from backlog will
continue to reduce cash used in its 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 or provide service to our customers.
<PAGE>
InfoNow has undertaken a review of its own computer systems and applications to
determine if significant problems exist with the operations of those systems as
a result of the Year 2000 Issue and expects to complete this review by March 31,
1999. As a result of that review, we do not expect that any modifications
required to address Year 2000 problems will have a material impact on its
business, operations or financial condition. In addition, InfoNow has
implemented a Year 2000 compliance inquiry program with its major vendors and
suppliers as to both the status of the Year 2000 compliance of their own systems
and any delays they anticipate in supplying goods and services to the Company.
We cannot guarantee that the systems of our vendors and suppliers will be Year
2000 compliant; however based on our initial surveys, which we expect to
complete by March 31, 1999, we do not anticipate replacement or major
modification of any hardware or software components in our systems if third
party supplied hardware and software is not year 2000 compliant. Nevertheless,
we may be required to install software updates to our systems and hardware so
that they will run properly after December 31, 1999. We believe that these
needed software updates are currently available or will be available based on
announcements made by our vendors through our normal software maintenance
licenses. The Company has not incurred material costs to date in its Year 2000
review process and does not believe the cost of any additional actions will be
material to its operations or financial condition. We do not anticipate that we
will incur material expenses outside the normal course of business to modify our
system or third party supplied systems to be year 2000 compliant. However, the
Company's systems and third party systems may contain undetected errors or
defects which may incur material costs and could result in a material adverse
effect on the Company?s operation and financial condition. In addition, if
suppliers or other companies on whom the Company relies fail to address and
correct their Year 2000 issues, the Company could face business interruption and
material unexpected costs.
In addition, we are conducting testing of our production and other systems to
determine if all components of our systems will function properly after December
31, 1999. We expect this testing to be complete by June 30, 1999. Although the
Company believes that it has identified all material issues and has developed
adequate plans to address the year 2000 problem, our testing may reveal
unexpected or previously undetected issues. The Company has not yet formed
contingency plans in the event that planned modifications do not correct year
2000 issues and will formulate such plans after the completion of its testing,
if necessary.
FORWARD LOOKING STATEMENTS AND RELATED BUSINESS RISKS AND ASSUMPTIONS
Our actual results may vary materially from the forward-looking statements made
above. In this report, statements that are not historical fact and the words
"anticipate," "believes," "expects," "future," "intends," or similar expressions
identify forward-looking statements. We intend 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 market
acceptance of its inquiry management services, (ii) our ability to forecast and
meet the demands of the our customers which includes the maintenance of the
technical performance of the system as new customers are added, (iii) our
ability to obtain financing to purchase equipment needed to provide service to
additional customers, (iv) our ability to maintain pricing and thereby maintain
adequate profit margins on its products and services, (vi) our ability to retain
qualified technical personnel (vii) our ability to complete planned development
of our services within current budgeted levels, (viii) our ability to raise
<PAGE>
additional capital if needed to fund current operations, and (ix) the effect of
Year 2000 compliance issues on our business operations.
Our assumptions are based on judgments about 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 our 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 its services 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 made in this document should not be regarded as a
representation by the Company or any other person that we will achieve our plans
or objectives.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F-16 of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference from the portion of the proxy statement entitled
"Proposal 1-Election of Directors."
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference from the portion of the proxy statement entitled
"Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the portion of the proxy statement entitled
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the portion of the proxy statement entitled
"Certain Transactions."
ITEM 13. EXHIBITS
(a) Exhibits
Included as exhibits are the items listed on the Exhibit Index. The
Registrant will furnish a copy of any of the exhibits listed below upon
payment of $5.00 per exhibit to cover the costs to the Registrant of
furnishing such exhibit.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 19, 1999.
