<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 0-28284
INFONAUTICS, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
------------ ----------
(State or other jurisdiction (IRS Employer ID No.)
of incorporation of organization)
900 West Valley Road, Suite 1000, Wayne, Pa 19087
---------------------------------------------------
(Address of principal executive offices)
(610) 971-8840
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 1998
----- -----------------------------
<S> <C>
Class A Common Stock, no par value 9,537,827
Class B Common Stock, no par value 100,000
</TABLE>
1
<PAGE>
INFONAUTICS, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 1998 and
June 30, 1997 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1998 and June 30, 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II: OTHER INFORMATION
Item 2. Changes in Securities 13
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INFONAUTICS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 1,476,728 $ 2,301,933
Short-term investments.................................... 1,793,241 10,095,504
Receivables:
Trade, less allowance for doubtful accounts
of $57,566 in 1998 and $32,566 in 1997................. 2,781,975 1,742,070
Other................................................... 639,265 154,397
Prepaid expenses and other assets......................... 1,488,630 799,127
------------ ------------
Total current assets.............................. 8,179,839 15,093,031
Property and equipment, net................................... 3,211,002 3,019,908
Long-term investments......................................... -- 600,000
Prepaid and other assets...................................... 357,666 80,729
------------ ------------
Total assets...................................... $ 11,748,507 $ 18,793,668
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of obligations under capital lease........ $ 306,557 $ 297,538
Accounts payable.......................................... 1,667,929 1,275,500
Accrued expenses.......................................... 2,154,387 1,642,421
Accrued royalties......................................... 924,093 674,723
Deferred revenue.......................................... 4,946,676 4,039,752
------------ ------------
Total current liabilities......................... 9,999,642 7,929,934
Noncurrent portion of obligations under capital lease......... 229,385 404,107
------------ ------------
Total liabilities................................. 10,229,027 8,334,041
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, no par value -- --
Class A common stock, no par value; 25,000,000
shares authorized; one vote per share; 9,537,827
and 9,391,627 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively -- --
Class B common stock, no par value; 100,000 shares
authorized, issued and outstanding; 50 votes per
share.................................................... -- --
Additional paid-in capital................................ 53,804,245 53,360,221
Deferred compensation..................................... (187,500) (250,000)
Accumulated deficit....................................... (52,097,265) (42,650,594)
------------ ------------
Total shareholders' equity (deficit).............. 1,519,480 10,459,627
------------ ------------
Total liabilities and shareholders' equity........ $ 11,748,507 $ 18,793,668
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INFONAUTICS, INC.
Consolidated Statements Of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues ......................................... $ 3,581,865 $ 1,904,093 $ 6,165,492 $ 2,711,450
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues ............................ 1,050,807 617,079 1,927,070 1,070,274
Customer support expenses ................... 256,797 146,993 482,051 258,047
Technical operations and development expenses 2,051,671 1,473,012 3,836,151 2,850,294
Sales and marketing expenses ................ 3,932,495 2,804,160 6,893,041 5,693,572
General and administrative expenses ......... 1,100,542 1,274,206 2,618,451 2,811,043
--------- --------- --------- ---------
Total costs and expenses ............... 8,392,312 6,315,450 15,756,764 12,683,230
--------- --------- --------- ---------
Loss from operations ............................. (4,810,447) (4,411,357) (9,591,272) (9,971,780)
Interest income (expense), net ................... 35,791 272,415 144,601 606,739
--------- --------- --------- ---------
Net loss ............................... $ (4,774,656) $ (4,138,942) $ (9,446,671) $ (9,365,041)
--------- --------- --------- ---------
--------- --------- --------- ---------
Loss per common share- basic and diluted ......... $ (0.50) $ (0.44) $ (0.99) $ (1.00)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares
outstanding- basic and diluted ............... 9,634,000 9,492,000 9,564,000 9,492,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INFONAUTICS, INC.
