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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File Number: 0-28284
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INFONAUTICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 West Valley Road, Suite 400
Wayne, Pennsylvania 19087
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 610-971-8840
Securities registered pursuant to Section 12(b)of the Act:
Title of each class: Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g)of the Act:
Class A Common Stock, no par value
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 1998 was approximately $15.2 million (based on the
last reported sale price on The Nasdaq Stock Market on that date). For purposes
of making this calculation only, the registrant has defined affiliates to
include all directors and executive officers, all holders of more than ten
percent of the Company's Class A Common Stock and all holders of more than five
percent of the Company's Class A Common Stock who also have a representative on
the Company's board of directors. The number of shares of the registrant's Class
A Common Stock outstanding as of February 28, 1998 was 9,391,627.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1998 Annual Meeting of Shareholders to be held on May 28, 1998 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
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INFONAUTICS, INC.
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31, 1997
TABLE OF CONTENTS
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Page
PART I
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Item 1 Business........................................................................................ 1
Item 2 Properties......................................................................................18
Item 3 Legal Proceedings...............................................................................19
Item 4 Submission of Matters to a Vote of Security Holders.............................................19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................21
Item 6. Selected Financial Data........................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........24
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.....................................29
Item 8. Financial Statements and Supplementary Data....................................................29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........29
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................29
Item 11. Executive Compensation.........................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................29
Item 13. Certain Relationships and Related Transactions.................................................30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................30
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Unless the context indicates otherwise, the terms "Infonautics" and
"Company" refer to Infonautics, Inc. and its subsidiaries. "Infonautics" and
"Electric Library" are registered trademarks and service marks and "Homework
Helper," "Electronic Printing Press," "EPP," "EPP-Direct," "Encyclopedia.com,"
"Research Zone," "Electric Library Business Archive," "Electric Library Business
Edition," "Electric Library Personal Edition," and "IntelliBank" are trademarks
and service marks of the Company or its subsidiaries. All other brand names,
service marks or trademarks appearing in this Annual Report on Form 10-K are the
property of their respective owners.
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PART I
Item 1. BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K 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," "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions are intended to identify
forward-looking statements. These include statements regarding growth in the use
of the Internet, growth of consumer online services, effect of the Company's
agreement with America Online, Inc., changes in the number of publications
available on the Company's services, changes in the number of subscribers to the
Company's services, pricing uncertainty, the Company's proprietary technology,
software suppliers, system capacity, growth, development and expansion plans,
sales and marketing plans, content and publisher relationships, seasonality,
industry development and regulation, competition, operating results and the
sufficiency of the Company's liquidity 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"
on page 13 of this Annual Report on Form 10-K.
Overview
Infonautics provides premium online information services for
the educational and end-user markets, formerly referred to as the
institutional and consumer markets, and provides content management and
custom archive services for publishers of quality content and business
information. The Company's flagship online reference service, Electric
Library, is available to end-users through the Internet and consumer online
services, and is marketed to schools, libraries and other educational
institutions. The standard Electric Library service allows users to search
horizontally across the Company's entire content collection or customize
searches to meet specific user requirements. The service provides the user
with a list of full-text documents and images, ranked by relevancy,
from the Company's content collection that contains full-text documents
and images from thousands of diverse publications and data sources.
The Company's content management and custom archive services have been
identified in the past as Electronic Printing Press, EPP and EPP-Direct. These
services combine the Company's core technology, operating environment and
optional services (business and management functions), to provide large custom
digital archives on the Internet and/or intranets. In the future, these services
will be part of the Company's content management and custom archive services.
The Company was incorporated in Pennsylvania in November 1992.
Recent Developments
Significant Agreement with America Online, Inc. In March 1998,
the Company entered into a multi-year, multi-million dollar interactive
marketing agreement (the "AOL Agreement") with America Online, Inc.
("AOL"). The AOL Agreement provides for the Electric Library to be
marketed through exclusive placement and distribution on AOL's "Research
and Learn Channel" and "WorkPlace Channel," with a guaranteed number of
impressions. Electric Library will also have a placement and distribution
on AOL's "WorkPlace Channel Business Research" screen. The Company
anticipates that Electric Library will be accessible to AOL members
commencing in the second quarter of 1998, through a logo button on
the respective channel screens, as "Electric Library@AOL Personal
Edition" or "Electric Library@AOL Business Edition." The service is
expected to be available to AOL members at prices similar to the Internet
version of Electric Library during the second quarter of 1998.
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The AOL Agreement provides for fixed payments as well as
revenue sharing payments. Although the Company anticipates that the
promotional placements resulting from these arrangements will increase
subscriber numbers, and accordingly revenue, the Company has agreed to
make significant fixed payments over the contract term. There can be
no assurance that the AOL Agreement will generate adequate revenues to
cover the associated expenditures, and any significant shortfall would
have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"-- Risk Factors -- Need for Additional Funds" and "-- Risk Factors --
Dependence on AOL."
Agreement with Chairman and Chief Executive Officer. In February
1998, the Company entered into an agreement with Marvin I. Weinberger, the
Chairman of the Board, Chief Executive Officer and founder of the Company,
pursuant to which Mr. Weinberger will resign as Chairman and Chief
Executive Officer of the Company to become the Chief Executive Officer of
a newly formed company that will pursue the Company's Electric Schoolhouse
project. Pursuant to the terms of the agreement, the Company will transfer
to the new entity all of the Company's rights in certain trademarks,
trademark applications, domain names and tangible Electric Schoolhouse
materials, along with certain other rights to non-Electric Schoolhouse
materials and concepts, and in return the Company will receive a 10% equity
interest in the new company. The Company also will enter into a
remarketing agreement with the new entity for a version of the Electric
Library service containing a portion of the Company's content collection. In
addition, pursuant to the terms of the agreement, Mr. Weinberger's
employment and royalty agreements with the Company will terminate upon the
issuance by the Company of 125,000 shares of Class A Common Stock to Mr.
Weinberger, Mr. Weinberger's stock option dated February 2, 1996 will be
canceled and he will be granted a new stock option to purchase up to 75,000
shares of Class A Common Stock (representing the vested portion of his
February 2, 1996 grant) at an exercise price of $11.50 per share (the same
exercise price as the February 2, 1996 grant) with a termination date of
December 31, 1998 and Mr. Weinberger's stock option dated May 29, 1997
will be amended to accelerate the vesting of the options so that, until
the option is terminated by its terms, Mr. Weinberger will be able to
exercise options to purchase 50,000 shares of Class A Common Stock at an
exercise price of $1.875. If requested, the Company has agreed, under
certain conditions, to loan Mr. Weinberger the funds required to exercise the
May 1997 option. In addition, the Company has agreed to reimburse the new
entity for Mr. Weinberger's salary through December 31, 1998.
It is anticipated that the transactions contemplated by the
agreement will be completed promptly after receipt by the Board of
Directors of a satisfactory opinion that the transactions contemplated
by the agreement are fair, from a financial point of view, to the
shareholders of the Company. The Company anticipates the transactions
contemplated by the agreement with Mr. Weinberger will be completed during
the first half of 1998. In addition, in connection with the agreement, the
Company will have severance and related expenses of approximately $700,000.
In addition, the Company is currently negotiating with Joshua M.
Kopelman, one of the founders of the Company, to terminate his royalty agreement
with the Company pursuant to which he is entitled to receive, commencing in 1998
and terminating in 2091, payments equal to 0.15% of the Company's after-tax
adjusted net income.
Strategy
Infonautic's mission is to be the company more people turn to for
trusted information. To accomplish this mission, the Company's strategy is
to continue to improve and enhance its services, to provide services of high
value at a reasonable cost, to identify and meet the information needs of
schools, libraries, businesses and individual users and to expand
distribution. The Company believes that in the foreseeable future, schools,
libraries, businesses and individual users will continue to generate
the large majority of the Company's revenues. The Company also believes
that the growth of the Internet in the United States and around the
world will continue to provide new opportunities to sell its services.
Federal, state and local governments appear committed to expanding access
to information technology in schools and libraries. The Company plans
to implement its strategy, in part, through the following efforts:
Business Users and Corporations. The Company is currently
developing a business version of the Electric Library service called the
Electric Library Business Edition, a portion of which the Company plans to
offer as a stand alone service called the Electric Library Business
Archive. The Electric Library Business Edition will contain enhanced
content and features for meeting the particular needs of small business users.
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International. The Company believes that there is a potential
market for customized versions of Electric Library in other countries,
particularly, though not exclusively, in countries with a significant
English-speaking population, and is currently completing development on the
first international edition of the Electric Library service for Rogers Media
Inc. (formerly Rogers Multi-Media Inc.) in Canada. This version of
Electric Library will include Canadian and other content. International
editions of the Electric Library service are expected to feature
country-specific interfaces, content and billing, and will be marketed in
partnership with companies from the country in which the international
edition of Electric Library is offered.
Resellers and remarketers. The Company believes that reseller
and remarketing agreements are an effective means of extending the
marketing reach for its services, particularly in markets where the Company
does not currently have the resources to market its services
independently, and recently entered into several agreements of this type.
Services
Since its founding in late 1992, Infonautics has developed a complete
information system architecture, in order to help realize its mission. This
system architecture forms the basis for the Company's online reference services
and its content management and custom archive services.
Online Reference Services
Leveraging its investment in this information system architecture, the
Company continues to enhance and repackage its flagship Electric Library
service, developing a product line that the Company believes satisfies the
information needs of a diverse and varied customer base.
Electric Library. Electric Library (also marketed on Prodigy under the
trademark Homework Helper) is a broad research and reference service providing
access to a diverse collection of content. Electric Library offers user-friendly
graphical interfaces and a powerful natural language search capability that
allows users to search an entire content collection simply by asking a question.
Results are provided in the form of a list of documents, from which the user can
select from the most relevant full-text articles, pictures and other documents.
The service's ability to customize searches, combined with the underlying
technology and diversity of content, is designed to enable users to satisfy
their general and special interest information requirements. Users can pose a
question to launch a comprehensive search of the Company's content collection.
Query results are returned quickly and users can select the results based on
relevancy, size, date or reading level. The Company's graphical user interface
offers a familiar, easy-to-use, point-and-click functionality. Clicking on a
reference title allows users to download the document or image of interest
automatically. The recently upgraded Electric Library service also provides
users with the ability to see related Internet content from thousands of web
sites. For advanced users, Electric Library also has a number of search options,
including: Boolean search, subject-based searching and fielded searching (by
title, author or publication).
The Company has developed several versions of Electric Library that are
marketed through different channels. The Company markets a version of the
Electric Library to schools and libraries ("Electric Library for Libraries and
Educational Institutions"). This version has been optimized with a customized
interface in order to be more student-friendly, including more
educationally-specific content, no advertising and restricted links to other
Internet sites. In addition, the service allows institutions to authenticate
themselves via an Internet Protocol (IP) address rather than requiring every
library patron to enter a user name and password. For educational institutions,
the annual fee is approximately $1,500 per concurrent user. The Company offers
discounts in certain circumstances, including high-volume purchases and site
licenses.
The end-user edition of Electric Library (the "Electric Library
Personal Edition"), based on the original Electric Library service introduced in
the first quarter of 1996, is accessible directly over the Internet (at
http://www.elibrary.com) and through a variety of marketing partners. Users are
able to access the service through any standard World Wide Web (the "Web")
browser. The Company markets Electric Library to end-users through paid
advertisements as well as through bounty and royalty incentive arrangements.
Individual subscriptions, which include a one month free trial, are typically
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priced at $9.95 per month and offer virtually unlimited consumer usage of the
Electric Library service. Annual subscriptions are available for $59.95.
Pursuant to the AOL Agreement described earlier, it is anticipated that in
the second quarter of 1998, the Electric Library will also be featured on AOL
as Electric Library@AOL Personal Edition. See "-- Risk Factors -- Dependence
on AOL."
Electric Library Business Edition. The business version of Electric
Library is expected to be introduced in the second quarter of 1998 and will be
marketed both toward the individual business end-user and toward work groups
within corporations. Pursuant to the AOL Agreement, Electric Library will also
be featured on AOL as Electric Library@AOL Business Edition commencing in the
second quarter of 1998. See "-- Risk Factors -- Dependence on AOL."
Electric Library Canada. The Company is currently developing a
customized version of Electric Library for Rogers Media Inc. that is expected to
be launched in Canada during the second quarter of 1998. It will feature
specific interfaces and content for the Canadian market.
Custom Libraries
The Company also builds custom libraries for third-parties which
contain a subset of the content and functionality of the Electric Library. An
example of this is the Netcom On-line Communication Services, Inc.'s NETCOM
Research Library, which offers customers of the Netcom's NETCOMplete Advantage
Pro service with access to a collection of magazines and newspapers organized by
subject.
Acquisition Sites
The Company currently operates two advertising-supported "acquisition
sites" that provide selected research-related information to users and promote
usage of the Electric Library. The first of these sites, Researchpaper.com, is
an Internet site dedicated to helping students with their term papers. Launched
in 1997, Researchpaper.com provides visitors with access to a directory of over
5,000 term-paper topics in over 300 subjects, a writing center with over 100
lessons on writing a research paper and a discussion group where students and
teachers can post messages about specific projects or papers. In addition to
advertising revenue, Researchpaper.com provides the Company with a strong
marketing vehicle for the Electric Library service, by allowing the Company to
reach the students who are using the site.
In the first quarter of 1998, the Company launched Encyclopedia.com,
which the Company believes to be the first recognized brand of printed
encyclopedia available free of charge on the Internet. Designed as a basic,
easy-to-use research tool for anyone on the Web, Encyclopedia.com contains the
complete text of The Concise Columbia Encyclopedia - Third Edition. More than
17,000 articles have been assembled to provide free, quick and useful
information on almost any topic. Through extensive cross-references, users also
have the option of expanding their research through direct links to other
articles within the Encyclopedia.com site, to other related web sites and books,
as well as to the in-depth archives of the Electric Library service. The Company
anticipates that Encyclopedia.com will provide the Company with revenues from
advertising partners, as well as introduce new subscribers to the
Electric Library.
Content Management and Custom Archive Services
The underlying technology of the Electric Library service is adept at
managing large volumes of information, providing robust search capabilities
across multiple stored libraries and providing detailed reports of user activity
and document usage. Previously, these capabilities were branded Electronic
Printing Press, EPP and EPP-Direct. In the future, this technology will be part
of content management and custom archive services.
Content management and custom archive services are designed for
publishers or other content creators who wish to have their own online
information service based on Electric Library technology, but wish to outsource
the entire
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operation to the Company. The Company digitizes a publisher's content,
implements their chosen billing methodology, readies customer support and
implements systems for ongoing service, support and reporting to the publisher.
The business and management functions of the Company's content
management services provide publishers and other content creators with an
opportunity to effectively market their archival information and to manage that
marketing effort with control processes and feedback. The royalty management
function records the downloading of published documents and tracks frequency of
user access by document over time. The Company believes these records, with
their links to subscriber demographics, may be used by its customers in many
different ways to meet their needs. The subscriber management function gathers
customer information and calculates charges for input in a broad variety of
accounting systems. These billing functions are designed to support a variety of
pricing options as well as flexible and effective alternatives for processing
invoices by credit card or direct invoicing.
Currently, the Company has ten archive customers for these services,
including, Financial Times, Business Week, Cox Interactive (Atlanta Journal and
Constitution, Palm Beach Post, Dayton Daily News and Austin American-Statesman)
and Newsday. Archive agreements normally have a two-year term.
Extranet Knowledge Management Services
The Company believes that IntelliBank, the Company's knowledge
management service and product line that disseminates internal individual or
team "know-how" across an organization, can assist companies with their
knowledge management process. In mid-1997, the Company entered into a contract
with Hewlett-Packard Company pursuant to which the Company provided
Hewlett-Packard with a modular and scalable Intranet product that functions as a
stand-alone information repository, can be linked into existing databases and
represents a flexible platform for collecting and disseminating knowledge
throughout an organization.
Content and Publisher Relationships
Infonautics believes that the relationships and contracts it
maintains with publishers and other content providers are a strategic asset.
To that end the Company devotes significant resources to establishing and
maintaining those relationships. During 1997, the Company signed more than
200 content licensing contracts covering more than 600 publications and
distinct sources. Today the majority of the content collection on the
Electric Library service is available to Infonautics through direct licenses
with content suppliers, significantly reducing the Company's dependence on
content aggregators. While the Company expects the content available on its
services to change from time to time, it believes that these direct licensing
relationships will provide greater stability to the content collection.
Nevertheless, the Company will, on a case-by-case basis, enter into
relationships with content aggregators to fill specific needs of the Company.
For example, as part of development for its business version of Electric
Library, the Company recently entered into an agreement to obtain numerous
business related titles from one aggregator. See "-- Risk Factors --
Dependence on Content Providers; Significant Payments Required to be Made to
Content Providers."
The Company continues to place a high priority on increasing the
depth and variety of its information sources, and it will continue to license
additional content from newspapers, magazines, journals, book publishers, map
and photo providers and other providers. The Company initially focused its
licensing efforts almost exclusively on meeting the content needs of schools,
libraries and individual consumer subscribers. More recently the Company has
broadened its licensing objectives, and today devotes significant resources
to licensing content for the business and corporate markets as well. These
markets have different content needs, including, company profiles, financial
reports, statistical data, trade and industry publications and more in-depth
business and financial news. The Company believes it can license content for
the business and corporate market on terms similar to its existing content
contracts. See "-- Risk Factors -- Dependence on Content Providers;
Significant Payments Required to be Made to Content Providers."
The Company's content licenses allow it to provide access to full-text
documents and images from thousands of diverse publications and data sources,
including newspapers, newswires, magazines, journals, books, photos, maps,
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transcripts and great works of literature. The following table shows a partial
list of publications and other content sources that the Company has the rights
to include in its content collection.