INFONOW CORPORATION
By: /s/ Michael W. Johnson, President
----------------------------------
Michael W. Johnson, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Michael W. Johnson Chairman, Chief Executive Officer, March 19, 1999
- ----------------------
Michael W. Johnson President and Director
(Principal Executive Officer)
/s/ Kevin D. Andrew Chief Financial Officer, March 19, 1999
- ------------------- Treasurer and Secretary
Kevin D. Andrew (Principal Financial
and Accounting Officer)
/s/ Stuart Fullinwider Director March 19, 1999
- ----------------------
Stuart Fullinwider
/s/ Donald E. Cohen Vice Chairman and Director March 19, 1999
- -------------------
Donald E. Cohen
/s/ Duane H. Wentworth Director March 19, 1999
- ----------------------
Duane H. Wentworth
/s/ Michael D. Basch Director March 19, 1999
- --------------------
Michael D. Basch
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as Amended. (A)
3.3 Bylaws of the Company, as Amended. (B)
4.1 Form of Common Stock Certificate for the Registrant's Common Stock,
$.001 par value per share. (B)
4.4 Form of Class C Warrant. (C)
10.14 InfoNow Corporation 1990 Stock Option Plan, as amended.
10.29 Employment Agreement between the Company and W. Brad Browning dated
January 9, 1996. (E)
10.30 Employment Agreement between the Company and Kevin D. Andrew dated
March 1, 1996. (E)
10.31 Agreement between the Company and Environmental Systems Research
Institute, Inc. ("ESRI") dated March 6, 1996. (E)
10.32 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)
10.38 Letter Agreement between the Company and Michael Basch dated September
21, 1998.
27.1 Financial Data Schedule
- -----------------------
(A) Incorporated by reference from the Company's Annual Report or Form 10-K for
the year ended Decemeber 31, 1998.
(B) Incorporated by reference from Registration Statement No. 33-43035 on Form
S-1 dated February 14, 1992.
(C) Incorporated by reference from Post-Effective Amendment No. 2 to
Registration Statement No. 33-43035 on Form S-1 dated July 13, 1993.
(D) Incorporated by reference from Post-Effective Amendment No. 3 to
Registration Statement No. 33-43035 on Form S-1 dated September 30, 1996.
(E) Incorporated by reference from the Company's Annual Report on Form 10-K for
year ended December 31, 1995.
(F) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 27, 1997.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors Report F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Operations and Comprehensive Loss for
the years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
F-1
<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, 1998 and 1997 and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity, and cash flows for the years then ended. 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 19, 1999
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(US Dollars in Thousands,
except per share information) 1998 1997
---- ----
ASSETS
Current Assets:
Cash and equivalents $ 1,303 $ 325
Restricted cash investments 76 --
Accounts receivable 379 177
Prepaids and other current assets 20 20
-------- --------
Total current assets 1,778 522
-------- --------
Property and equipment, net 760 647
Capitalized software development costs,
net of accumulated amortization of $522 and
$384 in 1998 and 1997, respectively 7 146
Other assets and deferred charges 9 9
-------- --------
Total Assets $ 2,554 $ 1,324
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion $ 103 $ 59
Accounts payable and accrued expenses 603 552
Unearned revenue and prepaid service fees 464 263
Deferred compensation -- 5
-------- --------
Total current liabilities 1,170 879
NOTES PAYABLE, net of current portion 89 47
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,
6,815,243 and 5,364,179 issued
and outstanding at December 31, 1998
and 1997, respectively 7 5
Additional paid-in capital 23,910 21,904
Accumulated deficit (22,622) (21,511)
-------- --------
Total stockholders' equity 1,295 398
-------- --------
Total Liabilities and Stockholders' Equity $ 2,554 $ 1,324
======== ========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(US Dollars in Thousands,
except per share information) 1998 1997
- ----------------------------- ---- ----
REVENUES $ 2,498 $ 1,053
OPERATING EXPENSES:
Cost of sales and direct project related costs 1,754 1,501
Selling and marketing 1,084 575
General and administrative 821 965
Impairment of long-lived assets -- (363)
----------- -----------
Total operating expenses 3,659 2,678
----------- -----------
Loss from operations (1,161) (1,625)
OTHER INCOME (EXPENSE):
Interest income 58 40
Interest expense (14) (26)
Other non-operating income 6 2
----------- -----------
50 16
Loss from continuing operations (1,111) (1,609)
Discontinued operations
Income from operations of Cimarron Int'l -- 86
Loss on disposal of Cimarron -- (838)
----------- -----------
Net loss and comprehensive loss $ (1,111) $ (2,361)