Consolidated Statements Of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (9,446,671) $ (9,365,041)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization ............................ 775,080 425,821
Provision for losses on accounts receivable .............. 25,000 85,976
Amortization of deferred compensation .................... 62,500 62,500
Severance and related expenses ........................... 398,525 --
Changes in operating assets and liabilities:
Receivables:
Trade ................................................ (457,598) (506,377)
Other ................................................ (484,868) 62,406
Prepaid and other assets ............................... (966,440) (434,531)
Accounts payable ....................................... 192,429 (43,763)
Accrued expenses ....................................... 511,966 356,145
Accrued royalties ...................................... 249,370 200,355
Deferred revenue ....................................... 299,617 518,263
------------ ------------
Net cash used in operating activities ............... (8,841,090) (8,638,246)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ........................... (766,175) (1,537,313)
Purchases of short-term investments ........................... (7,284,487) (9,118,565)
Proceeds from maturity of short-term investments .............. 16,186,750 10,440,000
------------ ------------
Net cash provided by (used in) investing activities . 8,136,088 (215,878)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock .................... 45,499 5,876
Payments on capital lease obligations ......................... (165,702) --
------------ ------------
Net cash provided by (used in) financing activities . (120,203) 5,876
------------ ------------
Net decrease in cash and cash equivalents ....................... (825,205) (8,848,248)
Cash and cash equivalents, beginning of period .................. 2,301,933 16,064,159
------------ ------------
Cash and cash equivalents, end of period ........................ $ 1,476,728 $ 7,215,911
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited consolidated financial statements of Infonautics, Inc.
(together with its subsidiaries, the "Company") presented herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission for quarterly reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
financial statements for the year ended December 31, 1997 and the notes thereto
included in the Company's 1997 Annual Report on Form 10-K.
The financial information in this report reflects, in the opinion of
management, all adjustments of a normal recurring nature necessary to present
fairly the results for the interim period. Quarterly operating results may not
be indicative of results which would be expected for the full year.
2. Basic and Diluted EPS:
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," the Company is required to present basic earnings per
share and, if applicable, diluted earnings per share. Basic EPS is a per share
measure of an entity's performance computed by dividing income (loss) available
to common stockholders (the numerator) by the weighted average number of common
shares outstanding during the period (the denominator). Diluted earnings per
share measures the entity's performance taking into consideration common shares
outstanding (as computed under basic EPS) and dilutive potential common shares,
such as stock options; however, entities with a net loss do not include common
stock equivalents in the computation of diluted earnings per share, as the
effect would be anti-dilutive. Accordingly, basic and diluted EPS are equal.
3. Related Party Transaction:
Included in general and administrative expenses for the six months
ended June 30, 1998 is a charge of approximately $500,000 for separation and
related expenses for the completion of transactions pursuant to the terms of an
agreement entered into in February 1998 with the former Chairman of the Board,
Chief Executive Officer and founder of the Company, under which he resigned as
Chairman and Chief Executive Officer of the Company on March 31, 1998.
Additionally, an amount of approximately $320,000 is included in other
receivables at June 30, 1998, for costs to be reimbursed by a newly formed
company which the former Chairman and Chief Executive Officer is currently the
Chief Executive Officer of, pursuant to the agreement discussed above.
4. Supplemental Disclosure of Cash Flow Information:
At June 30, 1998, included in accounts receivable and deferred revenue
was approximately $1.7 million representing that portion of subscription revenue
from long-term agreements which have been billed, but not yet received or
recognized as income.
Additional paid in capital of $351,625 and $46,900 were recorded as of
March 31, 1998 for the issuance of 125,000 shares of common stock and the
acceleration of vesting of 50,000 options, respectively, pursuant to the
agreement described in Note 3.
6
<PAGE>
5. Comprehensive Income:
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), Reporting Comprehensive Income.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS No. 130 requires unrealized gains
or losses on the Company's foreign currency translation adjustments to be
included in other comprehensive income. The Company has not had foreign currency
translation adjustments to date.