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Magazines & Journals
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American Demographics Harper's Bazaar People
Business Week Information-Week Popular Mechanics
Discover Magazine InfoWorld Ranger Rick
The Economist International Wildlife Science
Esquire Management Review Sports Illustrated
Forbes Magazine Money Sports Illustrated for Kids
Foreign Policy National Wildlife Time
Fortune The New Republic Time for Kids
Good Housekeeping PC World Online U.S. News & World Report
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Newspapers & Newswires
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Atlanta Journal and Constitution Independent (UK) Reuters
Arizona Republic International Herald Tribune Reuters Business Report
Baseball Weekly ITAR-TASS Rocky Mountain News
Cambridge Telecom Report Jerusalem Post St. Louis Post-Dispatch
The Christian Science Monitor Los Angeles Times Star Tribune (Minneapolis)
The Daily Telegraph (UK) Newsbytes News Network USA Today
The Dallas Morning News Newsday The Washington Times
Gannett News Service PR Newswire Xinhua News Agency
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Television and Radio Transcripts
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All Things Considered (NPR) Money Line with Lou Dobbs Talk of the Nation (NPR)
Capitol Hill Press Releases (CNN-fn) 20/20 (ABC)
Fresh Air (NPR) MSNBC Professional (MSNBC) Washington Transcript Service
Good Morning America (ABC) Nightline (ABC) World News Tonight with
Morning Edition (NPR) Nightly Business Report Peter Jennings (ABC)
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Photographs, Maps and Reference Works
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Archive Photos Hoovers Company Capsules and Reuters Toppix News and
Colliers Encyclopedia Profiles Sports (photographs)
Countries of the World Index Stock Photography, Inc. Shakespeare, The Complete Works of
The Columbia Encyclopedia, King James Bible Webster's New World Dictionary
Fifth Edition Magill's Survey of Cinema World Almanac and Book of Facts
The Dictionary of Cultural Monarch Notes World Almanac for Kids
Literacy The New York Public Library World Almanac of US Politics
Earth Explorer Science Desk Reference Young Students Learning Library
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The content collection is updated daily, often by satellite or other
direct links. The frequency of updates varies with the particular periodical or
reference source.
The majority of content providers are compensated from a
standard royalty pool that is based on a percentage of the
Company's revenues attributable to its Electric Library and related
services. Certain content providers chose to be compensated under a
separate royalty pool arrangement, whereby an independent royalty pool is
established by the Company from which a limited number of participating
content providers are compensated. Still other content providers are
compensated on a flat-fee basis. Certain agreements with content providers
provide for minimum fees or guaranteed
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payments. Payments to content providers from the standard royalty pool are
based on the number of full-record retrievals by subscribers. They are
calculated each calendar quarter according to the percentage of the total
retrievals that are attributable to each provider. For example, a provider
whose retrievals account for one percent of the royalty pool in a given
quarter will receive one percent of that quarter's royalty pool. Certain of
the Company's content provider agreements contain limits on the use of the
content, including limits in certain distribution channels or in certain
geographic locations and may be terminated by the content provider under
certain circumstances, including the failure of the Company to make certain
minimum payments. These agreements are typically non-exclusive and vary in
length of term, with terms ranging from one to five years. With certain
exceptions, the agreements automatically renew at the end of their terms
unless prior written notification is given. See "-- Risk Factors --
Dependence on Content Providers; Significant Payments Required to be Made to
Content Providers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Overview."
Markets and Customers
The Company's educational customers include libraries, schools and
other educational institutions, its end-user customers include individuals
and its content management and custom archive services customers include
corporations, publishers and other content creators. In addition, the Company
has agreements with a limited number of resellers to increase distribution of
its services. As of December 31, 1997, the Company had approximately 50,000
individual customers for its online reference services, which included
approximately 47,000 Electric Library subscribers. At the end of 1997, the
Company had more than 1,400 contracts covering approximately 5,000
institutions for the use of Electric Library.
The Electric Library product line addresses six broad markets: (i)
educational, including schools, libraries and other educational institutions;
(ii) end-user; (iii) corporations; (iv) resellers looking to provide their
customers with a complete information solution; (v) international; and (vi)
publishers. Online content management services customers include publishers and
other content creators. To date, most of the Company's revenues were derived
from the end-user market, although the revenues from the educational market
increased as a percentage of total revenues during 1997.
Educational
The Company currently targets three segments within the educational
market: kindergarten through grade twelve schools ("K-12 schools"), public
libraries and colleges and universities. The Company believes the educational
market for its services is large and growing, with an increasing number of K-12
schools, public libraries and colleges and universities making investments in
technology and connectivity that will enable them to access the Company's
services. The educational market business is seasonal, particularly in the K-12
market. Most schools make purchasing commitments in the spring for the following
school year, releasing funds in the fall, at the start of the school year.
In addition to the increased expenditures by schools with respect to
the "information highway," telecommunications companies have also pledged to
assist schools in getting on the "information highway" by offering free or
reduced cost hookups and connect time. The Company hopes that the educational
market will also lead to growth in the end-user market because it familiarizes
users with the Company's services in the classroom and library and therefore may
encourage or reinforce usage of the Company's services in the home.
End-User
The Company believes that the market potential for consumer online
reference information in the United States and worldwide is substantial. A
primary marketing goal of the Company is to create a strong brand identity as a
leading online reference service. The Company's content collection
and online reference services are designed to be easy to use by both adults and
children and are targeted to fulfill a broad range of reference and research
requirements. The Company believes that the growth of the Internet and online
services market will continue to expand the potential market for its services
among end-users. See "-- Risk Factors -- Limited Operating History; Limited
Services to Date" and "-- Risk Factors -- Developing Market."
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Corporations
The Company believes that there are large numbers of business
workers throughout the economy who benefit from desktop access to online
information services. With the growth of Internet and intranet applications
within the corporate environment, the Company believes that companies will
begin to shift their information investment from a centralized corporate
library to desktop information solutions. By enhancing the capabilities and
content of the Electric Library service, the Company believes it can further
establish its brand and extend its reach into this growing market. See "--
Risk Factors -- Limited Operating History; Limited Services to Date" and "--
Risk Factors -- Developing Market."
Resellers
As more companies begin offering premium online services and
products, the Company believes that quality content will prove to be a
consistent differentiating factor. The Company believes it can satisfy this
need by offering these companies the ability to offer their customers "custom
libraries" containing select Electric Library content and functionality. The
diversity of the Company's content collection, along with the flexibility to
create co-branded or private-label interfaces, enables the Company to provide
a unique "custom library" offering. The Company intends to initially focus on
offering custom libraries to resellers such as (i) Internet Service Providers
(ISPs) who are looking to offer value-added services, (ii) hardware
manufacturers who wish to offer their customers premium content services and
(iii) content-specific web site creators who are looking for subject-specific
premium content.
International
The Company believes that as international Internet penetration rates
rise, there is a potential market for country-specific versions of the Electric
Library service. Initially, the Company intends to focus on countries with a
significant English-speaking population and countries with high levels of
Internet use. See "-- Risk Factors -- Limited Operating History; Limited
Services to Date" and "-- Risk Factors -- Developing Market."
Publishers and Other Content Creators
As publishers and other content creators enter the online
information markets, the Company believes there is a growing need for
cost-effective content management and custom archive services. The Company
believes that this need provides a means to strengthen relationships with
current content providers as well as identify opportunities for new content
provider relationships. Target customers for the Company's content management
services are publishers and other content creators who wish to publish and
manage information online, either externally for customers or internally for
corporate purposes. The Company has entered into ten agreements for such
contracts. See "-- Services -- Content Management and Custom Archive
Services." In addition, the Company believes that the growth of consumer
online services, such as AOL and Microsoft Network, and of the Internet in
general will encourage publishers and other content creators to enter into
agreements for products and services such as those offered by the Company in
order to provide online access to their content for consumers.
Customer Service and Support
The Company believes customer service and support are critical to its
objectives. Through submission of online feedback forms, customers can provide
the Company with valuable feedback each time they use Electric Library. During
1997, the Company received and responded to an average of more than 14,000
e-mails and 4,000 phone calls each month. The Company believes that the customer
feedback received to date reflects a high level of customer satisfaction.
The Company has a customer service department which currently consists
of 17 people. The technical support coordinators provide centralized telephone
support for all institutional clients and users. The billing services teams
provide centralized support for all billing-related inquiries, as well as
telephone customer enrollments and cancellations.
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The online postmasters respond to e-mail correspondence and relay customer
feedback to other departments of the Company.
Sales and Marketing
The Company's primary marketing goals are to attract and retain
subscribers and customers, to create a strong brand identity as a leading online
reference service and to provide premium electronic archiving and
distribution services for content creators. The Company seeks to build brand
recognition and user loyalty.
The Company's primary marketing activities for the Electric Library
service are centered around two key areas: customer acquisition and customer
retention. The Company uses a variety of programs to stimulate demand for its
services, including direct sales, online marketing, resellers, software bundling
and integration and other arrangements. The Company believes that forming
strategic marketing alliances with partners in the educational, Internet, online
publishing and software areas will be important for rapid market penetration.
The Company generally structures its alliances with bounty and royalty
incentives, which rewards partners for both attracting new subscribers and
cultivating loyal and frequent users of its services. See " -- Risk Factors
- -- Retention; Pricing Uncertainty."
Direct Sales
The Company currently uses a combination of internal and external sales
people to sell educational and corporate site licenses for Electric Library and
to market its content management services to publishers and other content
creators. The internal direct-sales force totals 47 full-time sales
representatives, and the external direct-sales force totals 11 full-time sales
representatives. The Company recently opened a sales office in Pleasanton,
California to cover the western third of the U.S. The educational sales force
focuses its efforts on making telephonic sales calls, in-person presentations
and exhibiting the Company's services at key educational product trade shows. In
addition, the educational sales force responds to school and library inquiries
generated by users of the Company's end-user reference services. For its content
management services, the Company's sales force is focused on leveraging
relationships with existing and potential content providers.
Marketing
The Company's online marketing initiatives are focused on creating
awareness and generating traffic for its online reference services. The Company
currently promotes and advertises its services on several Internet sites,
through paid advertisements as well as through bounty and royalty incentive
arrangements. The Company currently purchases advertising space from a number of
leading Internet sites. Recently the Company reached an agreement for placement
as an anchor tenant on AOL's "Research and Learn" and "WorkPlace" channels.
Electric Library is featured as a "Distinguished Provider" of search and
navigation services on Netscape Communications Corporation's ("Netscape")
NetSearch page, generating significant Web site visits and product trials.
Infonautics also operates the Research Zone on AOL, which generates significant
Electric Library product trials. The Company believes that the Internet has
proven itself to be an environment for fostering communities of interest, many
of which have specialized information requirements, and that the Internet
provides an ideal one-to-one marketing environment to identify and service these
communities. The Company has entered into alliances with popular Web sites to
construct "co-branded" Web sites on which Electric Library is incorporated as a
standard reference tool. See "-- Risk Factors -- Dependence on AOL" " -- Risk
Factors -- Dependence on Netscape."
Advertising-supported Acquisition Sites
The Company currently operates two advertising-supported "acquisition
sites" which provide selected research-related information to users and promote
usage of Electric Library. The first of these sites, which was launched in early
1997, is Researchpaper.com -- one of the Internet's leading sites dedicated to
helping students with their term papers. In the first quarter of 1998, the
Company launched Encyclopedia.com., which the Company believes is the first
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recognized brand of printed encyclopedia available free of charge on the
Internet. These sites provide the Company with the ability to attract
potentially large numbers of consumers that are seeking specific information and
to market the Electric Library service to them. The Company anticipates creating
additional research and reference-related acquisition sites.
Remarketers
As part of its sales and marketing plan, the Company uses remarketers
for its online reference services. For the educational market, the Company has
remarketing relationships with several organizations. The Company plans to enter
into additional remarketing agreements for the end-user, educational and
corporate markets. In addition, the Company may enter into remarketing
agreements in connection with online content management and archive services.
International Sales
The Company has filled a position of director of international sales
and has begun to explore opportunities in a number of different countries.
Software Bundling and Integration
The Company pursues opportunities to bundle and integrate client
software for its services with complementary products and services. The Company
currently has bundling agreements with a variety of companies and is currently
exploring additional bundling and integration arrangements. See "-- Services --
Electric Library."
Technology
Infonautics' core technology encompasses technologies proprietary to
the Company in combination with those licensed from third parties, including
components of the Company's basic search software. The core technology is a
scalable, open and flexible online distributed information search and
retrieval system designed eventually to support thousands of concurrent
users. This system is easy to use and enables users to access and search the
Company's extensive database and receive rapid responses to their queries. In
addition to providing the foundation for the Company's Electric Library
service, this technology is also used as a service for publishers and other
content creators who wish to have their own online information service based
on Electric Library technology. This technology is accessible as intranet,
extranet or Internet information delivery systems. During 1997, the Company's
technical operations and development expenses were $6.3 million. See "-- Risk
Factors -- Risk of System, Service Failure or Inadequacy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's core technology is characterized by the following
important features:
Search Accuracy. The Company's core technology is designed to optimize
search precision (finding the right answers) rather than recall (finding all
possible answers). A proprietary algorithm evaluates the syntactical structure
of the query and analyzes parts of speech to determine the context and meaning
of the question as a basis for relevancy scoring. The documents are returned to
the user ranked in order of relevancy.
Ease of Use and Flexible Architecture. The Company's core technology
delivers flexibility for the product developer and for the end-user. For the
product developer, the core technology's three-tiered client-server architecture
separates each of the tiers by an Application Programming Interface, or API. An
API consists of a well-defined, well-tested set of programming routines that are
used to provide services that link different types of software. This interface
allows the client developer to define multiple user products accessing the same
server base and content. Products targeted to a broad or specific marketplace
can be quickly defined and implemented with minimal testing, thereby improving
time to market. From an end-user's perspective, access by user interfaces such
as Macintosh, Microsoft Windows or Internet browsers offers the same set of
options and functional capability. The APIs support a broad spectrum of
ease-of-use features such as the "Go to Best Part" button that transports users
to the most relevant parts of a retrieved article. In addition, the APIs
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support advanced searches, document categorization and a server-based
dictionary and thesaurus.
Natural Language Capability. The natural language search technology
allows the user to perform searches using plain English questions rather than
structured query syntax. An algorithm expands each query via a semantic network
to include words that are related to the words in the initial query, either as
synonyms or other forms of the root words. For example, a search for
"intelligent animals" would also include a search for "clever creatures."
Recurring Themes Technology. Infonautics' recurring themes algorithm
allows the user to view the major themes that are embedded in the results
returned from the searches they have performed.
Scalability. The core technology's three-tier client-server
architecture is designed to be scalable. Scalability is the ability of a
computer system to maintain both user performance and relative cost per
transaction while the database and the subscriber base grow. This modular
structure, in which the three tiers are separated by flexible APIs, allows the
system to be expanded in order to maintain rapid response times as the Company's
content collection and user base grow. This modularity also allows the addition
or replacement of server-based applications, such as search and retrieval or
database engines, without changing the entire system.
Content Diversity. The Company's content management capability
facilitates the integration and delivery of a broad variety of content types and
sources. This capability includes software filters that transform publishers'
content into unified and standard formats for loading into the database. As a
result, the Company can accept multiple data sources, including print or digital
media, in multiple formats, such as SGML, ASCII or major graphic formats, and
can accommodate real-time digital data feeds.
Business Management Functions. The Company's core technology includes
features for essential business management functions related to the Company's
online services or those of customers who might use its content management
services. These functions include billing, royalty management, subscriber
management and bounty tracking. For example, the royalty management function
permits tracking and accounting for royalties by each indexed document
retrieved. The Company believes these functions provide a sophisticated and
valuable foundation for managing relationships with subscribers, content
providers and marketing partners.
Technology Licensed From Third Parties. The Company licenses certain
software from third parties, including components of the basic search software
used by the Company. See "-- Risk Factors -- Dependence on Proprietary
Technology" and " -- Risk Factors -- Dependence on Limited Sources of Supply."
Competition
The information services industry is intensely competitive with many of
the Company's competitors having significantly greater resources or experience
than the Company. With respect to its online services, the Company competes
directly or indirectly with other information services and sources, including
consumer online reference services (such as Microsoft's Encarta Online Library
and Northern Lights); educational database providers and content aggregators
(such as EBSCO, Information Access Company, UMI and Newsbank); professional
business-related services (such as Lexis-Nexis, NewsEdge and Dow Jones
Interactive); CD-ROM encyclopedias and other reference sources (such as
Microsoft Encarta and Comptons Multimedia Encyclopedia); publishers offering
online or Internet access to their own content; Internet search service
companies; and individually-maintained Web sites on the Internet.
With respect to content management and archive services, the Company
competes with other providers of enabling technology for publishers and other
content creators. Other companies compete in the search technology aspect of
the market. The optional services market, which includes hosting services,
integration services and business management functions is new, and various
competitors continue to emerge. Competition comes from the disciplines of
document management, groupware, enterprise software and professional
consulting.
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The Company markets its online reference services through consumer
online services. In the future, however, the Company's partners may become
competitors of the Company. In general, these online services are primarily
designed for communication, casual browsing and entertainment. For those seeking
specific information, the major online services typically offer their own mix of
information resources, including independent sites of newswires, general
reference works and periodicals. However, the Company believes that these
services do not currently offer users the same search capabilities or the depth,
breadth and quality of content as the Company's services. See "-- Risk Factors
- -- Competition."