=========== ===========
Basic and Diluted EPS per common share:
Continuing operations $ (0.18) $ (0.30)
Discontinued operations -- (0.14)
----------- -----------
Net loss and comprehensive loss $ (0.18) $ (0.44)
=========== ===========
Weighted average common shares outstanding 6,298,000 5,396,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997 Additional
Common Stock Paid-in Accumulated
(US Dollars in Thousands, except per share information) Shares Amount Capital Deficit
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997 5,515,164 $ 5 $ 22,316 $ (19,150)
Offering costs and expenses for
December 6, 1996 private placement -- -- (55) --
Issuance of common stock in conjunction
with the exercise of employee stock options 2,819 -- 4 --
Retirement of common stock (153,804) -- (364) --
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)
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, net of financing costs
of $19,000 450,000 1 769 --
Non-cash charge related to the issuance of
options to purchase common stock issued to
consultants -- -- 99 --
Common shares issued upon exercise of
warrants and options at prices ranging from
$0.40 to $1.40 per share 999,064 1 1,137 --
Net loss -- -- -- (1,111)
---------- ---------- ---------- ----------
BALANCES, December 31, 1998 6,815,243 $ 7 $ 23,910 $ (22,622)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
(US Dollars in Thousands) 1998 1997
---- ----
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(1,111) $(2,361)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 537 619
Allowance for bad debt 31 --
Loss on disposal of business segment -- 838
Impairment of long-lived asset -- (363)
Gain on disposal of property and equipment -- (1)
Compensation expense recognized in connection
with stock option and warrant issuances 99 3
Changes in operating assets and liabilities:
Accounts receivable (233) (74)
Other current assets -- 137
Other assets and deferred charges 1 2
Accounts payable and other liabilities 47 (57)
Unearned revenues and prepaid service fees 201 52
------- -------
Net cash used in operating activities (428) (1,205)
INVESTING ACTIVITIES:
Purchase of property and equipment (359) (134)
Disposition of subsidiaries -- 85
Acquisition of geographic data -- (180)
Additions to capitalized software -- (26)
Proceeds from sale of property and equipment -- 6
Increase in restricted cash (76) --
------- -------
Net cash flows used in investing activities (435) (249)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 770 (55)
Proceeds from exercise of options and warrants 1,137 4
Proceeds from notes payable 9 --
Payment of related party note -- (100)
Principal payments on debt obligations (75) (120)
------- -------
Net cash provided by (used in) financing activities 1,841 (271)
------- -------
Net increase (decrease) in cash and equivalents 978 (1,725)
CASH AND EQUIVALENTS, beginning of period 325 2,050
------- -------
CASH AND EQUIVALENTS, end of period $ 1,303 $ 325
======= =======
Supplemental Information:
Cash paid during period for interest $ 14 $ 26
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
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 internet-based inquiry management services for
large corporate clients. 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, Inc. ("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 Cimarron 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 inquiry management services. Prior to its divestiture of Cimarron, the
Company also generated revenues from several other sources including the
production of Multimedia and 35mm slide presentations. The Company recognizes
revenue using the percentage-of-completion method on implementation of its
services. Revenues are recognized based on project milestones. 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.
Losses are recognized immediately if projected direct costs exceed anticipated
revenues.
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, 1998, the consolidated financial statements include all
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
F-7
<PAGE>
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 $530,000 in software development costs
were capitalized in conjunction with the development of the Company's system at
December 31, 1997, including a $253,000 non-cash provision related to the fair
value of options issued to ESRI. No costs were capitalized during the year ended
December 31, 1998. The Company amortized $138,000 and $244,000 of these
capitalized costs for the years ended December 31, 1998 and 1997, 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 1998 or
1997.
h. Cash and 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.
i. 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" ("SFAS 128").
SFAS 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 1998 and 1997 because the Company had
losses from operations and therefore, the effect of all potential common stocks
was anti-dilutive.