6. Subsequent Event- Private Placement:
On July 22, 1998, the Company issued 3,000 shares of Series A
convertible Preferred Stock with a stated value of $1,000 per share (the "Series
A Preferred Stock") and warrants with a term of five years to purchase 200,000
shares of Common Stock resulting in net proceeds, after expenses, of
approximately $2,940,000.
The Series A Preferred Stock has no voting rights and is convertible
into the number of shares of the Company's Common Stock equal to the stated
value of $1,000 per share plus a premium of 5% per annum of the stated value
from the date of issuance of the Series A Preferred Stock, divided by the
Conversion Price, calculated in accordance with the terms of the agreement.
The Series A Preferred Stock is convertible at the option of the
holders subject to limits on the number of shares they can convert at any one
time. Subject to the terms of the agreement, certain of which may permit
earlier conversion, prior to January 22, 1999, the Series A Preferred Stock
may not be converted. Unless the trading price of the Common Stock on Nasdaq
on the date of conversion meets certain amounts calculated as per the
agreement, the following limits apply to conversion: beginning on January 23,
1999, each holder of Series A Preferred Stock may convert up to 25% of its
initial holding of Series A Preferred Stock into Common Stock; beginning on
February 23, 1999, it may convert up to 50% of its initial holding into
Common Stock; beginning on March 23, 1999, it may convert up to 75% of its
initial holding; beginning on April 23, 1999, it may convert up to 100% of
its initial holding. Any Series A Preferred Stock issued and outstanding on
July 22, 2001 is automatically converted into common stock on that date (as
such date may be delayed on the terms of the agreement).
The exercise price of the warrants issued at the initial closing is
equal to $5.15 per share for half of the warrants, and for the other half, 130%
of the average closing bid price of the Company's Common Stock during specified
periods.
In addition, the Company has the option to issue, to the same Series A
Preferred Stockholders, up to 2,000 additional shares of Series A Preferred
Stock and similar warrants for $2,000,000 subject to satisfaction of certain
conditions.
7
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
This Report contains, in addition to historical information, forward looking
statements by the Company with regard to its expectations as to financial
results and other aspects of its business that involve risks and uncertainties
and may constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "may," "should,"
"believe," "plan," "estimate," "expect," and "intend," and other similar
expressions are intended to identify forward-looking statements. These include
statements regarding changes in the amount of content available on the Company's
services, the number of subscribers, gross margins, current and future expenses,
future revenues, use of system resources and marketing efforts, growth and
expansion plans, sales and marketing plans, increases in sales personnel,
capital expenditures, effects of the agreement with America Online, Inc. (the
"AOL Agreement") on the Company, seasonality, operating results, and the
sufficiency of the Company's liquidity, including cash resources, and capital.
Such statements are based on management's current expectations and are subject
to a number of uncertainties and risks that could cause actual results to differ
materially from those described in the forward-looking statements. Factors that
may cause such a difference include, but are not limited to, those described
under "Risk Factors" in the Company's 1997 Annual Report on Form 10-K. The
Company does not intend to update these cautionary statements or any forward
looking statements. Financial information discussed in this report is rounded to
the nearest thousand.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1997, AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Total revenues were $3,582,000 for the three months ended June 30,
1998, and $1,904,000 for the three months ended June 30, 1997. Total revenues
were $6,165,000 for the six months ended June 30, 1998 compared to $2,711,000
for the six months ended June 30, 1997.
Educational revenues accounted for $1,462,000 or 41% of revenue for the three
months ended June 30, 1998 and $336,000 or 18% of revenue for the three months
ended June 30, 1997. Total educational revenues were $2,611,000 for the six
months ended June 30, 1998 compared to $501,000 for the six months ended June
30, 1997. The Company had over 2,400 educational contracts at June 30, 1998,
compared with approximately 1,440 at December 31, 1997 and 362 at June 30, 1997.