Licenses and Intellectual Property
The Company relies on a combination of the intellectual property laws
of patents, trademarks, copyrights and trade secrets to establish and protect
its proprietary rights in its services. The Company has received seven United
States patents and has seven additional United States patents that are either
pending or allowed. The Company has decided at this time not to pursue the eight
international patent applications that it had filed on certain aspects of its
underlying its products and services, but may consider filing other
international patent applications in the future under the appropriate
circumstances. The Company has secured federal trademark registrations in the
United States for the trademarks Electric Library (one registration) and
Infonautics (two registrations) and has filed a total of fourteen trademark
applications in the United States Patent and Trademark Office. Eleven
applications are either pending or published. The Company has secured twelve
trademark registrations in certain foreign countries for the trademarks Electric
Library and Infonautics and has filed a total of thirty applications to register
the trademarks Electric Library and Infonautics in eight countries and the
European Community. Eighteen of these trademark applications are either pending
or published. The Company will continue to evaluate the registration of
additional trademarks, as appropriate. The Company has not to date registered
any of its copyrights in the United States or elsewhere. The Company also relies
on applicable federal law and state law for the protection of its trade secrets
within the United States. See "-- Risk Factors -- Dependence on Proprietary
Technology."
In addition to intellectual property laws, the Company relies on
confidentiality and non-disclosure agreements and other contractual agreements
and provisions to establish and protect its proprietary rights. The Company
enters into confidentiality and non-disclosure agreements with employees,
consultants and prospective and actual business partners where appropriate. The
Company also enters into license agreements and other agreements with, among
others, its publishers and content providers, its end-user and institutional
customers and its vendors of technology and services.
Regulatory Environment and Public Policy
The Company is not currently subject to direct regulation by any
government agency in the United States, other than the laws and regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Internet. The
Company believes it is currently in compliance with such laws and regulations
and that they do not have a material impact on its operations. Due to the
increasing popularity and use of commercial online services and the Internet, it
is possible that a number of such laws and regulations may be adopted with
respect to commercial online services and the Internet, which may cover issues
such as user privacy, pricing, taxation and the characteristics and quality of
products and services. For example, the Company may be subject to the provisions
of the Communications Decency Act of 1996 (the "CDA"). Although portions of the
CDA were struck down as unconstitutional by the United States Supreme Court, in
a ruling dated June 26, 1997, other portions of the CDA remain in effect, and
the manner in which the CDA will be interpreted and enforced and its effect on
the Company's operations cannot be determined; however, it is possible that the
CDA could expose the Company to substantial liability. The CDA or other laws and
regulations could decrease the growth of commercial online services and the
Internet, which could in turn decrease the demand for the Company's services and
increase the Company's cost of doing business or otherwise have a material
adverse effect on the Company. See "-- Risk Factors -- Government Regulation and
Legal Uncertainties."
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Employees
As of February 28, 1998, the Company had 177 full-time employees and 11
part-time and hourly employees. From time to time, the Company also employs
independent consultants to support its research and development, marketing and
support departments. None of the Company's employees are currently covered by
collective bargaining agreements. Management considers employee relations to be
good.
The Company's consulting relationships include Howard L. Morgan and
Israel J. Melman, who are directors of the Company.
Risk Factors
History of Losses; Anticipation of Future Losses. Since inception, the
Company has incurred significant losses and substantial negative cash flow. As
of December 31, 1997, the Company had cumulative net losses of approximately
$42.7 million, with net losses of approximately $7.5 million, $13.8 million and
$17.4 million, respectively, for each of the years ended December 31, 1995,
December 31, 1996 and December 31, 1997. There can be no assurance that the
Company will ever achieve profitable operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto.
Limited Operating History; Limited Services to Date. The Company
commenced operations in November 1992 and introduced its first online service in
early 1995. Online services generated total net revenues of approximately
$448,000 in 1995, $1.1 million in 1996 and $5.9 million in 1997, 100%, 81% and
86% of revenues, respectively, in 1995, 1996 and 1997. The content management
and custom archive services and the licensing of its core technology generated
revenues of $272,000 in 1996 and $937,000 in 1997, or 19% and 13% of revenues,
respectively, in 1996 and 1997. To achieve revenue growth, of which there can be
no assurance, the Company must, among other things, achieve market penetration
of its services, expand distribution of its services, continue to upgrade and
add technologies and commercialize existing and new services and products that
incorporate such upgraded or additional technologies. See "-- Services."
Developing Market. The Company's services are in markets that have only
recently begun to develop, are rapidly evolving and are characterized by an
increasing number of market entrants that have introduced or developed services
and products addressing information search and retrieval requirements over
private and public networks, online services and the Internet. Because the
markets for the Company's services are new and evolving and because the Company
has limited operating experience, it is difficult to assess or predict with any
assurance the growth rate, if any, and the size of these markets. See "--
Services" and "-- Markets and Customers." There can be no assurance that the
markets for the Company's services will develop. If these markets fail to
develop or develop more slowly than expected, the Company will be materially
adversely affected.
Need for Additional Funds. Based on current levels of operations and
commitments, the Company anticipates that its existing capital resources will
enable it to maintain its operations for at least twelve months. However, the
Company may require additional funds to sustain and expand its product
development and sales and marketing activities, particularly if a well-financed
competitor emerges or if there is a shift in the type of online or Internet
information services that receive customer acceptance. Adequate funds for these
and other purposes on terms acceptable to the Company, whether through
additional equity financing, debt financing or other sources, may not be
available when needed or may result in significant dilution to existing
shareholders. The inability to obtain sufficient funds from operations or
external sources would have a material adverse effect on the Company.
Further, as a strategic response to changes in the industry, the
Company may from time to time make certain marketing or other decisions that
could have a material adverse effect on the Company. For example, pursuant to
the terms of the AOL Agreement, the Company is required to pay AOL $4 million in
placement fees. There can be no assurance that the Company's arrangement with
AOL or any other arrangement it may enter into will generate adequate
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revenues to cover the associated expenditures, and any significant shortfall
would have a material adverse effect on the Company. See "-- Recent
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Competition. Many of the Company's current and potential competitors
have longer operating histories, significantly greater financial, technical and
marketing resources, greater name recognition and larger existing customer bases
than the Company. In addition, these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
devote greater resources to the development, promotion and sale of their
products or services than the Company and establish relationships with content
providers that have not entered into agreements with the Company. No assurance
can be given that a competitor or competitors will not develop services and
products which are comparable or superior to the Company's services; nor can any
assurance be given that a competitor or competitors will not seek to obtain
agreements with the Company's content providers or to market their services to
the same customers to whom the Company intends to market its services. Moreover,
because the success of the Company's strategy is dependent in part upon the
success of the Company's relationships with its strategic partners, including
the Company's suppliers, content providers, resellers and distributors, any
failure of the products of the Company's strategic partners to achieve or
maintain market acceptance or compete successfully in their markets could have a
material adverse effect on the Company.
Dependence on AOL. In March 1998, the Company entered into the AOL
Agreement, pursuant to which Electric Library will be accessible to AOL
members through placement and distribution on AOL's "Research and Learn
Channel" and "WorkPlace Channel" and on AOL's "WorkPlace Channel Business
Research" screen commencing in the second quarter of 1998. The Company is
required to pay AOL $4 million in placement fees. In addition, AOL will
receive additional fees based on a sliding scale of end-user revenues. The
Company cannot anticipate the impact on visits to its Electric Library Web
site due to the AOL Agreement, nor can the Company anticipate the effect on
subscriptions that may be generated from such visits or the impact of any
changes AOL may make to its Web site design (channels, screen) or browser in
the future. There can be no assurance that the AOL Agreement will generate
adequate revenues to cover the associated expenditures, and any significant
shortfall would have a material adverse effect on the Company. Further, there
can be no assurance that the AOL Agreement will be renewed, and the Company
anticipates that the termination of its relationship with AOL would
significantly reduce new individual end-user or business site acquisition
rates for the Company's Electric Library service. See "Recent Developments"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
Dependence on Netscape. In April 1996, the Company entered into a one
year Distinguished Provider Services Agreement with Netscape pursuant to which
the Company was designated one of fourteen "Distinguished Providers" of search
and navigation services accessible from the "Search" button on the Netscape
browser software program that directed users to the "Net Search" page on
Netscape's Web site. In 1997, the Company renewed a modified version of the
Distinguished Provider Services Agreement with Netscape for an additional one
year period until April 30, 1998. For the year ended December 31, 1997, a
significant portion of visits by individual consumers to the Company's Electric
Library Web site was derived through the Netscape Distinguished Provider
program. The Company cannot anticipate the impact on visits to its Electric
Library Web site due to any changes Netscape may make to its Web site or browser
or the effect on individual consumer subscriptions that may be generated from
such visits. There can be no assurance that the Distinguished Provider Services
Agreement will be renewed, and the termination of the Company's relationship
with Netscape could significantly reduce new individual consumer acquisition
rates for the Company's Electric Library service.
Dependence on Content Providers; Significant Payments Required to be
Made to Content Providers. The Company's relationships with its content
providers are fundamental to its goal of becoming a leading online reference
service. To date, various content providers, including publishers, have entered
into supply agreements with the Company to provide information for use in the
Company's reference services. Certain of these agreements contain limits on the
use of the content, including limits in certain distribution channels or in
certain geographic locations and generally may be terminated by either party
upon: (i) breach of any material obligation, if such breach remains uncured
within a specified number of days after written notice; or (ii) a bankruptcy,
insolvency or similar filing, if such filing is not withdrawn within a specified
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number of days. Certain of the agreements may also be terminated by the
content providers under certain circumstances, including the failure of the
Company to make certain minimum payments. In addition, the agreements are
typically non-exclusive and vary in length of term, ranging from one to five
years. Finally, the Company also obtains representations from its publishers
and content providers in these agreements as to the ownership of licensed
informational content and obtains indemnification to cover any breach of any
such representations.
The Company believes it may be necessary in the future to license
additional content from content providers such as major daily newspapers,
financial publications and weekly or monthly magazines and currently intends to
devote significant resources to licensing content for the business and corporate
markets. Further, users of online services and the Internet will in addition to
diversity also seek access to content from well known sources that are familiar
to users, such as major daily newspapers, financial publications and weekly or
monthly magazines. While the Company intends to continue adding new content,
including additional graphical material, there can be no assurance the Company
will be able to enter into agreements with additional content providers or on
terms similar to its existing content contracts. Failure to enter into new
agreements or to enter into agreements with similar terms may have a material
adverse effect on the Company.
The Company's future success also depends, in part, on its ability to
maintain its existing relationships with its content providers, of which there
can be no assurance. The Company is reducing its reliance on content aggregators
and concurrently is contracting directly with the publishers represented in the
content collections of such aggregators, as well as other publishers. As a
result, from time to time, there may be changes in the number of publications
available on the services. Nevertheless, the Company may, on a case-by-case
basis, enter into relationships with third-party content aggregators to fill
specific needs of the Company. In addition, the combination of contracting
directly with publishers and the Company's overall effort to increase the
content available under its Electric Library service will result in an increase
in data preparation costs. The Company believes that the possible reduction of
content or the increase in data preparation costs will not have a material
adverse effect on the Company. However, there can be no assurance that there
will not be a material adverse effect on the Company. See "-- Content and
Publisher Relationships."
In addition, while fees payable to the Company's content providers
constitute a significant portion of the Company's cost of revenues, there can be
no assurance that the content providers will be satisfied with the revenue
received through arrangements with the Company or that content providers will
enter into prospective agreements with the Company. If the Company is required
to increase the fees payable to its content providers, such increased payments
may have a material adverse effect on the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "-- Services,"
and "-- Content and Publisher Relationships."
Retention; Pricing Uncertainty. The Company's marketing strategy for
Electric Library depends in part upon retaining customers and renewing
customers after the subscriber period has ended. See "-- Services." Even if
customers do not cancel after the first thirty day free subscription period,
there can be no assurance that the Company will retain them as paying
customers, or that they will renew, and industry experience suggests that
each month a significant number of subscribers to the Company's services will
terminate their subscriptions. In addition, the Company may reduce the
selling price of its online reference services due to, among other things,
increased competition in the marketplace or loss of customers. If the
Company's retention and renewal rates change significantly or if the Company
reduces the selling price of its services, such changes may have a material
adverse effect on the Company. See "-- Services," "-- Sales and Marketing"
and "-- Competition."
Risk of System, Service Failure or Inadequacy. From time to time the
Company has suffered failures of the computer hardware and software and
telecommunications systems (the "Systems") it uses to deliver its services to
its customers, and these failures have resulted in interruptions in the delivery
of the Company's services to its customers. In addition, the growth of the
Company's customer base and/or content base may strain or exceed all or portions
of the capacity of its Systems and lead to degradation in performance or Systems
failure. Such growth of the Company's customer base and/or content base may also
strain or exceed the capacity of certain portions of its Systems dedicated to
performing specific functions such as customer enrollment and billing. Any
damage, failure or delay that causes
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interruptions in all or any part of the Company's Systems could have a material
adverse effect on the Company. The Company's operations are also dependent on
its ability to maintain its Systems in effective working order and to protect
its Systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. All of the Company's Systems
(except for external telecommunications systems) are located at its headquarters
facilities in Wayne, Pennsylvania. While the Company maintains property
insurance, such insurance may not be adequate to compensate the Company for all
losses that may occur or to provide for costs associated with business
interruption.
There can be no assurance that, despite testing and quality assurance
efforts by the Company and by current and potential customers, errors will not
be found in the Company's services or in upgrades to its services resulting in
loss of or delay in market acceptance and sales, diversion of development
resources, injury to the Company's reputation or increased service and support
costs, any of which could have a material adverse effect on the Company.
Potential Fluctuations in Quarterly Results. The Company expects to
experience significant fluctuations in future quarterly operating results that
may be caused by many factors, including demand for the Company's services,
introduction or enhancement of services and products by the Company and its
competitors, market acceptance of new services, the mix of distribution channels
through which services are sold, the mix of services sold, seasonality of the
online services and institutional markets and general economic conditions. As a
result, the Company believes that quarter-to-quarter comparisons of its results
of operations are not and will not necessarily be meaningful and should not be
relied upon as an indication of future performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Dependence on Proprietary Technology. The Company's success remains
heavily dependent upon a combination of proprietary software technology and
software developed by Infonautics and licensed from third parties. Although the
Company has lessened its dependence on certain third party technology and
software and has, in some cases, reasonable alternatives available to it for
certain third party technology and software, there can be no assurance that the
Company will be able to license similar technology at a comparable cost and,
therefore, any changes in third party licenses may have a material adverse
effect on the Company.
The Company relies on a combination of the intellectual property laws
of patents, trademarks, copyrights and trade secrets as well as confidentiality
and non-disclosure agreements and other contractual agreements and provisions to
establish and protect its proprietary rights in its services. See "-- Licenses
and Intellectual Property." Despite the Company's efforts to establish and
protect its proprietary rights there can be no assurance that such steps taken
by the Company will be adequate or effective. There also can be no assurance
that unauthorized parties will not attempt to copy aspects of the Company's
services or to obtain and use information that the Company regards as
proprietary. Further, there can be no assurance that the Company's competitors
will not independently develop substantially equivalent or superior technology
or duplicate the Company's services or design around patents issued or licensed
to the Company or circumvent any other intellectual property rights of the
Company. Although the Company believes that its services and the proprietary
rights developed by or licensed to it do not infringe the patents and
proprietary rights of other parties, there can be no assurance that infringement
claims, regardless of merit, will not be asserted against the Company or its
licensors in the future. There can be no assurance that any patent applications
now pending or filed in the future will result in patents being issued or, if
patents are issued, that the claims allowed will be sufficiently broad to
protect what the Company believes to be its proprietary rights. In addition,
there can be no assurance that pending applications or any patents licensed to
the Company or issued or licensed to the Company in the future will afford any
competitive advantages to the Company or will not be challenged by third
parties. There can be no assurance that the services the Company markets or will
seek to market do not or will not infringe patents or other intellectual
property rights owned by others, or that licenses for certain technologies or
services will be available to the Company on reasonable terms. Litigation may be
necessary to enforce or defend the Company's proprietary technology, contractual
agreements and intellectual property. Any such litigation may be time-consuming
and costly.
In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States,
and the global nature of online services and the Internet makes it impossible to
control the
16
<PAGE>
ultimate destination of the Company's services. Policing the unauthorized use of
the Company's technology and proprietary rights is often difficult and expensive
both in the United States and abroad.
Rapid Technological Change. The information services, software and
communications industries are characterized by rapid technological change,
changes in customer requirements, frequent new product and service introductions
and enhancements and emerging industry standards. The introduction of products
and services embodying new technologies and the emergence of new industry
standards and practices can render existing products and services obsolete and
unmarketable or require significant unanticipated investments in research and
development. The Company's future success will depend, in part, upon its ability
to keep abreast of, and to obtain rights to, the latest technologies in order to
enhance Electric Library, license its technology, introduce new services and
products and keep pace with technological developments, changing customer
requirements and frequent new product introductions. See "-- Technology"
and "-- Licenses and Intellectual Property."
Dependence on Personnel; Management of Growth. The Company's
performance is substantially dependent on the performance of its executive
officers and key employees, some of whom do not have employment agreements with
the Company. The loss of any such personnel could have an adverse effect on the
operations of the Company. The Company is dependent upon its ability to attract,
retain and motivate skilled technical, managerial and sales personnel.
Competition for qualified personnel is intense and there can be no assurance
that the Company will be able to attract, assimilate or retain additional highly
qualified employees. Furthermore, the expenses associated with hiring and
retaining employees may be incurred prior to the generation of any associated
revenues.
The Company's future growth will require it to manage its operations
effectively while responding to constant changes in both technology and the
markets in which the Company intends to compete. If the Company's management is
unable to manage growth effectively, the Company may be materially adversely
effected.
Dependence on Limited Sources of Supply. Components of the basic search
software used by the Company are licensed on a non-exclusive basis from
Excalibur Technologies Corporation ("Excalibur") (parent of and successor to
Conquest Software Corp.). No assurance can be given that Excalibur will continue
to support or maintain the software adequately or that the arrangement will not
be terminated. The Company's agreement with Excalibur was amended in January
1998 and provides for a term of 12 years, ending January 31, 2010. The agreement
may be terminated earlier, after a notice period, by either party upon breach of
any material obligation. However, the Company believes that if Excalibur were
unable to adequately support or maintain the software, additional or replacement
suppliers could provide the Company with comparable software within a reasonable
time frame. Nevertheless, there can be no assurance that the Company could find
alternative suppliers or that any such suppliers could provide comparable
software on a timely basis or on similar terms.