Options to purchase 2,153,553 shares of common stock, and warrants to purchase
532,863 shares of common stock were outstanding at December 31, 1998. See "Note
7. Stockholders' Equity", for a detailed discussion of the options and warrants
issued by the Company.
F-8
<PAGE>
j. 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 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 had 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.
k. 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.
l. Comprehensive Loss
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130, which is effective for fiscal years beginning after December
15, 1997, defines comprehensive income as all changes in stockholders' equity
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets and
liabilities that are reported directly in equity such as translation adjustments
on investments in foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive loss was equal to its net loss for the
year ended December 31, 1998.
Note 2. DISCONTINUED OPERATIONS
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. No payments were made under this agreement during the year ended
December 31, 1998.
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 $862,000. Cimarron
recorded sales of approximately $852,000 during its 1997 fiscal year prior to
its sale on December 11, 1997.
F-9
<PAGE>
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.
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 $7,246,000 as of December 31, 1998.
The significant components of the net deferred tax asset consist of the
following:
December 31,
1998 1997
---- ----
(In thousands)
Capitalized software $ -- $ (54)
Net operating loss carryforwards 2,878 2,200
Deferred compensation -- 2
------- -------
Deferred tax asset, net 2,878 2,148
------- -------
Less - valuation allowance (2,878) (2,148)
$ -- $ --
======= =======
The benefits of the Company's net operating loss carryforwards and other
temporary differences as of December 31, 1998 and 1997, do not satisfy the
realization criteria set forth in SFAS 109 and accordingly, the Company has
recorded a valuation allowance for the entire net deferred tax asset.
Note 4. PROPERTY AND EQUIPMENT
Property and Equipment consist of the following:
December 31,
1998 1997
---- ----
(In thousands)
Computer equipment $ 1,350 $ 773
Furniture and fixtures 92 90
Computer software and geographic data licenses 266 334
------- -------
1,708 1,197
Less accumulated depreciation and amortization (948) (550)
------- -------
Property and equipment, net $ 760 $ 647
======= =======
F-10
<PAGE>
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
$120,000 of property cost and $77,000 of accumulated depreciation in 1997.
Note 5. LONG TERM DEBT
a. Summary of Long Term Debt
December 31,
1998 1997
---- ----
(In Thousands)
Term loan payable to a bank, collateralized by all
property and equipment, bearing interest at prime
plus 1.25% (total of 9.00% at 12/31/98) due in
monthly installments of $3,817 to December 1999. $ 42 $ 81
Capital lease obligation bearing interest at 15%,
due in monthly installments of $497 to November
1999, collateralized by equipment under the lease. 5 10
Capital lease obligation bearing interest at
9.41%, due in Monthly installments of $4,820 to
August 2001, collateralized by equipment under the
lease. 136 --
Notes payable to suppliers at varying interest
rates. -- 15
Note payable to individual bearing interest at
6.00%, due in six equal monthly installments
beginning in the month following the first quarter
in which the Company reports net income of
$100,000 or greater. 9 --
------ ------
192 106
Less current portion (103) (59
------ ------
Long-term portion $ 89 $ 47
====== ======
b. Maturities of Long Term Debt
Future minimum lease payments under capital leases and annual maturities of
other long-term debt at December 31, 1998 are as follows:
Year ending December 31,
1999 $ 103
2000 55
2001 34
--------
$ 192
========
The Company paid $14,000 and $26,000 for interest during the years ended
December 31, 1998 and 1997 respectively. The total for the year ended December
31, 1997 includes $6,000 paid to related parties. There were no interest
payments to related parties during the year ended December 31, 1998.
F-11
<PAGE>
Note 6. SUPPLEMENTAL CASH FLOW INFORMATION
The Company had the following significant non-cash transaction:
During 1998, the Company completed a non-cash transaction in which the Company
financed a purchase of equipment under a capital lease with Bank One Leasing
Corp. for approximately $152,000. The lease bears interest at 9.41% and is
payable in equal monthly installments of $4,820 ending in August 2001.