The 2,400 contracts cover approximately 6,800 institutions.
End-user revenue accounted for $1,138,000 or 32% of revenue for the three months
ended June 30, 1998 and $846,000 or 44% of revenue for the three months ended
June 30, 1997. Total end-user revenues were $2,178,000 for the six months ended
June 30, 1998 compared to $1,334,000 for the six months ended June 30, 1997. The
Company had approximately 54,000 subscribers at June 30, 1998 compared to
approximately 35,500 at June 30, 1997.
Content management and custom archive services revenue was $864,000, or 24% of
revenue for the three months ended June 30, 1998, and $222,000, or 12% of
revenue for the three months ended June 30, 1997. Revenue for the six months
ended June 30, 1998 amounted to $1,203,000 as compared to $376,000 for the six
months ended June 30, 1997. Revenue has increased as a result of the increase in
the number of hosting and archive customers. The Company had 11 content
management and custom archive customers at June 30, 1998 compared to 3 at June
30, 1997.
8
<PAGE>
Other revenue was $118,000 for the three months ended June 30, 1998. Other
revenue consists of international and reseller revenue. There was no other
revenue for the three or six months ended June 30, 1997. For the six months
ended June 30, 1998, other revenue was $175,000.
An amount of $500,000 was included in second quarter 1997 revenues. This amount
was received in 1995 as consideration for limited exclusivity contained in a
marketing agreement. During the second quarter, the period of exclusivity ended
and the Company had no further obligation.
At June 30, 1998 the Company had deferred revenues of approximately $4.9
million, up from $3.9 million at March 31, 1998. The deferred revenues include
revenue to be recognized from educational contracts, monthly and annual end-user
subscriptions and contracted archive services. Deferred revenue at June 30, 1998
consists of $3.5 million related to educational subscriptions, $652,000 related
to end-user subscriptions, $91,000 related to contracted archive services,
$543,000 related to Electric Library Canada and $146,000 related to other
accounts.
COST OF REVENUES. The principal elements of the Company's cost of revenues
are royalty and license fees paid to providers of content, hardware and
software, as well as communication costs associated with the delivery of the
online services. Cost of revenues was $1,051,000 for the three months ended
June 30, 1998, compared to $617,000 for the three months ended June 30, 1997.
Cost of revenues as a percentage of revenue for the three months ended June
30, 1998 and 1997 was 29% and 44% (excluding the $500,000 described above),
respectively. Cost of revenues were $1,927,000 and $1,070,000 for the six
months ended June 30, 1998 and 1997, respectively. As a percentage of
revenues, this amounted to 31% and 48% (excluding the $500,000 described
above), respectively. The increase in cost of revenues for each period
primarily reflects costs incurred to provide services to an increased number
of users. The improvement in gross margin as a percentage of revenues in 1998
was primarily due to the positive impact of the restructuring of certain
agreements with hardware, software and content providers which occurred
during 1997 and the early part of 1998, and to a higher gross margin on
content management contracts as the Company was able to spread its fixed
costs over more contracts.
CUSTOMER SUPPORT. Customer support expenses consist primarily of costs
associated with the staffing of professionals responsible for assisting users
with technical and product issues and monitoring customer feedback. Customer
support expenses were $257,000 for the three months ended June 30, 1998,
compared to $147,000 for the three months ended June 30, 1997, representing a
75% increase. As a percentage of revenue, customer support expenses for the
second quarter were 7% in 1998 and 10% in 1997 (excluding the $500,000 described
above). Customer support expenses were $482,000 for the six months ended June
30, 1998 compared to $258,000 for the six months ended June 30, 1997. The
absolute dollar increase in 1998 resulted primarily from higher staffing levels
and the continuing need for the Company to provide additional support to its
growing customer base, yet the customer support expenses as a percentage of
revenues declined in 1998, as the staffing levels were able to support a greater
number of users. The Company anticipates continuing to make increasing customer
support expenditures as the number of subscribers increase.