Dependence on the Internet. Although the Company provides access to its
services across multiple delivery channels, including commercial online
services, the success of the Company's services depends on, among other things,
the continued expansion of the Internet and its network infrastructure. The
Internet may not prove to be a viable commercial marketplace because of, among
other things, inadequate development of the necessary infrastructure such as a
reliable network backbone, delayed development of complementary products and
technologies such as high speed modems and security procedures for financial
transactions or delays in the development or adoption of new standards and
protocols such as the next-generation Internet Protocol, all of which would
inhibit the Internet's ability to handle increased levels of activity. There can
be no assurance that the infrastructure, complementary products or protocols
necessary to make the Internet a viable commercial marketplace will be
developed. If they are not developed or if the Internet does not become a viable
commercial marketplace for any other reason, the Company may be materially
adversely affected. Moreover, critical issues concerning the commercial use of,
distribution on and government regulation of online services and the Internet
(including security, cost, ease of use and access, property ownership and other
legal liability issues) remain unresolved and may impact both the growth of
online services and the Internet and the Company's financial results. See "--
Government Regulation and Legal Uncertainties."
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<PAGE>
Government Regulation and Legal Uncertainties. The Company is not
currently subject to direct regulation by any government agency in the United
States, other than the laws and regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. The Company believes it is currently in compliance
with such laws and regulations and that they do not have a material impact on
its operations. Due to the increasing popularity and use of commercial online
services and the Internet, it is possible that a number of such laws and
regulations may be adopted with respect to commercial online services and the
Internet, which may cover issues such as user privacy, pricing, taxation and the
characteristics and quality of products and services. For example, the Company
may be subject to the provisions of the CDA. Although portions of the CDA were
struck down as unconstitutional by the United States Supreme Court in a ruling
dated June 26, 1997, other portions of the CDA remain in effect, and the manner
in which the CDA will be interpreted and enforced and its effect on the
Company's operations cannot be determined; however, it is possible that the CDA
could expose the Company to substantial liability. The CDA or other laws and
regulations could decrease the growth of commercial online services and the
Internet, which could in turn decrease the demand for the Company's services and
increase the Company's cost of doing business or otherwise have a material
adverse effect on the Company. A number of other countries also have enacted or
may enact laws and regulations that regulate online services and Internet
content and activity. The adoption of such laws or regulations may decrease the
growth of online services and the Internet, which could in turn decrease the
demand for the Company's products and services. Such laws and regulations also
could increase the Company's cost of doing business and may have a material
adverse effect on the Company.
In addition, due to the global nature of the Web, it is possible that,
although transmissions of the Company's services primarily originate in the
Commonwealth of Pennsylvania, the governments of other states and foreign
countries might attempt to regulate the Company's transmissions or prosecute the
Company for violations of their laws. There can be no assurance that violations
of local laws will not be alleged or charged by state or foreign governments,
that the Company might not unintentionally violate such law or that such laws
will not be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on the Company.
Moreover, the applicability to commercial online services and the
Internet of existing United States and foreign laws and regulations governing
issues such as intellectual property ownership, defamation, personal privacy,
obscenity and export restrictions is uncertain and could expose the Company to
substantial liability for which the Company might not be indemnified by content
providers, its other licensors or its insurance. For example, there is a
potential that claims will be made against the Company for copyright or
trademark infringement, defamation or negligence, or based on other theories
regarding the nature and content of materials made available in connection with
the Company's services, including claims based on the Company's providing access
to obscene or indecent information. Although the Company carries general
liability insurance, the Company's insurance may not cover potential claims of
this type or may not be adequate to indemnify the Company for all liability that
may be imposed. In addition, the Company obtains representations from its
publishers and content providers as to the ownership of licensed informational
content and obtains indemnification to cover any breach of any such
representations. Still, there can be no assurance that such representations will
be accurate or that such indemnification will provide adequate compensation for
any breach of such representations. Finally, any imposition of liability that is
not covered by indemnification or insurance, or is in excess of insurance
coverage or any indemnification limits, could have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
The Company's headquarters are currently located in approximately
40,000 square feet of office space in Wayne, Pennsylvania. The leases expire in
2000 and 2001, with some of the space having three-year renewal options. The
Company leases approximately 2,400 square feet in New York, New York used as a
content and publisher relations office. The Company also subleased 4,300 square
feet of sales office space in California.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company may be subject to legal proceedings and
claims in the ordinary course of business, including, for example, claims of
alleged infringement of intellectual property rights. The Company is not
currently aware of any legal proceedings or claims that the Company believes
will have, individually or in the aggregate, a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10-K with respect to executive
officers of the Company is set forth below. Executive officers of the Company
are elected by the Board of Directors on an annual basis and serve until their
successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.
The following table sets forth certain information concerning the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Marvin I. Weinberger (1).......................... 43 Chief Executive Officer and Chairman of the Board
of Directors
David Van Riper ("Van") Morris(1)................. 43 President and Chief Operating Officer
Joshua M. Kopelman................................ 26 Executive Vice President, Secretary and co-founder
James T. Beattie.................................. 49 Vice President - Intellibank Services
Ronald A. Berg.................................... 41 Vice President-Finance and Administration
and Chief Financial Officer
William R. Burger................................. 40 Vice President-Content and Publisher
Relations
Gerard J. Lewis, Jr............................... 37 Vice President, General Counsel and Assistant
Secretary
</TABLE>
- ---------------
(1) Pursuant to the February 1998 agreement between Mr. Weinberger and the
Company, it is anticipated that Mr. Weinberger will resign from all of his
positions with the Company, except that he will remain a director, during
the first half of 1998 and that at that time Mr. Morris will become the
Company's Chief Executive Officer.
Marvin I. Weinberger, a co-founder of the Company, has served as the
Company's Chief Executive Officer and Chairman of the board of directors since
the Company's inception in November 1992. From 1985 until he co-founded
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<PAGE>
the Company in 1992, he was Executive Vice President and co-founder of
Telebase Systems, Inc., a developer of customized information and
entertainment services that is now part of N2K Inc., where his duties included
marketing and sales functions.
Van Morris joined the Company as President and Chief Operating Officer
in September 1995. From 1992 until he joined the Company, Mr. Morris held
various vice president and general management positions at Legent Corporation
("Legent"), a systems management software company. From 1987 to 1992, Mr.
Morris was employed by Goal Systems International ("Goal"), initially as
Director of Marketing, later as Vice President of Marketing. Goal was
purchased by Legent in 1992.
Joshua M. Kopelman, a co-founder of the Company in 1991, is Executive
Vice President and Secretary of the Company. In addition, Mr. Kopelman is
responsible for the Company's sales and marketing functions.
James T. Beattie has been Vice President - Intellibank Services since
January 1998. From June 1996 until January 1998 he served as Vice President and
General Manager-New Media Services. From May 1994 until June 1996, he served as
Vice President-Engineering. For the preceding nine years, Mr. Beattie served as
Manager and Director of Systems Development of Prodigy Services Company, where
he was responsible for all aspects of technical product and application
development for editorial, merchandising and advertising lines of business, as
well as specified systems development and operations.
Ronald A. Berg joined the Company as Vice President-Finance and
Administration and Chief Financial Officer in January 1994. For the preceding
four years, Mr. Berg served as Chief Financial Officer of Ziff Technologies, the
technical services division of Ziff Communications Company, a computer
publishing and services company. Mr. Berg is a certified public accountant and
was employed by Coopers & Lybrand L.L.P. from 1977 to 1985, the last two years
as an Audit Manager.
William R. Burger joined the Company as Vice President-Content and
Publisher Relations in January 1997. From July 1995 to January 1997, Mr. Burger
was director of new media development and educational initiatives at AT&T's
Messaging, Wireless and Multimedia group, where he was responsible for
introducing voice-messaging services into primary and secondary schools as part
of the AT&T Learning Network. From 1981 to May 1995, Mr. Burger was employed by
Newsweek Magazine where he held a number of positions, including senior editor,
senior writer and foreign correspondent.
Gerard J. Lewis, Jr. was named Vice President & General Counsel of the
Company in February 1997. From May 1996 to February 1997, Mr. Lewis served the
Company as Corporate Counsel & Director of Business Development. Prior to
joining the Company in May 1996, Mr. Lewis was in private law practice with Reed
Smith Shaw & McClay in Philadelphia, Pennsylvania, where he practiced in the
intellectual property and technology law and related corporate areas since 1992.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Common Stock of the Company has traded on The Nasdaq Stock
Market under the symbol INFO since the Company's initial public offering on
April 30, 1996.
Prior to that time, there was no public market for the Company's Class
A Common Stock. The following table sets forth the high and low last reported
sale prices for the Company's Class A Common Stock for the period indicated as
reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
Year Fiscal Quarter Ended High Low
---- -------------------- ---- ---
<S> <C> <C> <C>
1996 June 30, 1996 (commencing April 30, 1996)............. $14.00 $8.00
September 30, 1996.................................... 8.25 4.25
December 31, 1996..................................... 5.50 3.50
1997 March 31, 1997........................................ 4.625 1.875
June 30, 1997......................................... 3.75 1.625
September 30, 1997.................................... 3.625 1.844
December 31, 1997..................................... 3.00 1.75
1998 March 31, 1998 (through February 28, 1998)............ 2.406 1.875
</TABLE>
As of February 28, 1998, the Company had approximately 231 shareholders
of record and 1638 beneficial owners.
The Company has not declared or paid dividends on its Common Stock and
does not intend to do so in the foreseeable future.
Use of Proceeds. The Company's Registration Statement on Form S-1 (File
No. 333-02428) was declared effective by the Securities and Exchange Commission
on April 29, 1996, the date the initial public offering of the Company's Class A
Common Stock commenced. The underwriters were Hambrecht & Quist, Cowen & Company
and Oppenheimer & Co., Inc. Pursuant to the Registration Statement, 2,250,000
shares were registered and sold for an aggregate amount of $31,500,000.
Underwriting discounts and commissions were $2,205,000 and other expenses were
$600,000 for net offering proceeds of $28,695,000.
<TABLE>
<CAPTION>
Use of proceeds to date are as follows:
<S> <C>
Purchase and installation of property and equipment $ 3,416,000
Working capital-officer salaries and directors consulting expenses 1,427,000
Working capital-other 21,490,000
Repayment of indebtedness 346,000
Cash and investments 2,016,000
</TABLE>
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the caption Consolidated
Statements of Operations Data with respect to each of the three years in the
period ended December 31, 1997 and under the caption Consolidated Balance Sheet
Data at December 31, 1997 and 1996, are derived from the consolidated financial
statements of the Company and its subsidiaries, which financial statements have
been audited by Coopers & Lybrand L.L.P., independent accountants. The following
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Consolidated Statements of Operations Data: (in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ -- $ -- $ 448 $ 1,441 $ 6,832
------------ ------------ ----------- ------------ ------------
Costs and expenses:
Cost of revenues.............................. -- -- 282 822 2,641
Customer support expenses..................... -- -- 146 324 578
Technical operations and development expenses. 90 2,009 3,554 5,210 6,272
Sales and marketing expenses.................. -- -- 1,979 6,142 10,674
General and administrative expenses........... 435 1,581 1,982 3,927 5,029
------------ ------------ ----------- ------------ ------------
Total costs and expenses..................... 525 3,590 7,943 16,425 25,194
------------ ------------ ----------- ------------ ------------
Loss from operations........................... (525) (3,590) (7,495) (14,984) (18,362)
Interest income (expense), net................. (30) (109) 14 1,198 1,003
------------ ------------ ----------- ------------ ------------
Net loss....................................... $ (555) $ (3,699) $ (7,481) $ (13,786) $ (17,359)
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
Net loss per common equivalent share(1)........ $ (0.42) $ (1.21) $ (1.51) $ (1.61) $ (1.83)
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
Weighted average number of common and
equivalent shares outstanding.................. 1,328,900 3,069,800 4,940,400 8,549,800 9,491,600
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments........ $ 1,233 $ 718 $ 962 $27,379 $12,397
Working capital (deficit)..................... 859 (224) (1,514) 25,841 7,163
Total assets.................................. 1,312 1,254 2,532 30,227 18,794
Long-term obligations, net of current portion 842 204 138 -- 404
Shareholders' equity (deficit)................ 91 51 (549) 27,688 10,460
</TABLE>
- ----------------
(1) Loss per common share-basic and diluted is calculated in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which requires public companies to present basic earnings per share
("EPS") and, if applicable, diluted earnings per share, instead of primary
and fully diluted EPS. Basic EPS is a per share measure of an entity's
performance computed by dividing income (loss) available to common
shareholders (the numerator) by the weighted average number of common
shares outstanding during the period (the denominator). Diluted EPS
includes dilutive potential common shares, such as stock options. However,
entities with a net loss do not include common stock equivalents in the
computation of EPS, as the effect would be anti-dilutive. Basic and diluted
EPS are equal as common stock equivalents have not been included as
inclusion of such shares would have an anti-dilutive effect. The Company
has restated its prior period EPS, which had been calculated in accordance
with APB Opinion 15.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 7 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," "anticipate," "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, the number of
content management and archive contracts, gross margins, current and future
expenses, future revenues, pricing uncertainty, use of system resources and
marketing effects, growth and expansion plans, sales and marketing plans,
accrued and mandatory contributions to the royalty pool for content providers,
increases in sales personnel, capital expenditures, severance expenses related
to the agreement with Marvin I. Weinberger, the effects of the AOL Agreement on
the Company, Year 2000 expenses, 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 Part I, Item 1 of this Annual Report on Form 10-K.
Overview
Infonautics provides premium online information services for the
educational and end-user markets, formerly referred to as the institutional
and consumer markets, and provides content management and custom archive
services for publishers of quality content and business information. The
Company's educational customers include libraries, schools and other
educational institutions, its end-user customers include individuals and its
content management and custom archive services customers include
corporations, publishers and other content creators.
Electric Library was introduced to the end-user market in the first
quarter of 1996, followed shortly thereafter by a version for the educational
market. Concurrently, the Company began to market content management and
archive services to the publisher and content creator market. Leveraging its
investment in its information system architecture, the Company continues to
enhance and repackage its flagship Electric Library service. Infonautics has
extended its core Electric Library product line into new markets, and the
Company launched an enhanced Electric Library service called Electric Library
`98 in October 1997.
During 1997, sales growth was achieved in all areas, with increases
in subscriber numbers for Electric Library, the number of agreements for
educational customers, and the number of content management and archive
services contracts. In addition, the Company changed its subscription model
to provide for a negative option plan. Prior to that time, visitors to the
Electric Library site were generally offered a two-week free trial. Upon
expiration of the trial period, those who had requested trials were asked to
enroll as subscribers. Currently, visitors to the Electric Library site are
asked to enroll as subscribers, at which time they will receive the first
thirty (30) days of usage free. One result of this change was to reduce the
number of non-paying (trial) users of Electric Library. The Company also
began offering annual subscriptions during March 1997, and as of December 31,
1997, approximately 45% of Electric Library users were subscribers under the
annual enrollment option.
Revenues from online subscriptions, both educational and end-user, are
recognized in the month the subscription service is provided for monthly
subscriptions, ratably over the term of the subscription for annual
subscriptions and when the service is provided for hourly usage subscribers.
Potential individual subscribers are given the first month free as a trial
period, after which the Company typically charges a fee of $9.95 per month for
monthly subscriptions and $59.95 per year for annual subscriptions, both for
virtually unlimited consumer usage. For educational institutions, the annual fee
is approximately $1,500 per concurrent user. The Company may offer discounts in
certain circumstances, including high-volume purchases and site licenses.
Revenue from contracts for hosting services are recognized ratably over the term
of the contract. Revenue from integration services for archive services are
recognized upon customer acceptance. Revenue from licensing the Company's core
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<PAGE>
technology is recognized upon delivery, provided that no significant
obligations of the Company remain and collection of the resulting receivable
is probable.
The Company recognized improvement in gross margin as a
percentage of revenues in 1997 due to a change in the revenue mix (the
proportion of direct sales versus reseller sales), restructuring of certain
agreements with hardware, software and content providers and a higher gross
margin on content management contracts.
Content providers are compensated from a royalty pool which is funded
in accordance with applicable contract provisions. "See Business -- Content and
Publisher Relationships." In an effort to reduce limitations sometimes required
by content providers on the use of content, the Company has established an
arrangement whereby certain content providers are given the option to
participate in a supplemental guaranteed royalty pool. The Company expects that
royalties paid into the standard pool will exceed the $825,000 guaranteed in the
supplemental royalty pool.
Severance and related expenses incurred in connection with the
agreement with Marvin I. Weinberger will be recognized in the first half of
1998. The Company anticipates this amount will approximate $700,000. See
"Business -- Recent Developments."
The Company's limited operating history and the nature of the
Internet and the markets in which the Company competes makes it difficult for
the Company to accurately forecast its revenues. The Company's current and
future expense levels are based largely on the Company's estimates of future
revenues and are to a certain extent fixed, although, the Company is able to
adjust certain expenses. However, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue
shortfall. In addition, the agreement reached with AOL in March 1998, which
provides for the Company's online service to be marketed within AOL, may not
generate adequate revenues to cover the significant fixed payments required
as part of the agreement. Accordingly, any significant shortfall in revenues
in relation to the Company's planned expenditures would have a material
adverse effect on the Company. See "Business -- Recent Developments,"
"Business -- Risk Factors -- Limited Operating History; Limited Services to
Date," "Business -- Risk Factors -- Need for Additional Funds" and "Business
- -- Risk Factors -- Dependence on AOL."
Results of Operations
Revenues. Revenue was $6.8 million in 1997, $1.4 million in 1996 and
$448,000 in 1995, representing a more than 370% increase in 1997 and more than a
200% increase in 1996. The 1,400 contracts cover approximately 5,000
institutions.