Note 7. STOCKHOLDERS' EQUITY
a. Preferred Stock
Shares of preferred stock may be issued from time to time in one or more series,
with the rights and powers of each series set by the Board of Directors. Of the
1,962,335 authorized shares, 213,483 have been designated as Series A
Convertible Preferred Stock.
The Series A Convertible Preferred Stock is convertible to common at the rate of
four shares of common for one share of preferred. The Series A Convertible
Preferred Stock has a liquidation value of $1.593 per share and the holders have
voting rights on an as-converted basis. No preferred stock was outstanding as of
December 31, 1998 or 1997.
b. Significant Equity Transactions
On March 27, 1998, the Company completed a private placement of 450,000 shares
of its common stock at $1.75 per share, which was above the quoted price of the
Company's common stock at the date of the transaction. Total gross proceeds from
the sale of stock were $788,000. The Company served as its own placement agent,
incurring $19,000 in costs.
During 1998, the Company issued 999,064 shares of common stock in conjunction
with the exercise of options and warrants. The per-share price range of $0.40 to
$1.40 resulted in gross proceeds to the Company of $1,137,000.
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:
1998 1997
---- ----
(In thousands, except per share amounts)
Net Loss As Reported $(1,111) $(2,361)
Pro Forma (2,060) (2,962)
Primary Earnings
Per Share As Reported $ (0.18) $ (0.44)
Pro Forma $ (0.30) $ (0.55)
F-12
<PAGE>
The fair value of each grant was determined using the Black-Scholes option
pricing model with the following assumptions used for grants for 1998 and 1997:
1) risk free interest rate of 6.50% in 1997 and 5.01% to 5.96% in 1998; 2) no
expected dividend yield; 3) expected lives of 5 years or the contractual term of
the option or warrant, whichever is less; and 4) assumed volatility of
approximately 242% in 1997 and approximately 216% to 240% in 1998. The weighted
average contractual term of the options was 10 years compared to a weighted
average expected term of 5 years.
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. On January 23, 1998 the
Board of Directors approved an increase from 1,700,000 to 2,200,000. Under the
terms of the Plan, the Board of Directors may grant officers and key employees
either "non-qualified" or "incentive stock options" as defined by the Internal
Revenue Service code and regulations and may grant non-qualified options to
non-employee directors. Under the terms of the Plan, the purchase price of the
shares subject to an option will be the fair market value of the Company's
common stock on the date the option is granted. If the grantee owns more than
10% of the total combined voting power or value of all classes of stock on the
date of grant, the purchase price shall be at least 110% of the fair market
value at the date of grant and the exercise term shall be up to five years from
the date of grant. All other options granted under the Plan are exercisable up
to 10 years from the date of the grant. Options issued under the Plan generally
vest over a three year period. A summary of the status of the Company's stock
option plan as of December 31, 1998 and 1997 and changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
Weighted Weighted
Average Average
Fixed Exercise Exercise
Options Shares Price Shares Price
- ------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 1,478,579 $1.47 720,745 $2.40
Granted 856,774 1.16 1,606,281 1.59
Exercised (1,167) 0.79 (2,819) 1.30
Forfeited (180,633) 1.12 (845,628) 2.49
---------- -----------
Outstanding at end of year 2,153,553 1.38 1,478,579 1.47
========== ===========
Options exercisable at year-end 1,440,978 770,978
Weighted-average fair value
of options granted during the year $1.16 $1.58
</TABLE>
F-13
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.29 to 1.30 515,084 7.7 years $ .89 273,557 $0.89
1.40 1,060,494 9.2 1.40 768,169 1.40
1.45 to 1.91 424,991 7.5 1.65 317,963 1.65
2.11 to 2.56 152,984 7.2 2.17 101,623 2.17
---------- --------
.29 to 2.56 2,153,553 8.2 1.38 1,461,312 1.38
========= =========
</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.
The Company issued options and warrants to purchase 150,000 shares of the
Company's common stock in lieu of compensation for investor relations and
recruiting services. The Company expensed $99,000 related to the issuance of
these options and warrants during the year ended December 31, 1998 in accordance
with SFAS 123.