TECHNICAL OPERATIONS AND DEVELOPMENT. Technical operations and development
expenses consist primarily of costs associated with maintaining the Company's
service, data center operations, hardware expenses and data conversion costs as
well as the design, programming, testing, documentation and support of the
Company's new and existing software, services and databases. To date, all of the
Company's costs for technical operations and development have been expensed as
incurred. Technical development and operation expenses were $2,052,000 or 57% of
total revenues for the three months ended June 30, 1998, compared to $1,473,000
or 105% of total revenues (excluding the $500,000 described above) for the three
months ended June 30, 1997. For the six months ended June
9
<PAGE>
30, 1998 and 1997, the technical development and operations costs were
$3,836,000 and $2,850,000, or 62% and 129% of total revenues (excluding the
$500,000 described above), respectively. The level of technical operations and
development expenses will continue to increase as the Company continues to make
significant expenditures as it develops new and enhanced services and upgrades
to the current services, but should decline as a percentage of sales, as
revenues are expected to grow faster than technical operations and development
expenditures. The Company's overall effort to increase the content available
under its Electric Library service may result in an increase in data preparation
costs in future periods, which to date have not been material. Data preparation
costs are deferred and expensed over the minimum useful life of the content.
SALES AND MARKETING. Sales and marketing costs consist primarily of costs
related to compensation, attendance at conferences and trade shows, advertising,
promotion and other marketing programs. Sales and marketing expenses were
$3,932,000 for the three months ended June 30, 1998, compared to $2,804,000 for
the three months ended June 30, 1997, representing a 40% increase. As a
percentage of revenue, sales and marketing costs were 110% and 200% for the
three months ended June 30, 1998 and 1997, respectively (excluding the $500,000
described above). Sales and marketing costs were $6,893,000 and $5,694,000, or
112% and 258% of revenue (excluding the $500,000 described above), for the six
months ended June 30, 1998 and 1997 respectively. During the last twelve months,
end-user subscriber acquisition costs have decreased, which has been more than
offset by an increase in the size of the educational sales and marketing staff.
Additionally, beginning in May 1998, the Company has started to amortize the
payments made under the AOL Agreement over the period of the agreement which
approximated $330,000 in the quarter ended June 30, 1998. In 1998, the Company
is continuing to focus its sales and marketing efforts towards those activities
that are believed to generate increased sales and traffic. The Company does not
anticipate further increasing the size of its sales and marketing staff or
expanding its direct sales force.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of expenses for administration, office operations, finance and general
management activities, including legal, accounting and other professional fees.
General and administrative expenses were $1,100,000 for the three months ended
June 30, 1998, compared to $1,274,000 for the three months ended June 30, 1997.
For the six months ended June 30, 1998 general and administrative expenses were
$2,619,000, as compared to $2,811,000 for the six months ended June 30, 1997.
Included in the six months ended June 30, 1998, was a one time charge of
approximately $500,000 for separation and related costs in connection with the
resignation of the former Chairman of the Board, Chief Executive Officer and
founder of the Company. General and administrative expenses have decreased in
each of the last six quarters. The Company anticipates that general and
administrative expenses may increase in absolute dollar amounts but decline as a
percentage of total revenues.
INTEREST INCOME, NET. Interest income, net of interest expense was approximately
$36,000 for the three months ended June 30, 1998, compared to $272,000 for the
three months ended June 30, 1997. The decrease was a result of the decrease in
cash and investments. The Company had interest expense of approximately $38,000
in the three months ended June 30, 1998 from its obligation under capital lease.
There was no interest expense in the three months ended June 30, 1997. Interest
income was $145,000 for the six months ended June 30, 1998, compared to $607,000
for the six months ended June 30, 1997.
