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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 0-28284
INFONAUTICS, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 West Valley Road, Suite 1000, Wayne, Pa 19087
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(Address of principal executive offices)
(610) 971-8840
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1999
----- -----------------------------
Class A Common Stock, no par value 11,594,616
Class B Common Stock, no par value 100,000
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INFONAUTICS, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
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PART I: FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
1999 (unaudited) and December 31, 1998 ..................................... 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 1999 and
June 30, 1998............................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1999 and June 30, 1998............................ 5
Notes to Consolidated Financial Statements.................................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 9-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 17
PART II: OTHER INFORMATION
Item 2. Changes in Securities.................................................. 17
Item 5. Other Information...................................................... 17
Item 6. Exhibits and Reports on Form 8-K....................................... 18
</TABLE>
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 1,576,583 $ 3,267,811
Receivables:
Trade, less allowance for doubtful accounts
of $90,340 in 1999 and $65,740 in 1998.......................... 5,173,170 2,934,597
Trade, assigned................................................. 1,916,376 --
Other........................................................... 176,346 305,121
Prepaid royalties................................................. 208,529 397,849
Prepaid expenses and other assets................................. 371,712 446,492
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Total current assets....................................... 9,422,716 7,351,870
Property and equipment, net........................................... 2,318,680 2,572,617
Other assets.......................................................... 224,922 267,885
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Total assets................................................. $ 11,966,318 $ 10,192,372
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, bank............................................... $ 1,533,101 $ --
Current portion of obligations under capital lease................ 319,538 356,898
Accounts payable.................................................. 1,330,981 1,929,598
Accrued expenses.................................................. 1,179,335 1,484,934
Accrued royalties................................................. 1,759,110 1,334,669
Deferred revenue.................................................. 9,683,655 7,807,016
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Total current liabilities.................................... 15,805,720 12,913,115
Noncurrent portion of obligations under capital lease................. 121,759 47,209
Noncurrent portion of deferred revenue................................ 953,802 530,256
Convertible debt...................................................... 2,485,873 --
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Total liabilities............................................ 19,367,154 13,490,580
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Commitments and contingencies
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, no par value, 5,000 shares
authorized, 0 and 283 shares issued and outstanding
at June 30, 1999 and December 31, 1998............................ -- 258,483
Class A common stock, no par value; 25,000,000
shares authorized; one vote per share; 11,594,616
and 11,522,692 shares issued and outstanding at
June 30, 1999 and December 31, 1998.............................. -- --
Class B common stock, no par value; 100,000 shares
authorized, issued and outstanding............................... -- --
Additional paid-in capital ........................................... 57,929,927 56,666,439
Deferred compensation ................................................ (62,500) (125,000)
Accumulated deficit .................................................. (65,268,263) (60,098,130)
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Total shareholders' equity (deficit) ........................ (7,400,836) (3,298,208)
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Total liabilities and shareholders' equity (deficit) ........ $ 11,966,318 $ 10,192,372
-------------- -------------
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The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ............................................... $ 5,977,004 $ 3,581,865 $ 11,208,032 $ 6,165,492
------------- ------------- ------------- ------------
Costs and expenses:
Cost of revenues....................................... 1,818,825 1,050,807 3,527,944 1,927,070
Customer support expenses.............................. 297,750 256,797 569,782 482,051
Technical operations and development expenses.......... 1,970,296 2,051,671 4,186,859 3,836,151
Sales and marketing expenses........................... 3,020,682 3,932,495 5,825,234 6,893,041
General and administrative expenses.................... 817,572 1,100,542 1,569,146 2,618,451
------------- ------------- ------------- ------------
Total costs and expenses.......................... 7,925,125 8,392,312 15,678,965 15,756,764
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Loss from operations........................................ (1,948,121) (4,810,447) (4,470,933) (9,591,272)
Interest income (expense), net.............................. (411,872) 35,791 (699,201) 144,601
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Net loss.......................................... (2,359,993) (4,774,656) (5,170,134) (9,446,671)
Redemption of preferred stock in excess of carrying amount -- -- (74,875) --
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Net loss attributable to common shareholders................ $(2,359,993) $ (4,774,656) $ (5,245,009) $(9,446,671)
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Loss per common share- basic and diluted.................... $ (.20) $ (0.50) $ (.45) $ (0.99)
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Weighted average shares
outstanding- basic and diluted......................... 11,666,700 9,634,000 11,664,700 9,564,000
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
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Cash flows from operating activities:
Net loss...................................................... $ (5,170,134) $ (9,446,671)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization............................ 727,968 775,080
Amortization of discount on debt......................... 573,820 --
Accretion on convertible debt............................ 80,625 --
Provision for losses on accounts receivable.............. 206,213 25,000
Amortization of deferred compensation.................... 62,500 62,501
Severance and related costs.............................. -- 398,525
Changes in operating assets and liabilities:
Receivables:
Trade................................................... (195,960) (457,598)
Other................................................... (43,138) (163,933)
Prepaid and other assets.................................. 307,063 (1,287,374)
Accounts payable.......................................... (598,617) 192,429
Accrued expenses.......................................... (305,599) 511,963
Accrued royalties......................................... 424,441 249,370
Deferred revenue.......................................... (1,693,104) 299,617
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Net cash used in operating activities............... (5,623,922) (8,841,091)
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Cash flows from investing activities:
Purchases of property and equipment......................... (236,017) (766,174)
Purchases of short-term investments......................... -- (7,284,487)
Proceeds from maturity of short-term investments............ -- 16,186,750
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Net cash provided by (used in) investing activities. (236,017) 8,136,089
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Cash flows from financing activities:
Proceeds from borrowings under accounts receivable
purchase agreement..................................... 1,790,596 --
Repayments of borrowings under accounts receivable
purchase agreement..................................... (257,496) --
Net proceeds from issuance of common stock ................. 169,792 45,499
Repurchase of preferred stock............................... (333,358) --
Proceeds from long term borrowings.......................... 3,000,000 --
Payments on capital lease obligations....................... (200,823) (165,702)
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Net cash provided by (used in) financing activities. 4,168,711 (120,203)
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Net decrease in cash and cash equivalents...................... (1,691,228) (825,205)
Cash and cash equivalents, beginning of period.................. 3,267,811 2,301,933
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Cash and cash equivalents, end of period........................ $ 1,576,583 $ 1,476,728
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited consolidated financial statements of Infonautics, Inc.
(together with its subsidiaries, the "Company") presented herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission for quarterly reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
financial statements for the year ended December 31, 1998 and the notes thereto
included in the Company's 1998 Annual Report on Form 10-K.
The financial information in this report reflects, in the opinion of
management, all adjustments of a normal recurring nature necessary to present
fairly the results for the interim period. Quarterly operating results may not
be indicative of results which would be expected for the full year.
2. Basic and Diluted EPS:
The Company calculates earnings per share (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
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 diluted 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. Related Party Transaction:
The company expensed $172,000 which is due from a related party as bad
debt in the three months ended June 30, 1999. The receivable had been included
in other receivables at December 31, 1998. The net amount due to the Company
arose pursuant to a 1998 agreement with the former Chairman of the Board, Chief
Executive Officer and founder of the Company.
The Company previously recognized severance and related expenses of
approximately $500,000 in the first quarter of 1998 related to this agreement.
4. Supplemental Disclosure of Cash Flow Information:
At June 30, 1999, included in accounts receivable and deferred revenue
was approximately $5.8 million representing that portion of subscription
revenue from long-term agreements which have been billed, but not yet received
or recognized as income.
Approximately $370,000 was recorded during the first six months ended
June 30, 1999 as a discount for the issuance of convertible debt below market
pursuant to the agreement described in Note 5. During the quarter ended June
30, 1999, the remaining $173,000 of this discount was amortized into interest
expense. Interest expense of $53,000 was accrued on the convertible debt in the
quarter ended June 30, 1999. The
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interest expense for the six months ended June 30, 1999 amounted to $81,000.
Also, approximately $800,000 was recorded as of June 30, 1999 as an
additional discount on debt related to the valuation of warrants issued in
connection with the convertible debt. In the quarter ended June 30, 1999,
$133,000 of this discount was amortized and recorded as interest expense. For
the six months ended June 30, 1999, $204,000 of this additional discount was
amortized as interest expense.
In connection with the repurchase of 283 shares of Series A
Convertible Preferred Stock described in Note 6, the Company charged
additional paid in capital for approximately $75,000, which represents the
excess of the redemption price over the Series A Preferred Stock accreted
carrying value. The Company acquired $238,000 of equipment under capital
lease during the six months ended June 30, 1999. Gross barter amounts of
$179,000 are included in revenues and marketing expenses for the six months
ended June 30, 1999.
5. Convertible Debentures:
On February 11, 1999, the Company entered into a Securities Purchase
Agreement with an investor under which it agreed to issue convertible
debentures in the amount of $3,000,000 and warrants to purchase 522,449 shares
of Class A Common Stock, no par value per share, of the Company.
The debentures bear interest at a rate of 7% and mature on August 11,
2000. The Debentures became convertible after 90 days from February 11, 1999
into that number of shares of Common Stock of the Company equal to the
principal amount of the debentures to be converted divided by $4.13, subject to
adjustment pursuant to the terms of the debentures. In connection with this, a
discount on convertible debt of approximately $370,000 was recorded upon the
issuance. During the six months ended June 30, 1999, the entire $370,000 of
this discount was amortized into interest expense.