Educational revenue accounted for $2.1 million or 31% of revenue in
1997 and $144,000 or 10% of revenue in 1996. There was no educational revenue in
1995. The Company had over 1,400 educational contracts at December 31, 1997
compared with approximately 160 at December 31, 1996. The 1,400 contracts
cover approximately 5,000 institutions.
End-user revenue accounted for $3.8 million or 56% of revenue in 1997,
$1.0 million or 71% of revenue in 1996 and $448,000 or 100% in 1995. Electric
Library had approximately 47,000 subscribers at December 31, 1997 compared to
approximately 10,500 subscribers at December 31, 1996. Homework Helper monthly
subscribers decreased to approximately 3,000 subscribers at December 31, 1997,
from approximately 6,100 subscribers at December 31, 1996 and approximately
10,000 subscribers at December 31, 1995. The Company expects the number of
Homework Helper subscribers to continue to decrease.
Content management and custom archive services and extranet knowledge
management services revenue was $937,000, or 13% of revenue in 1997, compared to
$272,000, or 19% of revenue, in 1996. Content management and custom archive
services revenue in 1997 was generated from primarily archive services, while in
1996, the majority of revenue was generated from a technology license. The
Company had 10 archive customers at December 31, 1997 compared to 4 in 1996.
Additionally, revenues were recognized in an amount of $500,000 that
was received in 1995 as consideration for limited exclusivity contained in a
marketing agreement. This amount was recognized in 1997, as the period of
exclusivity ended and the Company had no further obligation.
25
<PAGE>
As of December 31, 1997, deferred revenue increased $3.2 million, from
$796,000 at December 31, 1996, to $4.0 million at December 31, 1997. This
increase is attributable to increased customer commitments. The deferred revenue
balance of $4.0 million includes revenue to be recognized from institutional
contracts, monthly and annual end-user subscriptions and contracted archive
services. Included in the deferred revenue balance at December 31, 1996 and
1995, respectively, is the $500,000 marketing agreement described above. The
balance of $296,000 in 1996 related primarily to institutional subscriptions.
Deferred revenue at December 31, 1997 consists of $2.7 million related to
educational subscriptions and $700,000 from end-user subscriptions.
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 $2.6 million, $822,000 and $282,000, and
gross margins were 61%, 43% and 37%, in 1997, 1996 and 1995, respectively. The
increase in cost of revenue for each period primarily reflects costs incurred to
provide services to an increased number of users, including the costs to expand
the content sources. The improvement in gross margin as a percentage of revenues
in 1997 was primarily due to a change in the revenue mix, with 87% of revenues
derived from Internet services in 1997 compared to 81% in 1996, restructuring of
certain agreements with hardware, software and content providers and a higher
gross margin on content management contracts as the Company was able to spread
its fixed costs over more contracts. In 1996 the gross margin improved over 1995
due to the greater margins on EPP revenues, which accounted for nearly 19% of
total revenues in 1996, offset by minimum royalty payments paid to attract new
content providers and retain existing ones.
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 $578,000 in 1997, $324,000 in 1996 and $146,000 in 1995,
representing an increase of 78% in 1997 and 122% in 1996. As a percentage of
revenue, customer support expenses were 8% in 1997, 22% in 1996 and 33% in 1995.
The absolute dollar increases resulted primarily from higher staffing levels and
the continuing need for the Company to provide additional support to its growing
customer base, although the percentage increase declined in 1997 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 Company
provides service to an increased number of subscribers.
Technical Operations and Development. Technical operations and
development expenses consist primarily of costs associated with maintaining
the Company's service, data center operations, hardware expense, 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 the Company's costs for technical operations and
development have been expensed as incurred. Technical operations and
development expenses were $6.3 million in 1997, $5.2 million in 1996 and $3.6
million in 1995, representing an increase of 20% in 1997 and 47% in 1996. The
absolute dollar increases each year were largely due to the Company's
enlargement of the technical operations and development staff in order to
support increased activities as well as improvements and upgrades in the
Company's services which included Electric Library `98 that was launched in
October 1997. The larger percentage increase in 1996 was due to completion of
the Company's Internet service, Electric Library in the first quarter of
1996, combined with the lower revenue base.
26
<PAGE>
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, which to date have not been material. Data preparation
costs are deferred and expensed over the minimum useful life of the content.
The Company believes that the possible reduction of content or the increase
in data preparation costs will not have a material adverse effect on the
Company. However, there can be no assurance that there will be no material
adverse effect on the Company.
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 $10.7 million in 1997, $6.1 million in 1996 and $2.0 million in
1995, representing an increase of 74% in 1997 and over 210% in 1996. The
principal reasons for the increases were growth in the Company's sales and
marketing personnel, the continued efforts to increase sales and expand
distribution channels and expansion of general and targeted promotional
activities. Promotional marketing programs increased in 1996, mainly to support
the introduction of Electric Library and content management services. In
addition, sales and marketing costs increased as a percentage of revenue in 1997
compared to 1996 due to the increase in the direct sales force and other related
expenditures. The Company anticipates increasing the size of its sales and
marketing staff and expanding its direct sales force with the opening of a sales
office in California. These expenses may continue to grow faster than revenues
in the first half of 1998.
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 $5.0 million in 1997, $3.9 million in
1996 and $2.0 million in 1995, representing an increase of 28% in 1997 and over
98% in 1996. The increases in general and administrative expense were due to the
expansion of internal staffing, increased costs relating to the licensing of
additional content and the maintenance of existing content, increases in
professional service fees to support the Company's expanded operations and costs
associated with being a publicly traded company. The Company anticipates that
general and administrative expenses may increase in absolute dollar amounts but
not increase as a percentage of total revenues.
Interest Income, net. Interest income, net was approximately $1.0
million in 1997 and $1.2 million in 1996, a decrease of 13%, resulting primarily
from the decrease in cash and investments. During 1996, the Company received net
proceeds upon the closing of the Company's initial public offering and private
placement of Class C Common Stock. Interest income was approximately $15,000 in
1995, from interest earned on proceeds from the sale of the Company's Class A
Common Stock in that year. The Company had interest expense of approximately
$40,000 in 1997 from its obligation under capital leases.
Income taxes. The Company has not recorded an income tax benefit
because it has incurred net operating losses since inception. As of December 31,
1997, the Company had approximately $36.7 million in Federal and state net
operating loss carryforwards. The Federal net operating losses will expire
beginning in 2008 if not utilized. The state net operating losses of $2 million
will expire beginning in 1999 if not utilized. A portion or all of net operating
loss carryforwards which can be utilized in any year may be limited by changes
in ownership of the Company, pursuant to Section 382 of the Internal Revenue
Code and similar statutes.
Liquidity and Capital Resources
Prior to its initial public offering, the Company financed its
operations primarily from proceeds of the private sale of equity securities and,
to a lesser extent, operating leases.
The Company had cash, cash equivalents and investment balances of
approximately $13.0 million at December 31, 1997 and $27.4 million at December
31, 1996. The Company regularly invests excess funds in short-term money market
funds, corporate bonds and commercial paper. The Company monitors its cash and
investment balances regularly, and may, if necessary, take actions to reduce the
use of cash and manage its cash consumption.
27
<PAGE>
The Company used cash in operations of approximately $12.7 million,
$14.0 million and $5.8 million for 1997, 1996 and 1995, respectively. The
increases in use of cash in operations were due primarily to the Company's
operating losses.
Net cash used in investing activities was $1.7 million in 1997, $12.7
million in 1996 and $690,000 in 1995. In 1997, the net cash was provided by the
net redemption of $620,000 of investments and used for $2.3 of capital
expenditures. In 1996, this net use of cash was primarily made for the purchase
of $11.3 short-term investments and $1.4 million for capital expenditures.
During 1995, the Company used cash primarily for capital expenditures required
to support the expansion and growth of the business.
The Company's principal commitments at December 31, 1997 consisted of
commitments under royalty license and other agreements, as well as obligations
under operating and capital leases. See Note 9 of Notes to Consolidated
Financial Statements. In connection with the AOL Agreement entered into during
March 1998, the Company is committed to pay AOL $4 million in placement fees,
$500,000 in March 1998, $500,000 in April 1998 and $500,000 due each quarter,
commencing approximately six months after the commercial launch date, which is
anticipated to be during the second quarter of 1998. In addition, to the
placement fees, AOL will receive additional fees based on a sliding scale of
end-user revenues. 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. See "Business --
Recent Developments" and "Business -- Risk Factors -- Dependence on AOL."
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 December 31, 1997, the Company did not
have any material commitments for capital expenditures, although the Company
anticipates that its planned purchases of capital equipment and leasehold
improvements will require additional expenditures of approximately $2.0 million
for 1998, a portion of which may be financed through equipment leases. The
Company does not anticipate that any Year 2000 issues will require any
significant expenditures.
Net cash provided by financing activities was $652,000 in 1997, $41.7
million in 1996 and $6.7 million in 1995. The Company utilized a sale-leaseback
arrangement to finance the purchase of certain equipment in 1997. On April 29,
1996, the Company completed an initial public offering of its Class A Common
Stock in which 2,250,000 shares of Class A Common Stock were sold at a price of
$14.00 per share, with net proceeds of approximately $28.7 million. On February
26, 1996, the Company completed a private placement in which it issued 1,201,086
shares of Class C Common Stock (which converted into shares of Class A Common
Stock upon the closing of the initial public offering), with net proceeds of
approximately $12.9 million. The Company raised approximately $6.7 million
through its sale of stock in 1995.
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 Annual Report on Form 10-K, the Company does not have any
understandings, commitments or agreements with respect to any such material
acquisition.
The Company believes that cash flow from operations, together with
existing cash balances, will be sufficient to meet its working capital
requirements for at least 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 may change its planned expenditures or take other cost
cutting measures, if its expected rate of revenue and subscriber growth is not
achieved. However, any projection of future cash needs and cash flows is subject
to substantial uncertainty. If cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may seek additional
equity, debt or other financing. There can be no assurance that financing will
be available in amounts or on terms acceptable to the Company, if at all.
28
<PAGE>
Seasonality
Management anticipates that growth rates in the third quarter are
likely to reflect a seasonal element, given that little school related research
work is done in July and August. As a result, the Company's third quarter
results may be affected by reduced levels of traffic on the Company's Internet
sites and by customary subscriber cancellations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its
subsidiaries and supplementary data required by this item are attached to this
Annual Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is
incorporated herein by reference to the Company's Proxy Statement to be filed
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K. The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this item will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K.
The information required by this item concerning executive officers is
set forth in Part I, Item 4 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement to be filed within 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement to be filed within 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
Company's Proxy Statement to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List of documents filed as part of this report:
(a) 1. Financial Statements. Consolidated Financial Statements listed in
the accompanying Index to Consolidated Financial Statements and Financial
Statement Schedule appearing on page F-1 are filed as part of this Annual Report
on Form 10-K.
2. Financial Statement Schedules. The Financial Statement Schedule
listed in the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedule appearing on page F-1 is filed as part of this
Annual Report on Form 10-K.
3. Exhibits. See (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
(c) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Form of Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-2428) ("Form S-1
Registration Statement"))
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Report on Form 10-Q for the quarterly period
ended March 31, 1997)
10.1** Amended and Restated 1994 Omnibus Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Form
S-1 Registration Statement)
10.2** 1996 Equity Compensation Plan as amended and restated as
of April 1, 1997 and as of September 23, 1997
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (File No.
333-37545))
10.3** Form of Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.3 to the Form
S-1 Registration Statement)
30
<PAGE>
10.4** Employment Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Marvin Weinberger (incorporated by
reference to Exhibit 10.4 to the Form S-1 Registration
Statement)
10.5** Employment Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua Kopelman (incorporated by
reference to Exhibit 10.5 to the Form S-1 Registration
Statement)
10.6(a)** Employment Agreement dated September 5, 1996 between
Infonautics, Inc. and Van Morris (incorporated by
reference to Exhibit 10.6 to the Form S-1 Registration
Statement)
10.6(b)** Amendment No. 1 to Employment Agreement dated as of
November 4, 1996 between Infonautics, Inc. and Van
Morris (incorporated by reference to Exhibit 10.6(b) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 ("1996 Form 10-K"))
10.7(a)** Employment Agreement dated January 21, 1994 between
Infonautics, Inc. and Ronald Berg (incorporated by
reference to Exhibit 10.7 to the Form S-1 Registration
Statement)
10.7(b)** Amendment No. 1 to Employment Agreement dated as of
November 4, 1996 between Infonautics, Inc. and Ronald
Berg (incorporated by reference to Exhibit 10.7(b) to
the 1996 Form 10-K)
10.8(a)** Employment Agreement dated as of April 14, 1994 between
Infonautics, Inc. and James Beattie (incorporated by
reference to Exhibit 10.8 to the Form S-1 Registration
Statement)
10.8(b)** Amendment No. 1 to Employment Agreement dated as of
November 4, 1996 between Infonautics, Inc. and James
Beattie (incorporated by reference to Exhibit 10.8(b) to
the 1996 Form 10-K)
10.9** Employment Agreement dated as of January 2, 1997 between
Infonautics, Inc. and William Burger (incorporated by
reference to Exhibit 10.9 to the 1996 Form 10-K)
10.10* ** Employment Agreement dated as of November 24, 1997
between Infonautics, Inc. and Gerard J. Lewis, Jr.
10.11** Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.9 to the Form S-1 Registration
Statement)
10.12** Royalty Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Marvin Weinberger (incorporated by
reference to Exhibit 10.10 to the Form S-1 Registration
Statement)
10.13** Royalty Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua Kopelman (incorporated by
reference to Exhibit 10.11 to the Form S-1 Registration
Statement)
10.14(a)** Consulting agreement effective July 1, 1994 between
Infonautics, Inc. and Israel Melman (incorporated by
reference to Exhibit 10.13 to the Form S-1 Registration
Statement)
10.14(b)** Amendment No. 1 to Consulting Agreement dated as of
January 13, 1997 between Infonautics, Inc. and Israel
Melman (incorporated by reference to Exhibit 10.13(b) to
the 1996 Form 10-K)
31
<PAGE>
10.15** Consulting agreement effective as of March 1, 1993, as
amended February 1, 1994 and February 1, 1996 between
Infonautics, Inc. and Howard Morgan (incorporated by
reference to Exhibit 10.14 to the Form S-1 Registration
Statement)
10.16 Agreement of Termination and Assignment dated October
30, 1992 between Telebase Systems, Inc. and Marvin
Weinberger and Lawrence Husick and Bill of Sale dated
April 19, 1993 between Infonautics, Inc. and Marvin
Weinberger (incorporated by reference to Exhibit 10.15
to the Form S-1 Registration Statement)
10.17 Agreement dated March 24, 1993 between Infonautics, Inc.
and Lawrence Husick (incorporated by reference to
Exhibit 10.16 to the Form S-1 Registration Statement)
10.18 Amended and Restated Registration Rights Agreement dated
as of February 7, 1996 by and among Infonautics, Inc.
and Zero Stage Capital II-Central Pennsylvania, L.P.,
Keystone Venture IV, L.P., 21st Century Communications
Partners, L.P., 21st Century Communication Foreign
Partners, L.P. and 21st Century Communications T-E
Partners, L.P. and other individuals and entities listed
on Exhibit A thereto (incorporated by reference to
Exhibit 10.17 to the Form S-1 Registration Statement)
10.19 Amended and Restated Piggyback Registration Rights
Agreement dated as of February 7, 1996 by and among
Infonautics, Inc. and 21st Century Communications
Partners, L.P., 21st Century Communication Foreign
Partners, L.P. and 21st Century Communications T-E
Partners, L.P., VIMAC & Co. Nominee Trust and Meridian
Venture Partners and the other individuals and entities
listed on Exhibit A thereto (incorporated by reference
to Exhibit 10.18 to the Form S-1 Registration Statement)
10.20 Registration Rights Agreement dated as of February 8,
1996 by and among Infonautics, Inc. and the persons
whose signatures appear on the counterpart signature
pages thereto (incorporated by reference to Exhibit
10.19 to the Form S-1 Registration Statement)
10.21* ** Software License Agreement dated June 27, 1994 between
Infonautics, Inc. and Conquest Software Corp. (succeeded
by Excalibur Technologies Corporation) (incorporated by
reference to Exhibit 10.21 to the Form S-1 Registration
Statement)
10.22* Agreement of Lease dated June 14, 1994, as amended
January 27, 1995, June 30, 1995 and November 13, 1995
(each incorporated by reference to Exhibit 10.24 to the
Form S-1 Registration Statement), April 18, 1996 and May
22, 1996 (each incorporated by reference to Exhibit
10.25 to the 1996 Form 10-K), April 14, 1997
(incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarterly period
ended June 30, 1997), September 19, 1997 (incorporated
by reference to Exhibit 10.1 to the Company's Report on
Form 10-Q for the quarterly period ended September 30,
1997) and November 17, 1997* between Infonautics, Inc.
and West Valley Business Trust
21* Subsidiaries
23* Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney (included as part of the signature
page hereof)
27.1* Financial Data Schedule
32
<PAGE>
27.2* Financial Data Schedule (Restated)
27.3* Financial Data Schedule (Restated)
---------------
</TABLE>
* Filed herewith.
** Compensation plans and arrangements for executive officers and
others.
*** Portions of these exhibits were omitted and filed separately with
the Secretary of the Securities and Exchange Commission pursuant to
a request for confidential treatment.
Copies of the exhibits are available to shareholders (upon payment
of a fee to cover the Company's expenses in furnishing exhibits) from
Ronald A. Berg, Vice President-Finance and Administration and Chief
Financial Officer, Infonautics, Inc., 900 West Valley Road, Suite 400,
Wayne, Pennsylvania 19087.
33
<PAGE>
INFONAUTICS, INC.
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1995, 1996 and 1997
<PAGE>
INFONAUTICS, INC.