F-14
<PAGE>
e. Stock Warrants
A summary of the status of the Company's Warrants as of December 31, 1998 and
1997 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,036,876 4.14 2,666,759 $ 19.01
Granted 105,000 0.69 -- --
Exercised (997,897) 1.14 -- --
Forfeited (611,116) 10.27 (629,883) 66.80
---------- ---------
Outstanding at end of year 532,863 2.03 2,036,876 4.14
========== =========
Warrants exercisable at year-end 498,780 2,029,167
Weighted-average fair value of warrants
granted during the year $ 0.69 --
The following table summarizes information about Warrants outstanding at
December 31, 1998:
Warrants Outstanding Warrants Exercisable
--------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
- ----------------------------------------------------------------------------------------------------------------
$.29 to .80 80,000 2.1 $ .53 69,583 $0.49
1.20 to 1.40 242,000 1.4 1.37 219,751 1.39
2.63 to 3.68 123,500 1.6 2.70 122,083 2.69
4.25 87,363 1.3 4.25 87,363 4.25
--------- ---------
.29 to 4.25 532,863 1.6 2.03 498,780 2.08
========= =========
</TABLE>
Note 8. COMMITMENTS AND CONTINGENCIES
a. Operating Lease Commitments
The Company has non-cancelable leases for its facilities and certain office
equipment. At December 31, 1998, the Company was obligated for a total of
approximately $41,000, all payable during 1999. Subsequent to December 31, 1998,
the Company entered into a new lease agreement for its facilities.
Rent expense related to operating leases was $84,000 and $124,000 for the years
ended December 31, 1998 and 1997 respectively.
F-15
<PAGE>
b. Contingent Issuance of Stock Options
The option agreement issued to the Company's President contains an anti-dilution
provision that provides that additional options to purchase common shares shall
be issued equal to 10.7% of options exercised that were outstanding as of
October 23, 1997. Options to purchase 106,774 shares were granted under this
agreement during 1998 are included in the option table in "Note 7. Stockholders'
Equity."
On October 23, 1997, the Company entered into an agreement with the President
and Chief Executive Officer of the Company. This agreement expires on April 23,
1999, and provides compensation to the President in the event the Company is
sold. 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 9. RISKS AND UNCERTAINTIES
a. Credit Concentration and Dependence upon Certain Customers
The Company has contracted with approximately 50 customers. During the year
ended December 31, 1998 the Company received 33% of its revenues from two
customers accounting for 17% and 16% of its revenues in 1998, respectively. The
Company anticipates that revenues per customer will become less concentrated as
additional customers are added to its revenue base and projected revenues from
new installations in 1998 produce revenues for a full year in 1999.
b. Continuing Operating Losses
The Company's financial condition and revenue backlog significantly improved
during the year ended December 31, 1998 and, as a result, the Company expects to
have adequate cash flows from recurring and anticipated new business to sustain
its operations for the foreseeable future. However, the Company has experienced
recurring losses from operations since inception and incurred a net loss from
continuing operations of $1.1 million for the year ended December 31, 1998. The
Company must produce consistent positive cash flows and earnings from its
operations to sustain its business.
Note 10. SUBSEQUENT EVENTS
On March 1, 1999, the Company announced that the Vancouver Stock Exchange
approved its request to delist the Company's stock effective at the end of
trading on March 15, 1999 and that it plans to seek a listing on the NASDAQ
Small Cap Market provided that it meets the quantitative criteria for listing
set forth by NASDAQ. The Company's shares will continue to trade on NASDAQ's
electronic bulletin board system.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,302,823
<SECURITIES> 0
<RECEIVABLES> 379,220
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,777,976
<PP&E> 1,707,953
<DEPRECIATION> (948,426)
<TOTAL-ASSETS> 2,554,485
<CURRENT-LIABILITIES> 1,170,041
<BONDS> 0
0
0
<COMMON> 6,816
<OTHER-SE> 1,288,721
<TOTAL-LIABILITY-AND-EQUITY> 2,554,485
<SALES> 2,498,467
<TOTAL-REVENUES> 2,498,467
<CGS> 1,754,049
<TOTAL-COSTS> 3,659,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,201
<INCOME-PRETAX> (1,110,473)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,110,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,110,473)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