INCOME TAXES. The Company has incurred net operating losses since inception and
accordingly, has not recorded an income tax benefit for these losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and investments of approximately $3.3
million at
10
<PAGE>
June 30, 1998, as compared to $13 million at December 31, 1997, a decrease of
$9.7 million. The Company raised an additional $3 million on July 22, 1998 in a
private placement for the issuance of 3,000 shares of Series A Convertible
Preferred Stock -see Note 6. The Company monitors its cash and investment
balances regularly and invests excess funds in short-term money market funds,
corporate bonds and commercial paper.
The Company used cash in operations of approximately $8.8 million for the six
months ended June 30, 1998 compared with $8.6 million for the comparable period
in 1997.
Net cash provided by investing activities was $8,136,000 for the six months
ended June 30, 1998 compared to net cash used in investing activities of
$216,000 for the six months ended June 30, 1997. Net cash used for capital
expenditures was $766,000 and $1,537,000, respectively, for the six months ended
June 30, 1998 and 1997. Net cash provided by investment purchases and proceeds
was $8,902,000, net, and $1,321,000, net, for the six months ended June 30, 1998
and 1997, respectively.
The Company's principal commitments at June 30, 1998 consisted of commitments
under royalty licenses and other agreements, as well as obligations under
capital leases. In connection with the AOL Agreement entered into during March
1998, the Company will pay AOL $4 million in placement fees, with $500,000 paid
in March 1998, $500,000 paid in April 1998, and $500,000 due each quarter
commencing approximately six months after the commercial launch, which occurred
in May 1998. Included in prepaid expenses is $667,000, net of $333,000 amortized
as of June 30, 1998. The fees are being amortized on a straight-line basis as of
the launch in May 1998, over the term of the two year agreement. In addition to
the placement fees, America Online will receive additional fees based on a
sliding scale of end-user revenues, which will be expensed as incurred. Although
the Company anticipates that the promotional placements resulting from this
arrangement will increase subscriber numbers, and accordingly revenue, there can
be no assurance that this agreement will generate adequate revenues to cover the
associated expenditures and any significant shortfall would have a material
adverse effect on the Company.
Capital expenditures have been, and future expenditures are anticipated to be,
primarily for facilities and equipment to support the expansion of the Company's
operations and systems. The Company expects that its capital expenditures will
increase as the number of Electric Library subscribers and archive hosting
contracts increase. As of June 30, 1998, the Company did not have any material
commitments for capital expenditures, and the Company anticipates that its
planned purchases of capital equipment and leasehold improvements will require
additional expenditures of approximately $200,000 for the remaining period in
1998, a portion of which may be financed through equipment leases.
From time to time, the Company expects to evaluate the acquisition of products,
businesses or technologies that complement the Company's business. As of the
date of this report on Form 10-Q, the Company does not have any understandings,
commitments or agreements with respect to any such material acquisition.
At June 30, 1998, the Company had available cash, cash equivalents and
investments of approximately $3.3 million and working capital deficiency of
approximately $1.8 million. The Company raised an additional $3 million in July
1998 as discussed above to supplement its working capital. An additional $2
million in equity capital may be secured from the same investor under certain
conditions and the same terms described in Note 6. Additionally, as of June 30,
1998, the Company had available approximately $200,000 under a revolving lease
line available to finance equipment purchases, which is expected to be utilized
by the end of 1998. The Company believes that these funds and its expected cash
flows generated in 1998 and 1999 should be sufficient to meet its capital and
liquidity requirements for the next twelve months. The rate of use by the
Company of its cash resources will depend, however, on numerous factors,
including the rate of increases in subscribers and educational and content
management contracts. The Company will change its planned expenditures or take
other cost cutting measures, if its
11
<PAGE>
expected rate of revenue and subscriber growth is not achieved. If the cash and
cash equivalents balance and cash generated by operations is insufficient to
satisfy the Company's liquidity requirements, the Company may be required to
sell additional debt or equity securities. The sale of additional equity or debt
securities, if available, could result in dilution to the Company's
stockholders. There can be no assurance, however, that the Company will be
successful in such efforts or that additional funds will be available on
acceptable terms, if at all. In the event the Company does not meet its expected
cash flows and the efforts to raise financing are unsuccessful, this could have
a material adverse effect on the Company.