Index to Consolidated Financial Statements
and Financial Statement Schedule
<TABLE>
<CAPTION>
PAGES
----------
<S> <C>
Report of Independent Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997..................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996
and 1997....................................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997............................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997.................................................................. F-6
Notes to Consolidated Financial Statements....................................... F-7-F-20
Schedule II--Valuation and Qualifying Accounts, for the years ended December
31, 1995, 1996 and 1997........................................................ F-21
</TABLE>
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Infonautics, Inc. and Subsidiaries:
We have audited the consolidated financial statements and the financial
statement schedule of Infonautics, Inc. and subsidiaries listed in the index on
page F-1 of this Form 10-K. The financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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 consolidated financial position of
Infonautics, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 13, 1998
F-2
<PAGE>
INFONAUTICS, INC.
Consolidated Balance Sheets
December 31, 1996 and 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 16,064,159 $ 2,301,933
Short-term investments........................................................... 11,314,956 10,095,504
Receivables:
Trade, less allowance for doubtful accounts of $31,590 in 1996 and $32,566 in
1997......................................................................... 373,509 1,742,070
Other.......................................................................... 62,406 154,397
Prepaid expenses and other assets................................................ 565,858 799,127
------------- -------------
Total current assets....................................................... 28,380,888 15,093,031
Property and equipment, net........................................................ 1,701,306 3,019,908
Long-term investments.............................................................. -- 600,000
Prepaid and other assets........................................................... 145,265 80,729
------------- -------------
Total assets............................................................... $ 30,227,459 $ 18,793,668
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of obligations under capital lease............................... $ -- $ 297,538
Accounts payable................................................................. 1,199,621 1,275,500
Accrued expenses................................................................. 319,481 1,642,421
Accrued royalties................................................................ 224,439 674,723
Deferred revenue................................................................. 796,129 4,039,752
------------- -------------
Total current liabilities.................................................. 2,539,670 7,929,934
Noncurrent portion of obligations under capital lease.............................. -- 404,107
------------- -------------
Total liabilities.......................................................... 2,539,670 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; 9,389,357 and 9,391,627 shares issued and outstanding at December 31,
1996 and 1997.................................................................. -- --
Class B common stock, no par value; 100,000 shares authorized, issued and
outstanding; 50 votes per share................................................ -- --
Additional paid-in capital....................................................... 53,354,345 53,360,221
Deferred compensation............................................................ (375,000) (250,000)
Accumulated deficit.............................................................. (25,291,556) (42,650,594)
------------- -------------
Total shareholders' equity (deficit)....................................... 27,687,789 10,459,627
------------- -------------
Total liabilities and shareholders' equity (deficit)....................... $ 30,227,459 $ 18,793,668
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
INFONAUTICS, INC.
Consolidated Statements of Operations
for the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Revenues.......................................................... $ 447,936 $ 1,441,651 $ 6,831,731
------------- -------------- --------------
Cost and expenses:
Cost of revenues................................................ 282,022 822,745 2,641,198
Customer support expenses....................................... 146,416 323,898 578,212
Technical operations and development expenses................... 3,554,185 5,209,975 6,271,514
Sales and marketing expenses.................................... 1,978,913 6,141,962 10,674,468
General and administrative expenses............................. 1,981,722 3,926,853 5,029,100
------------- -------------- --------------
Total costs and expenses.................................. 7,943,258 16,425,433 25,194,492
------------- -------------- --------------
Loss from operations.............................................. (7,495,322) (14,983,782) (18,362,761)
Interest and other income......................................... 14,465 1,197,562 1,044,204
Interest expense.................................................. -- -- (40,481)
------------- -------------- --------------
Net loss.................................................. $ (7,480,857) $ (13,786,220) $ (17,359,038)
------------- -------------- --------------
------------- -------------- --------------
Loss per common share--basic and diluted.......................... $ (1.51) $ (1.61) $ (1.83)
------------- -------------- --------------
------------- -------------- --------------
Weighted average shares outstanding--basic and diluted............ 4,940,000 8,549,800 9,491,600
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE>
INFONAUTICS, INC.
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- NOTES AND
CLASS A CLASS B ADDITIONAL STOCK
-------------------- ------------------ PAID-IN ACCUMULATED SUBSCRIPTIONS
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT RECEIVABLES
--------- --------- -------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994..................... 3,863,466 -- 100,000 -- $ 4,102,708 $ (4,024,479) $ (27,500)
Stock issued in exchange
for notes................ 82,666 -- -- -- 304,000 -- (304,000)
Notes collected............ -- -- -- -- -- -- 70,000
Sale of stock and warrant
for cash................. 1,877,138 -- -- -- 6,645,671 -- --
Exercise of warrant........ 44,444 -- -- -- 16,667 -- --
Shares issued in connection
with employee stock
purchase plan............ 25,594 -- -- -- 95,978 -- (95,978)
Shares issued in connection
with services
performed................ 42,440 -- -- -- 148,973 -- --
Net loss for the year...... -- -- -- -- -- (7,480,857) --
--------- --------- -------- --------- ----------- ------------- -------------
Balance at December 31,
1995..................... 5,935,748 -- 100,000 -- 11,313,997 (11,505,336) (357,478)
Sale of stock.............. 3,451,086 -- -- -- 41,526,095 -- --
Deferred compensation...... -- -- -- -- 500,000 -- --
Amortization of deferred
compensation............. -- -- -- -- -- -- --
Notes collected............ -- -- -- -- -- -- 357,478
Other...................... 2,523 -- -- -- 14,253 -- --
Net loss for the year...... -- -- -- -- -- (13,786,220) --
--------- --------- -------- --------- ----------- ------------- -------------
Balance at December 31,
1996..................... 9,389,357 -- 100,000 -- 53,354,345 (25,291,556) --
Amortization of deferred
compensation............. -- -- -- -- -- -- --
Other...................... 2,270 -- -- -- 5,876 -- --
Net loss for the year...... -- -- -- -- -- (17,359,038) --
--------- --------- -------- --------- ----------- ------------- -------------
Balance at December 31,
1997..................... 9,391,627 -- 100,000 -- $53,360,221 $(42,650,594) --
--------- --------- -------- --------- ----------- ------------- -------------
--------- --------- -------- --------- ----------- ------------- -------------
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFERRED EQUITY
COMPENSATION (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at December 31,
1994..................... -- $ 50,729
Stock issued in exchange
for notes................ -- --
Notes collected............ -- 70,000
Sale of stock and warrant
for cash................. -- 6,645,671
Exercise of warrant........ -- 16,687
Shares issued in connection
with employee stock
purchase plan............ -- --
Shares issued in connection
with services
performed................ -- 148,973
Net loss for the year...... -- (7,480,857)
------------ -------------
Balance at December 31,
1995..................... -- (548,817)
Sale of stock.............. -- 41,526,095
Deferred compensation...... $(500,000) --
Amortization of deferred
compensation............. 125,000 125,000
Notes collected............ -- 357,478
Other...................... -- 14,253
Net loss for the year...... -- (13,786,220)
------------ -------------
Balance at December 31,
1996..................... (375,000) 27,687,789
Amortization of deferred
compensation............. 125,000 125,000
Other...................... -- 5,876
Net loss for the year...... -- (17,359,038)
------------ -------------
Balance at December 31,
1997..................... $(250,000) $ 10,459,627
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INFONAUTICS, INC.
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (7,480,857) $ (13,786,220) $ (17,359,038)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization................................. 246,854 487,780 1,096,353
Common stock issued for services.............................. 148,973 -- --
Provision for losses on accounts receivable................... -- 48,799 86,181
Amortization of deferred compensation......................... -- 125,000 125,000
Changes in operating assets and liabilities:
Receivables:
Trade..................................................... (125,345) (296,963) (385,024)
Other..................................................... (250,000) 187,594 (35,356)
Prepaid and other assets.................................... (86,636) (462,278) (168,733)
Accounts payable............................................ 591,828 443,452 (19,384)
Accrued expenses............................................ 568,395 (1,091,064) 1,322,940
Accrued royalties........................................... 133,627 90,812 450,284
Deferred revenue............................................ 480,000 296,129 2,173,905
------------- -------------- --------------
Net cash used in operating activities................... (5,773,161) (13,956,959) (12,712,872)
------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment............................. (690,016) (1,372,825) (2,321,326)
Purchases of short-term investments............................. -- (11,546,956) (22,086,548)
Purchases of long-term investments.............................. -- -- (600,000)
Proceeds from maturity of short-term investments................ -- 232,000 23,306,000
------------- -------------- --------------
Net cash used in investing activities................... (690,016) (12,687,781) (1,701,874)
------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrant.......... 6,715,671 42,027,826 5,876
Proceeds from sale--leaseback of equipment...................... 766,504
Proceeds from exercise of common stock and warrant.............. 16,667 -- --
Payments on capital lease obligations........................... -- -- (64,860)
Payments under note payable--funding agreement.................. (8,015) (232,437) --
Proceeds from long-term borrowings and note payable............. 31,000 -- --
Loans to officer................................................ (48,500) (48,500) (55,000)
------------- -------------- --------------
Net cash provided by financing activities............... 6,706,823 41,746,889 652,520
Net increase (decrease) in cash and cash equivalents.............. 243,646 15,102,149 (13,762,226)
Cash and cash equivalents, beginning of period.................... 718,364 962,010 16,064,159
------------- -------------- --------------
Cash and cash equivalents, end of period.......................... $ 962,010 $ 16,064,159 $ 2,301,933
------------- -------------- --------------
------------- -------------- --------------
Supplemental disclosure of cash flow information and noncash
investing and financing activities:
Cash paid for interest expense.................................. $ 8,410 $ 58,916 $ 27,378
Noncash items:
Issuance of stock for note and subscription receivable........ $ 304,000 -- --
Equipment capital leases...................................... -- -- $ 766,504
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
Infonautics, Inc. (the "Company" or "Infonautics") provides online
information services for the educational and end-user markets, formerly
referred to as the institutional and consumer markets, and provides content
management and custom archive services for publishers of content and business
information. The Company's online reference service, Electric Library, is
available to end-users through the Internet and consumer online services,
and is marketed to schools, libraries and other educational institutions.
Additionally, the Company markets content management and custom archive
services that combine the Company's core technology, operating environment
and optional services (business and management functions), to provide digital
archives on the Internet and/or intranets.
On May 3, 1996, the Company completed an initial public offering (IPO) of
its Class A Common Stock in which 2,250,000 shares of common stock were
issued (see Note 6).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of
Infonautics, Inc. and its wholly-owned subsidiaries (collectively, the
Company). All intercompany balances and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements:
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 revenues, expenses, assets,
and liabilities and disclosure of contingencies. Actual results could differ
from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents. Cash equivalents are
stated at cost, which approximates market value. At December 31, 1997, the
Company has restricted cash of approximately $330,000. This amount consists
of restricted U.S. Treasury notes held as collateral by a financial
institution against letters of credit for leasing arrangements (see Note 9).
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Investments:
All the Company's investments are classified as available-for-sale as
defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Such investments are
stated at market value, and unrealized gains and losses on such securities
are reflected in shareholders' equity (deficit). The Company uses the
specific identification method to determine the cost of securities sold.
Depreciation and Amortization:
Depreciation is provided over the estimated useful lives of the related
assets. The Company defines useful lives as three years for computer
equipment, office equipment, leasehold improvements and purchased software
and seven years for furniture and fixtures on a straight-line basis.
Leasehold improvements are capitalized and amortized on the straight-line
basis over the shorter of their useful life or the term of the lease. Capital
leases are amortized over the shorter of the life of the asset or the term of
the respective lease, which range from two years to two and one-half years.
Product Development Costs:
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established upon
completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant, and all product development
costs have been expensed.
Advertising Costs:
Advertising costs, included in sales and marketing expenses, are expensed
over the period the advertising takes place. Advertising expense was
$617,664, $2,374,997, and $2,450,904, respectively, for the years ended
December 31, 1995, 1996 and 1997.
Subscriber Acquisition Costs:
New subscriber acquisitions costs, primarily in sales and marketing
expenses, are expensed as incurred. These costs relate directly to new customer
solicitations and include the Company's direct costs of acquiring new customers,
including the cost of providing trial subscriptions free of charge. Costs
associated with renewal of current customers are also expensed as incurred.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Stock Based Compensation:
Stock based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock and amortized over the
vesting period. See Note 6.
Revenue Recognition:
Revenues from consumer subscriptions and customer billing services are
recognized in the month the service is provided. Those subscriptions sold
through remarketers are recognized net of the related fees. Revenue from
integration services are recognized upon customer acceptance. Revenues from
subscription agreements are deferred and recognized over the term of the
respective agreement as service is provided. Revenues from licensing
contracts are recognized when delivery and services related to the license
agreement are complete. Costs incurred with the procurement of subscriptions
and the delivery of the service are expensed as incurred.
Payments received in advance of providing services or for a long-term
license are deferred until the period such services are provided.
At December 31, 1997, included in accounts receivable and deferred
revenue was $1,070,000 representing that portion of subscription revenue from
long-term agreements which have been billed, but not yet received or
recognized.
Cost of Revenue:
Cost of revenues include royalties payable to content, hardware,
software, and telecommunications providers, as well as certain content
preparation and network costs.
Income Taxes:
The Company has incurred losses since inception; therefore, there was no
provision for taxes in the Company's statements of operations. Provision for
income taxes is determined based on the asset and liability method. The asset
and liability method provides that deferred tax balances are recorded based
on the difference between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Deferred tax liabilities or assets at the end of each period are
determined using the tax rate enacted under the current tax law. The
measurement of net deferred tax assets is reduced by the amount of any tax
benefits that, based on available evidence, are not expected to be realized,
and a corresponding valuation allowance is established.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, investments and
trade accounts receivable. The Company maintains cash and cash equivalents
and investments with various financial institutions. Company policy is
designed to limit exposure with any one institution. As part of its cash
management process, the Company performs periodic evaluations of the relative
credit standing of these financial institutions.
Trade receivables consist of receivables from remarketers and a
diversified base of consumers and institutions. The Company performs ongoing
credit evaluations of its remarketers. Concentrations of credit risk with
respect to the remaining trade receivables are limited due to the diversified
customer base. The Company generally requires no collateral from its
customers. In 1997, there were no significant revenues or receivables from
any one customer or remarketer. In 1996, one customer and two remarketers
aggregated approximately 62% of revenues and approximately 59% of trade
accounts receivable. In 1995, all revenues were from one remarketer.
Vulnerability Due to Certain Concentrations:
The Company markets Electric Library through the Internet to consumers
and through direct sales and remarketer arrangements to educational markets.
The major components of the basic search software used by the Company are
licensed from a single supplier.
The Company is dependent upon various content providers, including
publishers, to provide content for use in the Company's reference services.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Basic and Diluted EPS:
The Company has restated its prior period EPS, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which requires public companies to present basic earnings per share
(EPS) and, if applicable, diluted earnings per share, instead of primary and
fully diluted EPS. 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 EPS, as the effect
would be anti-dilutive.
Basic and diluted EPS are equal, as common stock equivalents are not
included as inclusion of such shares would have an anti-dilutive effect.
3. INVESTMENTS:
The estimated fair value of investments, which approximate cost, are as
follows at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Available for sale:
Commercial paper............................ $ 4,369,176 $ 3,981,661
Corporate bonds............................. 6,945,780 6,713,843
------------- -------------
Total available for sale.................... $ 11,314,956 $ 10,695,504
------------- -------------
------------- -------------
</TABLE>
At December 31, 1997, investments contractually mature within one year,
except for $600,000 which matures June 1999.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Property and equipment:
Computer equipment.............................. $ 1,286,966 $ 1,883,237
Office equipment................................ 356,636 790,724
Furniture and fixtures.......................... 505,524 760,905
Leasehold improvements.......................... 212,862 336,806
Purchased software.............................. 171,771 229,049
Capital leases:
Equipment....................................... -- 766,504
------------ ------------
2,533,759 4,767,225
Less accumulated depreciation and amortization:
Property and equipment.......................... (832,453) (1,656,691)
Capital leases.................................. -- (90,626)
------------ ------------
Property and equipment, net....................... $ 1,701,306 $ 3,019,908
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was approximately $247,000 in 1995, $529,000 in 1996
and $1,005,700 in 1997. Amortization expense was approximately $91,000 in
1997.
5. INCOME TAXES:
The significant components of deferred tax assets at December 31, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Federal tax loss carryforward.................... $ 8,071,000 $ 12,450,000
State tax loss carryforward...................... 147,000 132,000
Accrual to cash basis difference................. 352,000 1,929,000
Research and experimentation credit.............. 335,000 710,000
------------ -------------
8,905,000 15,221,000
Less: valuation allowance........................ (8,905,000) (15,221,000)
------------ -------------
-- --
------------ -------------
------------ -------------
</TABLE>
A valuation allowance was established against the Company's net deferred
tax asset due to the Company's lack of earnings history and, accordingly, the
uncertainty as to the realizability of the asset.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES, CONTINUED:
At December 31, 1997, the Company had a net operating loss carryforward
of approximately $36,749,000 for federal tax purposes, with $225,000 expiring
in 2008, $2,819,000 expiring in 2009, $6,089,000 expiring in 2010,
$14,749,000 expiring in 2011, and $12,867,000 expiring in 2012, if not
utilized. The net operating loss carryforward for state tax purposes is
$2,000,000, of which $1,000,000 expires in 1999 and $1,000,000 expires in
2000. These carryforwards may be applied as a reduction to future taxable
income of the Company, if any. The Company also has research and
experimentation credit carryforwards of approximately $710,000, with $96,000
expiring in 2009, $72,000 expiring in 2010, $168,000 expiring in 2011 and
$374,000 expiring in 2012. The Company's ability to utilize its net operating
loss carryforwards and credit carryforwards may be subject to annual
limitations as a result of prior or future changes in ownership.
6. SHAREHOLDERS' EQUITY (DEFICIT):
An officer and director of the Company is the holder of all 100,000
outstanding shares of Class B Common Stock. The shares of Class B Common
Stock may be converted at any time by the holder of such shares into shares
of Class A Common Stock on a one-for-one basis.
The Company issued 31,440 shares of Class A Common Stock in consideration
for $111,848 of administrative and consulting services in 1995. The Company
also issued 11,000 shares of Class A Common Stock in connection with a
consulting contract and charged such issuances to development expenses in
1995.
In 1995, the Company sold 400,000 shares of Class A Common Stock and a
warrant to purchase 44,444 additional shares of Class A Common Stock. During
1995, the warrant was exercised. The total amount received, including
exercise of the warrants, was $1,516,667. In October 1995, the Company
entered into an agreement with a company of which an officer/shareholder is
the president, for the sale of 66,666 shares of Class A Common Stock at $3.75
per share. The Company received a note for $250,000, with interest at 6% per
annum. The note was paid in February 1996.
In February 1996, the Company completed a private placement in which it
issued 1,201,086 shares of Class C Common Stock, which converted to Class A
Common Stock at the IPO, with proceeds to the Company of approximately $12.9
million, which is net of approximately $0.8 million of offering expenses. In
April 1996, the Company issued 2,250,000 shares of Class A Common Stock at a
price of $14.00 per share in the initial public offering. Proceeds to the
Company were $28.7 million, net of approximately $2.8 million of offering
expenses.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
PREFERRED STOCK:
The Company is authorized to issue 1,250,000 shares of preferred stock
with no par value per share, none of which is outstanding.
Stock Options:
In February 1996, the Company adopted the 1996 Equity Compensation Plan
("1996 Plan"). Concurrently, the 1994 Omnibus Stock Plan ("1994 Plan") was
amended and restated. Both plans provide for the granting of stock options to
officers, directors, employees and consultants. Grants under both plans may
consist of options intended to qualify as incentive stock options ("ISOs"),
or nonqualified stock options that are not intended to so qualify ("NQSOs").
In addition, under the 1996 Plan, grants may also consist of grants of
restricted stock, stock appreciation rights ("SARs"), or performance units.
The option price of any ISO will not be less than the fair market value on
the date the option is granted (110% of fair value in certain instances). The
option price of a NQSO may be greater than, equal to, or less than the fair
market value on the date the option is granted. The 1994 Plan authorizes up
to 1,100,000 shares of Class A Common Stock. In April 1997, the board of
directors approved an increase in the number of authorized shares for
issuance under the 1996 Plan from 500,000 to 1,000,000 shares of Class A
Common Stock.
The Plans are administered by a committee of the board of directors. The
Committee determines the term of each option, provided, however, that the
exercise period may not exceed ten years from the date of grant, and for
ISOs, in certain instances, may not exceed five years. The options granted
under both plans in general vest ratably over a four-year period from the
date of grant, except for options granted to any directors which vest when
granted.
Compensation expense of approximately $500,000 is being recognized, over
the four-year vesting period for certain options which were granted in 1995,
to acquire 80,600 shares of Class A Common Stock. Compensation expense of
$125,000 was recognized in 1996 and 1997.
F-14
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
Stock Options, continued:
If compensation cost had been determined based on the fair value of the
options at the grant dates for those options for which no compensation cost has
been recognized, consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company's net loss and loss per share would have been:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss........................ As reported $ (7,480,857) $ (13,786,220) $ (17,359,038)
Proforma (7,492,000) (14,954,000) (18,564,000)
Loss per share.................. As reported (1.51) (1.61) (1.83)
Proforma (1.51) (1.75) (1.96)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997, respectively: expected
volatility of 75% percent; risk-free interest rates of 6.28 percent, 6.71
percent, and 6.48 percent; and expected lives of 5 years.
A summary of the Company's stock options plans are presented below:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...................... 353,450 $ 2.66 739,850 $ 3.08 1,331,730 $ 7.20
Granted............................................... 437,450 3.58 721,030 11.05 536,600 2.00
Exercised............................................. -- -- (1,413) 2.22 (5,150) 2.62
Expired/canceled...................................... (51,050) 2.43 (127,737) 8.25 (132,850) 3.59
--------- ---------- ----------
Outstanding at end of year............................ 739,850 3.08 1,331,730 7.20 1,730,330 5.77
--------- ---------- ----------
--------- ---------- ----------
Weighted-average fair value of options granted during
year................................................ $ 3.98 $ 7.42 $ 1.31
</TABLE>
F-15
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
Stock Options, continued:
The following table summarizes information about the stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------- --------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER CONTRACTUAL EXERCISE DECEMBER EXERCISE
EXERCISE PRICES 31, 1997 LIFE PRICE 31, 1997 PRICE
- ----------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1.750--2.625..... 760,750 3.8 years $ 2.07 204,085 $ 2.15
3.000--4.000..... 426,100 3.5 years 3.70 182,350 3.73
6.000--6.500..... 72,280 3.6 years 6.38 18,070 6.38
11.500--14.000... 471,200 3.2 years 13.52 117,800 13.52
----------- -----------
1,730,330 3.6 years 5.77 522,305 5.41
----------- -----------
----------- -----------
</TABLE>
7. EMPLOYEE BENEFIT PLAN:
In 1995, the Company established a defined contribution 401(k) retirement
plan covering substantially all its employees. Under this plan, eligible
employees may contribute a portion of their salary until retirement and the
Company, at its discretion, may match a portion of the employee's contribution
up to 15% of an employee's annual compensation; however, no contributions were
made by the Company through December 31, 1997.
8. RELATED PARTY TRANSACTIONS:
The Company entered into, and subsequently amended, consulting agreements
with two of its directors and shareholders during 1994 through 1997. The
individuals entered into stock subscription agreements to purchase 28,504 and
16,000 shares of Class A Common Stock in 1994 and 1995, respectively, in an
aggregate amount of $60,000 and $54,000, respectively. Included in the notes
and stock subscription receivables balance in shareholders' equity (deficit)
at December 31, 1995 was $11,500 due under these agreements which were paid
in full during 1996. Consulting expense of $124,000, $74,000, and $72,000 was
recognized under these agreements, in each of the years ended December 31,
1995, 1996, and 1997, respectively.
F-16
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS: (CONTINUED)
In 1997, the Company loaned $25,000 and $30,000 to two officers bearing
interest rates of 5.78% and 6.23%, respectively. As of December 31, 1997, no
payments had been received on these balances. The outstanding balances, which
amount to $56,635 are included in Accounts Receivable, Other.
9. COMMITMENTS AND CONTINGENCIES:
Letters of Credit:
The Company had outstanding irrevocable letters of credit in the amount of
$235,000 at December 31, 1997. These letters of credit, which expire on January
1, 1999 and March 31, 2000, collateralize the Company's obligations to third
parties under certain agreements and leasing arrangements. The fair value of the
letters of credit approximates contract values based on the nature of the
estimated costs to settle these obligations.
Liquidity:
The rate of use by the Company of its cash resources will depend on numerous
factors, including the rate of increase in subscribers, and educational and
content management contracts. The Company may change its planned expenditures,
or take other cost cutting measures, if its expected rate of revenue and
subscriber growth is not achieved.
Royalty/License Agreements:
The Company has entered into certain agreements to license the use of
hardware, software and content which provide for a royalty pool and license
payments aggregating up to 43% of subscription revenue from Homework Helper and
Electric Library. Additionally, certain content providers are under a contract
which provides for certain minimum amount royalty pool of $825,000 for the
period ended July 1, 1997 through June 30, 1998. Those participating content
providers may receive an additional royalty amount equal to their percentage of
usage for all content providers multiplied by any shortfall to the minimum on an
annual basis.
The agreement to license certain software provides for payment of up to
12.5% of revenues for sublicensing the software to content management and
custom archive customers.
Subsequent to year-end, the agreement to license certain software was
amended to provide for a twelve year license for $250,000, payable in
installments during 1998 and 1999, replacing the 12.5% royalty payment for
content management and custom archive revenue and 1.5% royalty on
subscription revenues (which was included in the 43% described above).
F-17
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Other Agreements:
In 1994, the Company entered into an exclusive agreement, with a right of
first refusal, with a computer company whereby certain computer hardware
systems will be supplied by the equipment manufacturer through February 1999.
In return for providing all computer systems required to operate and support
Homework Helper and Electric Library, the supplier receives a certain
percentage of the Company's revenue from subscriptions. During 1997, this
agreement was converted into an eighteen month operating lease agreement.
In 1992, certain shareholders entered into an agreement with the
corporation that had been developing Homework Helper. This agreement provided
for the assignment to the Company of all rights in and to Homework Helper in
exchange for quarterly payments equal to 3% of the Company's revenue for a
term of up to eight years, expiring in October 2000, with a maximum
cumulative amount of $1,200,000. At the end of the eight-year term the
difference between the aggregate amount paid and $1,200,000 may (unless paid
by the Company at such time) be converted to equity at a discount of 20% of
the then market rate.
Separate agreements with two key officers provide for payment equal to
3.15% of the Company's net income, as defined in the agreements, commencing
in 1998, and continuing until 2091. Subsequent to December 31, 1997, an
agreement with one of the officers was terminated.
In February 1998, the Company entered into an agreement with the Chairman
of the Board, Chief Executive Officer and founder of the Company, pursuant to
which he will resign as Chairman and Chief Executive Officer of the Company
to become the Chief Executive Officer of a newly formed company that will
pursue the Company's Electric Schoolhouse project. Pursuant to the terms of
the agreement, the Company will transfer to the new entity all of the
Company's rights in certain trademarks, trademark applications, domain names
and tangible Electric Schoolhouse materials, along with certain other rights
to non-Electric Schoolhouse materials and concepts and, in return, the
Company will receive a 10% equity interest in the new company. The Company
also will enter into a remarketing agreement with the new entity for a
version of the Electric Library service, containing a portion of the
Company's content collection. In addition, pursuant to the terms of the
agreement, his employment and royalty agreements with the Company will
terminate upon the issuance by the Company to him of 125,000 shares of Class
A Common Stock, one option will be canceled and he will be granted a new
option at the same exercise price with an extended termination, and another
option will be amended to accelerate the vesting of such option.
It is anticipated that the transactions contemplated by the agreement
will be completed in the first half of 1998 resulting in a charge of
approximately $700,000.
F-18
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Marketing Agreement:
The Company received $500,000 as consideration for limited exclusivity
contained in a marketing agreement with a software company. A director of the
Company is also a director of the licensee. During 1997, the period of
exclusivity ended and the Company had no further obligation. Accordingly, the
$500,000 was recognized as revenue.
Service Agreement:
The Company has a commitment to purchase data conversion services in 1998
for $180,000.
Leases:
During 1997, the Company secured a $1,000,000 revolving lease line, of
which approximately $230,000 remains available through September 30, 1998,
collateralized by substantially all the Company's property and equipment and
receivables. Under this arrangement, the Company sold $766,504 of equipment
purchased in the first half of 1997, at its net book value which approximated
fair market value, to the lessor, and leased back the equipment.
The leases are classified as capital leases. The equipment has original
lease terms ranging from 24 to 30 months, with a fair value purchase option
at the end of each lease term. Leased equipment is included in property and
equipment (see Note 4).
F-19
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Leases, continued:
The Company leases its facilities and certain other equipment under
agreements classified as operating leases expiring through 2002. Future
minimum payments as of December 31, 1997, by year and in the aggregate, under
these noncancelable capital leases and operating leases for each fiscal year
ended December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ------------
<S> <C> <C>
1998.......................................................... $421,363 $2,267,000
1999.......................................................... 407,846 1,587,000
2000.......................................................... 49,644 751,000
2001.......................................................... -- 286,000
2002.......................................................... -- 130,000
Thereafter.................................................... --
-------- ----------
Total minimum lease payments.................................. 878,853 $5,021,000
-------- ----------
-------- ----------
Amount representing interest.................................. 177,208
--------
Present value of net minimum payments......................... 701,645
Current portion............................................... 297,538
--------
$404,107
--------
--------
</TABLE>
F-20
<PAGE>
INFONAUTICS, INC.
Schedule II : Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ------------ ----------------------------- ------------ -------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -------------------------------------------- ------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Valuation allowances for deferred tax asset
1997...................................... $ 8,905,000 $ 6,316,000 -- -- $ 15,221,000
1996...................................... 4,292,000 4,613,000 -- -- 8,905,000
1995...................................... 1,687,850 2,604,150 -- -- 4,292,000
Allowance for doubtful accounts
1997...................................... $ 31,590 $ 86,181 -- $ 85,205 $ 32,566
1996...................................... -- 48,799 -- 17,209 31,590
1995...................................... -- -- -- -- --
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFONAUTICS, INC.
Date: March 30, 1998
By: /s/ David Van Riper Morris
--------------------------
David Van Riper Morris
President and Chief Operating Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Ronald A. Berg his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and his name,
place and stead, in any and all capacities, to execute and cause to be filed
with the Securities and Exchange Commission any and all amendments to this
report and in each case to file the same, with all exhibits thereto and other
documents in connection therewith and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
Name Capacity Date
<S> <C> <C>
/s/ David Van Riper Morris Principal March 30, 1998
- -------------------------- Executive Officer
David Van Riper Morris
/s/ Ronald A. Berg Principal Financial and March 30, 1998
- -------------------------- Accounting Officer
Ronald A. Berg
/s/ Israel J. Melman Director March 30, 1998
- --------------------------
Israel J. Melman
/s/Howard L. Morgan Director March 30, 1998
- --------------------------
Howard L. Morgan
/s/Lloyd N. Morrisett Director March 30, 1998
- --------------------------
Lloyd N. Morrisett
34
<PAGE>
/s/Barry Rubenstein Director March 30, 1998
- ---------------------------
Barry Rubenstein
/s/Marvin I. Weinberger Director March 30, 1998
- ---------------------------
Marvin I. Weinberger
/s/Lester D. Wunderman Director March 30, 1998
- ---------------------------
Lester D. Wunderman
/s/ Michael Zisman Director March 30, 1998
- ---------------------------
Michael Zisman
</TABLE>
35
<PAGE>
EXHIBIT INDEX
10.10* ** Employment Agreement dated as of November 24, 1997
between Infonautics, Inc. and Gerard J. Lewis, Jr.
10.25* Agreement of Lease dated June 14, 1994, as amended January
27, 1995, June 30, 1995, November 13, 1995, April 18, 1996,
May 22, 1996, April 14, 1997, September 19, 1997 and
November 17, 1997* between Infonautics, Inc. and West
Valley Business Trust
21* Subsidiaries
23* Consent of Coopers & Lybrand L.L.P.
24* Powers of Attorney (included as part of the signature page
hereof)
27.1* Financial Data Schedule
27.2* Financial Data Schedule (Restated)
27.3* Financial Data Schedule (Restated)
------------------------
* Filed herewith.
** Compensation plans and arrangements for executive officers and
others.
<PAGE>
EMPLOYMENT SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of November 24, 1997, is by and between
INFONAUTICS CORPORATION, a Pennsylvania corporation, which is a subsidiary of
INFONAUTICS, INC. (INFONAUTICS, INC. and INFONAUTICS CORPORATION being
collectively referred to in this Agreement as "Corporation"), and GERARD J.
LEWIS, JR., an individual residing at 407 Shortridge Drive, Wynnewood,
Pennsylvania 19096 ("Employee"). In consideration of the mutual promises
contained herein, and specifically the Corporation's promise to pay Employee
a lump-sum severance payment in accordance with the terms of this Agreement
in the event Employee's employment is terminated without Cause (as defined
below), which the Corporation had not previously agreed to do, Corporation
and Employee, both intending to be legally bound, agree as follows:
1. Employment
The Corporation employs Employee as Vice President &
General Counsel of the Corporation, and Employee hereby accepts such
employment on the terms set forth in this Agreement.
2. Base Compensation
In consideration of the services rendered by Employee to
the Corporation hereunder, the Corporation shall pay to Employee a base
salary at the annual rate of $95,000 (ninety-five thousand dollars), payable
semi-monthly or as otherwise agreed by the Corporation and Employee.
Employee's performance and salary will be subject to periodic review.
3. Expenses
The Corporation shall reimburse Employee for all ordinary
and necessary expenses reasonably incurred by him in carrying out his duties
hereunder, upon presentation to the Corporation by Employee, from time to
time, of an itemized account of such expenses together with such receipts and
forms as are required pursuant to the Corporation's normal policies and
practices.
4. Duties
During the term of his employment hereunder, Employee shall
perform duties as customarily performed by a General Counsel subject to the
discretion and control of the President of the Corporation. Employee shall
devote his full time, energy, skill and best efforts to promote the business
and affairs of the Corporation. Except as may otherwise be provided herein,
Employee agrees that during his employment hereunder he will not be employed
by, participate or engage in or be a part of in any manner, directly or
indirectly, in the affairs of any other business enterprise or occupation
without approval of the Corporation's Board of Directors.
-1-
<PAGE>
5. At-will Employment
(a) Employee's employment hereunder shall be "at will" and
either party shall have the right to terminate this Agreement at any time,
pursuant to the following terms and conditions:
(i) Termination by Employee. Employee shall have the
right to terminate his employment hereunder by providing thirty (30)
days' prior written notice to the President of the Corporation. Upon
the effectiveness of such notice, this Agreement shall terminate except
for the provisions that expressly survive termination.
(ii) Termination by Corporation. The Corporation
shall have the right to terminate Employee's employment by the
Corporation at any time, with or without Cause.