SEASONALITY
Management anticipates that growth rates in the third quarter, and part of the
first quarter, are likely to reflect a seasonal element, given that little
school related research work is done in July and August, and early January.
Accordingly, results for those quarters may be affected by reduced levels of
traffic on the Company's Internet sites and by customary subscriber
cancellations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
12
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On July 22, 1998, the Company completed a private placement with a private
equity fund under which it agreed to issue up to 5,000 shares of Series A
Convertible Preferred Stock with a stated value of $1,000 per share (the "Series
A Preferred Stock") for an aggregate of $5 million in cash.
Each share of Series A Preferred Stock is convertible into the number of shares
of the Company's Class A common stock (the "Common Stock") equal to (i) the
stated value ($1,000) plus a premium of 5% per annum of the stated value from
the date of issuance of the Series A Preferred Stock, divided by (ii) the
Conversion Price. The Conversion Price is equal to the lesser of (i) the average
of the closing bid prices on the Nasdaq National Market ("Nasdaq") for any five
consecutive trading days during either (A) the twenty trading day period ending
one trading day prior to the date that the conversion notice is sent by a holder
to the Company on or before 240 days following the issue date and (B) the thirty
trading day period ending one trading day prior to any conversion date occurring
after 240 days after the issue date, or (ii) the dollar amount, $5.15, which
represents 150% of the average of the closing bid prices over the 10 trading
days beginning on July 16, 1998 or, in the case of any subsequent closing, 130%
of the average of the closing bid prices over the 5 trading days immediately
preceding the subsequent closing.
The holders of the Series A Preferred Stock are subject to limits on the number
of shares they can convert at any one time. Unless the trading price of the
Common Stock on Nasdaq on the date of conversion is greater than or equal to
either (i) 120% of the average of the closing bid prices for any five
consecutive trading days during either (A) the twenty trading day period ending
one trading day prior to the date that the conversion notice is sent by a holder
to the Company on or before 240 days following the issue date and (B) the thirty
trading day period ending one trading day prior to any conversion date occurring
after 240 days after the issue date or (ii) the dollar amount, $5.15, which
represents 150% of the average of the closing bid prices over the 10 trading
days beginning on July 16, 1998 or, in the case of subsequent closing, 130% of
the average of the closing bid prices over the 5 trading days immediately
preceding the subsequent closing, and in certain other limited situations, the
following limits apply: Prior to January 22, 1999, the Series A Preferred Stock
may not be converted; beginning on January 23, 1999, each holder of Series A
Preferred Stock may convert up to 25% of its initial holding of Series A
Preferred Stock into Common Stock; beginning on February 23, 1999, it may
convert up to 50% of its initial holding into Common Stock; beginning on March
23, 1999, it may convert up to 75% of its initial holding; beginning on April
23, 1999, it may convert up to 100% of its initial holding.
The Company also issued five year warrants to the private equity fund to
purchase 200,000 shares of Common Stock at a purchase price, subject to
adjustment, equal to $5.15 for half of the warrants, and for the other half,
130% of the average closing bid price of the Company's common stock during
specified periods.
The Company has agreed to register under the Securities Act of 1933 the resale
of the Common Stock to be issued upon conversion of the Series A Preferred Stock
or exercise of the warrants.
13
<PAGE>
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits
27.0 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the three-month period
ended June 30, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFONAUTICS, INC.
Date: August 10, 1998 /s/ David Van Riper Morris
----------------------------
David Van Riper Morris
Chief Executive Officer
Date: August 10, 1998 /s/ Federica F. O'Brien
----------------------------
Federica F. O'Brien
Director of Financial Reporting,
Acting Chief Financial Officer
(Principal Financial
and Accounting Officer)
15
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<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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