(A) With Cause. In the event Corporation
terminates Employee's employment for "Cause," this Agreement
shall terminate except for the provisions which expressly
survive termination, and Employee shall vacate the offices of
the Corporation. For purposes of this Agreement, "Cause" shall
mean (a) dishonesty, misconduct, conviction of a crime
involving moral turpitude, use of alcohol or drugs in such a
manner or to an extent that job performance is impaired, drug
abuse, violation of a rule of professional conduct,
misappropriation of funds, disparagement of the Corporation
(or its management or employees), or (b) failure of Employee
to perform or observe any of the terms or provisions of this
Agreement or to comply fully with the lawful directives of the
Board of Directors of the Corporation or any other proper
cause determined in good faith by the Board of Directors of
the Corporation; provided, however, that Employee's conduct
shall not constitute "Cause" within the meaning of (b) above
unless and until (i) the Corporation shall have provided
Employee with notice setting forth with specificity (A) the
conduct deemed to constitute such "Cause," (B) reasonable
action that would remedy the objectionable conduct, and (C) a
reasonable time (not less than 15 days) within which Employee
may take such remedial action, and (ii) Employee shall not
have taken such specified remedial action within such
specified reasonable time.
(B) Without Cause. In the event Corporation
terminates Employee's employment without Cause, the
Corporation shall pay to the Employee in a lump sum in cash
within 30 days of the date of such termination an amount equal
to the Employee's annual base salary (gross salary less any
applicable withholdings) as of the termination date.
Notwithstanding the foregoing, payments to be provided
pursuant to this Section shall in all respects be conditioned
upon (i) the prior receipt by the Corporation from Employee of
a
-2-
<PAGE>
general release of all claims of any nature whatsoever which
Employee had, has or may have against the Corporation and
related parties relating to his employment by the Corporation
(other than his entitlement under any employee benefit plan or
program sponsored by the Corporation in which he participated
and under which he has accrued a benefit) or the termination
thereof and (ii) continued compliance by Employee with the
provisions of this Agreement that expressly survive
termination.
(b) Excess Parachute Payments. Notwithstanding anything in
this Agreement to the contrary, if it shall be determined that any payment or
distribution by the Corporation to or for the benefit of Employee pursuant to
the terms of this Agreement or otherwise (a "Payment") would constitute an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), as a result of a "Change of
Control" of the Corporation as defined in Section 11 of the Corporation's 1996
Equity Compensation Plan and that it would be economically advantageous to the
Corporation to reduce the Payment to avoid or reduce the taxation of excess
parachute payments under Section 4999 of the Code, the aggregate present value
of the amounts payable or distributable to or for the benefit of Employee
pursuant to this Agreement (such payments or distributions pursuant to this
Agreement are hereinafter referred to as "Agreement Payments") shall be reduced
(but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an
amount expressed in present value which maximizes the aggregate present value of
Agreement Payments without causing any Payment to be subject to taxation under
Section 4999 of the Code. For purposes of this Paragraph 5, present value shall
be determined in accordance with Section 280G(d)(4) of the Code. The
calculations under Paragraph 5(a) shall be made as follows:
(i) All determinations to be made under this
Paragraph 5(b) shall be made by the Corporation's independent public
accounting firm (the "Accounting Firm"), which firm shall provide its
determinations and any supporting calculations to the Corporation and
Employee within 10 business days of the event that gives rise to the "excess
parachute payment." Any such determination by the Accounting Firm shall be
binding upon the Corporation and Employee. Employee shall in his sole
discretion determine which and how much of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Paragraph
5(b). Within five business days after Employee's determination, the
Corporation shall pay (or cause to be paid) or distribute (or cause to be
distributed) to or for the benefit of Employee such amounts as are then due
to Employee under this Agreement.
(ii) As a result of the uncertainty in the
application of Section 280G of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Agreement
Payments will have been made by the Corporation which should not have been
made ("Overpayment") or that additional Agreement Payments which have not
been made by the Corporation could have been made ("Underpayment"), in each
case, consistent with the calculations required to be made hereunder. Within
two years after the event that gives rise to the "excess parachute payment,"
the Accounting Firm shall review the determination made by it
-3-
<PAGE>
pursuant to the preceding paragraph. If the Accounting Firm determines that
an Overpayment has been made, any such Overpayment shall be treated for all
purposes as a loan to Employee which Employee shall repay to the Corporation,
together with interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no
amount shall be payable by Employee to the Corporation if and to the extent
such payment would not reduce the amount which is subject to taxation under
Section 4999 of the Code. In the event that the Accounting Firm determines
that an Underpayment has occurred, any such Underpayment shall be promptly
paid by the Corporation to or for the benefit of Employee, together with
interest at the Federal Rate.
(iii) All of the fees and expenses of the
Accounting Firm in performing the determinations referred to in Paragraphs
5(b)(i) and 5(b)(ii) above shall be borne solely by the Corporation. The
Corporation agrees to indemnify and hold harmless the Accounting Firm from
any and all claims, damages and expenses resulting from or relating to its
determinations pursuant to Paragraphs 5(b)(i) and 5(b) (ii) above, except for
claims, damages or expenses resulting from the gross negligence or willful
misconduct of the Accounting Firm.
(iv) The limitations of this Paragraph 5(b) shall
only apply if payments under this Agreement are subject to Section 280G at
the time of the Change of Control.
(c) This Agreement and all of Employee's rights hereunder
shall terminate upon the death of Employee, and neither Employee nor his
estate shall have any further rights hereunder, except for any unpaid
compensation, unpaid benefits (including but not limited to unpaid vacation,
if any) and expense reimbursements through the date of death and except to
the extent otherwise provided in any applicable welfare or benefit plan of
the Corporation in which Employee is a participant at the date of death.
(d) Following termination of this Agreement, neither the
Corporation nor Employee shall direct any disparaging statements against the
other party.
6. Benefits; Vacation
The Corporation shall provide and Employee shall be
entitled to participate in all benefit plans and programs generally available
to the officers of the Corporation upon their adoption and implementation. It
is the Corporation's intention, but not its obligation, to adopt and make
available to Employee a stock option or similar plan or plans relating to the
Corporation or an affiliate of Corporation, all on such terms and with such
conditions and restrictions as may be determined by the Board of Directors of
the Corporation in its sole discretion. Employee shall be entitled to
vacation in accordance with the Corporation's policies, to be scheduled after
consultation with and as approved by the President of the Corporation.
7. Notices
-4-
<PAGE>
All notices and other communication which are required or
permitted hereunder shall be given in writing and either delivered by hand or
mailed by certified mail, return receipt requested, postage prepaid, as
follows or to such other address as a party may specify in a written notice
given hereunder:
(a) If to Employee, to:
Gerard J. Lewis, Jr.
407 Shortridge Drive
Wynnewood, PA 19096
with a required copy to:
Robin Sheldon, Esquire
Reed Smith Shaw & McClay LLP
2500 One Liberty Place
1650 Market Street
Philadelphia, PA 19103-7301
(b) If to the Corporation, to:
Ronald A. Berg
Infonautics Corporation
900 West Valley Road, Suite 1000
Wayne, PA 19087
with a required copy to:
David R. King, Esquire
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
A notice shall be effective upon receipt, or if delivery is refused, an the
third business day after the attempted delivery.
8. Miscellaneous
(a) This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the successors and assigns of Corporation
and the heirs, estate, personal representatives and beneficiaries of
Employee. The rights, obligations and duties of the Employee hereunder shall
be personal and are not assignable or delegable by him in any manner
whatsoever.
-5-
<PAGE>
(b) This Agreement constitutes the entire understanding of
the parties with respect to the subject matter hereof, supersedes all prior
discussions, promises, and representations between the parties, and shall not
be modified, terminated or any provisions waived orally, including this
clause.
(c) No failure to exercise, delay in exercising, or single
or partial exercise of any right, power or remedy hereunder shall preclude
any other or further exercise of the same or any other right, power or remedy.
(d) The headings of the paragraphs of this Agreement have
been inserted for convenience of reference only and shall not constitute a
part of this Agreement.
(e) This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding
choice of law principles, applicable to contracts made and to be performed
solely therein, and each party consents to the exclusive jurisdiction and
venue of the state and Federal courts of Pennsylvania to resolve any disputes
between the parties.
IN WITNESS WHEREOF, the parties have executed this
Agreement on the date first written above.
INFONAUTICS CORPORATION EMPLOYEE:
By: /s/ Ronald A. Berg /s/ Gerard J. Lewis, Jr.
- ------------------------------------ ------------------------
Name: Ronald A. Berg Gerard J. Lewis, Jr.
Title: Vice President - Finance
and Administration
-6-
<PAGE>
EIGHTH AMENDMENT OF LEASE
THIS AMENDMENT, made and entered into as of 11/17/97 by and between FMOB
ASSOCIATES ("Landlord") and INFONAUTICS CORPORATION, a Pennsylvania
Corporation ("Tenant").
WHEREAS, by lease dated June 1994 (the "Initial Lease"), Landlord leased
to Tenant and Tenant leased from Landlord a portion of a building located at
900 West Valley Road, Wayne, Pennsylvania, consisting of 7,756 square feet of
space in Building 900 as more particularly described in the Lease (the
"Original Premises").
WHEREAS, by that certain First Amendment to lease dated January, 1995
(the "First Amendment") Landlord leased to Tenant an additional (i) 1,522
square feet of space in Building 1000 as more particularly described in the
First Amendment ("First Expansion Space"), and (ii) 1,247 square feet of
space in Building 1000 as more particularly described in the First Amendment
("Second Expansion Space").
WHEREAS, by that certain Second Amendment to lease dated June 30, 1995
(the "Second Amendment") Landlord leased to Tenant an additional 5,462 square
feet of space in Building 1100 more particularly described in the Second
Amendment ("Third Expansion Space"), and Landlord and Tenant
extended the Initial Term Expiration Date to July 31, 2000.
WHEREAS, by that certain Third Amendment to lease dated as of November
13, 1995, Landlord leased to Tenant Suite 1101 consisting of approximately
1,509 square feet of space in Building 1100 as more particularly described in
the Third Amendment ("Fourth Expansion Space").
WHEREAS, by that certain Fourth Amendment to lease dated as of May 22,
1996, Landlord and Tenant agree to the terms of a utility access agreement.
WHEREAS, pursuant to the terms of the Third Amendment, the Initial Lease
was amended to redefine the term "Demised Premises" to include the Original
Premises, the First Expansion Space, the Second Expansion Space, the Third
Expansion Space and the Fourth Expansion Space thereby increasing the total
square footage of the Demised Premises to 17,496 square feet of the Tenant's
Proportionate Share to 10.83%. The Fifth Expansion Space thereby increases
the total square footage of the Demised Premises to 21,040 square feet and
Tenant's Proportionate Share to 13.03%.
WHEREAS, by that certain Fifth Amendment to lease dated April 18, 1996
(the "Fifth Amendment"), Landlord leased to Tenant Suites 801, 802 and 804
consisting of approximately 3,544 square feet of space in Building 800 as
more particularly described in the Fifth Amendment ("Fifth Expansion Space").
<PAGE>
WHEREAS, by that certain Sixth Amendment to lease dated 4/14/97 (the
"Sixth Amendment") Landlord leased to Tenant the following suites:
Suite 402 (Focus) - 3,569 SF
Suite 701 (Textile) - 1,575 SF
Suite 702 (CSR) - 3,610 SF
Suite 504 (Vacant) - 1,263 SF
Suite 503 (J. Miller) - 1,566 SF
---------
TOTAL 11,583 SF
as more particularly described in the Sixth Amendment ("Sixth Expansion
Space").
WHEREAS, by that certain Seventh Amendment to lease dated 9/19/97
(the "Seventh Amendment") Landlord leased to Tenant Suite 401 consisting of
approximately 1,641 SF as more particularly described in the Seventh Amendment
("Seventh Expansion Space").
WHEREAS, Tenant desires to lease from Landlord and Landlord desires to
lease to Tenant the following suites:
Suite 604 - plus minus 4,000 SF
Suite 601 - plus minus 1,220 SF
-------------------
TOTAL plus minus 5,220 SF
as more particularly outlined in Exhibit "A" attached hereto as ("Eighth
Expansion Space").
NOW THEREFORE, in consideration of the sum of $1.00, in hand well and
truly paid, and other good and valuable consideration, the receipt of which
is hereby acknowledged, and in further consideration of the mutual premises
and covenants herein contained, the parties, intending to be legally bound,
agree:
1. The Initial Lease, as amended, is sometimes referred to herein as
the "Lease". All other capitalized terms used in this Amendment shall have
the same meaning as assigned to them in the WHEREAS clauses of this Amendment
or the Lease, unless otherwise specifically noted. The provisions of the
WHEREAS clauses are incorporated herein as if fully set forth.
2. Commencing on February 1, 1998, the Eighth Expansion Space
Commencement Date, the Lease is amended to redefine the term "Demised
Premises" to include the Original Premises, the First Expansion Space, the
Second Expansion Space, the Third Expansion Space, the Fourth Expansion, the
Fifth Expansion, the Sixth Expansion, the Seventh Expansion Space and the
Eighth Expansion for all purposes, provided that the following provisions
shall apply to the Eighth Expansion Space only notwithstanding any contrary
provisions of the Lease: (i) the term of the lease of Eighth Expansion Space
shall be Sixty (60) Months, (ii) the Extension Option provided in the Initial
Lease shall not apply to the Eighth Expansion Space; (iii) the first and
second termination options provided in the Initial Lease shall not apply to
the Eighth Expansion Space, (iv) Tenant's Proportionate Share with respect to
the Eighth Expansion Space only shall be 3.23% (5,220/161,519 sq. ft.)
increasing the total square footage to 39,487 sq. ft. and Tenant's
proportionate share to 24.45%; and (v) Base Rent for the Eighth Expansion
Space shall be $107,010.00 per year, payable in advance in equal monthly
installments of $8,917.50.
<PAGE>
3. Landlord's Work.
a. Landlord and Tenant agrees that Tenant is leasing this Eighth
Expansion Space in its current "As-Is" condition with the exception that
Landlord will provide Tenant with a construction allowance of $20,000.00,
representing Landlord's sole construction allowance contribution to Tenant.
All other improvements to the space Tenant wishes to perform shall be at
Tenant's sole cost and expense with such improvements being submitted in
writing to Landlord for Landlord's approval of the work, such approval not to
be unreasonably withheld.
4. Tenant shall, at Tenant's sole cost and expense, keep the Eighth
Expansion Space and every part thereof in good condition and repair, damage
thereto from fire or other casualty and ordinary wear and tear, condemnation,
and from the negligence or misconduct of Landlord, its agents, employees,
invitees, contractors, subcontractors, and others for whom Landlord is
legally responsible, alone excepted. The parties hereto affirm that Landlord
has made no representations to Tenant respecting the condition of the Seventh
Expansion Space or the Building except as specifically herein set forth in
writing.
5. Tenant and Landlord agree that Tenant has no further expansion
options under the Lease.
6. ALL TIMES HEREIN AND IN THE LEASE ARE AND REMAIN OF THE ESSENCE.
7. Except as modified herein, all terms and conditions of the Lease
shall remain in full force and effect. In the event of any inconsistency
between the terms of this Amendment and the terms of the Lease, the terms of
this amendment shall prevail. The Lease and this Amendment represent the
entire agreement between the parties relating to the lease of the Premises
and shall supersede any other agreements, whether written or oral. There are
no understandings, representations or warranties of any kind, pertaining to
the lease of the Premises which are not expressly set forth in this Amendment
and the Lease. ALL OF THE CONFESSIONS OF JUDGMENTS FOR DAMAGES AND POSSESSION
CONTAINED IN THE LEASE ARE HEREBY RATIFIED, CONFIRMED AND RESTATED BY TENANT
AND ARE INCORPORATED HEREIN BY REFERENCE AS THROUGH SET FORTH IN THEIR
ENTIRETY.
8. Submission of Lease/Lease Amendment to Tenant. The submission by
Landlord to Tenant of this Lease Amendment shall have no binding force or
effect, shall not constitute an option for the leasing of the Demised
Premises, shall not constitute a lease or agreement to enter into a lease
(even if such term is less than three (3) years in duration), nor confer any
rights tor impose any obligations upon either party until the execution
thereof by Landlord and the delivery of an executed original copy thereof by
Landlord to Tenant or Tenant's representative.
[Signature Page Following]
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
on the date first above mentioned.
LANDLORD:
FMOB ASSOCIATES By its General Partner
West Valley, Inc.
BY: /s/ Jack R. Loew
---------------------------------
Jack R. Loew, President
TENANT:
INFONAUTICS CORPORATION, a
Pennsylvania Corporation
ATTEST: BY: /s/ Ronald Berg
----------------- ---------------------------------
Name: Ronald Berg
[CORPORATE SEAL] Title: VP Finance and Administrations
<PAGE>
EXHIBIT 'A"
FLOOR PLAN
8th Expansion Space
plus minus 5220 SF
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Subsidiary of Incorporation
------------------ ---------------------
<S> <C>
Infonautics Corporation Pennsylvania
Infoprop, Inc. Pennsylvania
Infoloans, Inc. Delaware
</TABLE>
<PAGE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Infonautics, Inc. on Form S-8 (File No. 333-12279) and Form S-8
(File No. 333-37545) of our report dated February 13, 1998, on our audits of
the consolidated financial statements and financial statement schedule of
Infonautics, Inc. as of December 31, 1996 and 1997 and for each of the three
years in the period ended December 31, 1997, which report is included in this
Annual Report on Form 10-K.
/s/Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
PHILADELPHIA, PENNSYLVANIA
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000909494
<NAME> INFONAUTICS, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,301,933
<SECURITIES> 10,695,504
<RECEIVABLES> 1,929,033
<ALLOWANCES> 32,566
<INVENTORY> 0
<CURRENT-ASSETS> 15,093,031
<PP&E> 4,767,225
<DEPRECIATION> 1,747,317
<TOTAL-ASSETS> 18,793,668
<CURRENT-LIABILITIES> 7,929,934
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,459,627
<TOTAL-LIABILITY-AND-EQUITY> 18,793,668
<SALES> 6,831,731
<TOTAL-REVENUES> 6,831,731
<CGS> 2,641,198
<TOTAL-COSTS> 25,194,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,481
<INCOME-PRETAX> (17,359,038)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,359,038)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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