The warrants may be exercised at any time during the five year period
following their issuance at an exercise price of $5.97 per share, which is
equal to 130% of the closing bid price of the Company's Common Stock on
February 10, 1999. In connection with the issuance of the warrants, the company
recorded approximately $800,000 to additional paid in capital as an additional
discount to the debt. This discount is being amortized ratably over the term of
the debt which is eighteen months. Through June 30, 1999, $205,000 of this
discount has been amortized.
6. Shareholders' Equity (Deficit):
On February 11, 1999, the Company repurchased 283 shares of Series A
Preferred Stock which were issued on July 22, 1998 for $333,358. The Company
and the holder have agreed not to engage in additional financing under the July
1998 agreement. However, the two warrants, each for 100,000 shares of the
Company's Class A Common Stock, under the July 1998 agreement remain in effect.
The exercise price of the first warrant for 100,000 shares is $5.15 per share;
the exercise price for the second warrant for 100,000 shares is $6.25. Both
warrants have a five year term.
7. Commitments and Contingencies:
Marketing Agreement:
The Company entered into a marketing agreement in March 1998, in which
the Company agreed to pay $4.0 million in placement fees, with $1,200,000 paid
in 1998. In March 1999, the payment schedule was revised as follows: $223,333
paid in March 1999 upon the execution of the amendment, monthly payments of
$223,333 due through July, 1999, and $500,000 due in August, 1999, November,
1999, and February, 2000. The fees are being amortized on a straight-line basis
as of the launch in May 1998, over the term of the two year agreement, with
$1,000,000 amortized during the six months ended June 30, 1999.
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Included in accrued expenses as of June 30, 1999 is $249,000 resulting from
this agreement.
Equity Investment:
In conjunction with the planned departure of the Company's Executive
Vice President and Co-founder, the Company amended his employment agreement on
June 17, 1999. The agreement provides for the Company to invest in the former
Executive Vice President's new company as follows: $30,000 in July 1999,
$50,000 in August 1999, $80,000 in September 1999, and $120,000 in October 1999
in return for an equity interest in the former employee's new company. The
Executive Vice President terminated his employment on July 6, 1999.
8. Accounts receivable purchase line:
The Company entered into an accounts receivable purchase agreement in
May 1999, to sell its receivables to a bank, with recourse. Pursuant to the
terms of the agreement the bank may purchase up to $3,000,000 of the Company's
receivables. The bank will retain a reserve of at least 20% of any purchased
receivable, refunding this amount when the receivable is collected. There is a
1.5% per month finance charge of the average daily account balance and the
Company will pay a fee of .75% of each purchased receivable. This agreement is
collateralized by substantially all the Company's assets and either party may
cancel the agreement at any time. Advances made to the Company are repayable in
full upon demand in the event of a default under the agreement. As of June 30,
1999, the Bank had made advances aggregating $1,533,000 against trade
receivables with a face amount of $1,916,000.
The Company has accounted for this transaction as a secured borrowing
in accordance with FAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
9. Subsequent event:
Agreement to form a new company:
On July 8, 1999, Infonautics signed an agreement with Bell & Howell
Company, and its wholly owned subsidiary, Bell and Howell Information and
Learning Company(BHIL) to create a new, as-yet-to-be-named company that will
combine both companies' complementary K-12 reference businesses.
Infonautics will contribute its school and library Electric Library
business and will receive 27 percent of the new company. BHIL will own the
balance of the new entity and also will purchase Infonautics' e-commerce online
archive business. In connection with the transaction, Infonautics will receive
$22 million in cash. Infonautics will continue to develop and market its suite
of Sleuth services. Infonautics will also retain rights to market Electric
Library Personal Edition to end-users (subject to an option granted to BHIL to
purchase the end-user business).
The agreement is subject to shareholder approval.
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Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
This Report contains, in addition to historical information,
forward-looking statements by the Company with regard to its expectations as
to financial results and other aspects of its business that involve risks and
uncertainties and may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "may," "should," "anticipate," "believe," "plan," "estimate," "expect" and
"intend," and other similar expressions are intended to identify
forward-looking statements. These include statements regarding the
sufficiency of the Company's liquidity, including cash resources, capital and
utilization of the accounts receivable purchase agreement, the number of
subscribers, gross margins, current and future expenses, future revenues and
shortfalls in revenues, contract pricing and pricing uncertainty, use of
system resources and marketing effects, growth and expansion plans, sales and
marketing plans, changes in number of sales personnel, capital expenditures,
the effects of the AOL Agreement on the Company, Year 2000 readiness and
expenses, seasonality, Electric Schoolhouse, and operating results, and the
proposed joint venture. 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, the risks set forth in the Company's filings with the
Securities and Exchange Commission. The Company does not intend to update
these cautionary statements or any forward-looking statements.
RECENT DEVELOPMENTS
On July 8, 1999, the Company, Bell & Howell Company ("Bell & Howell")
and its wholly owned subsidiary, Bell & Howell Information and Learning Company
("BHIL"), entered into a Master Transaction Agreement that provides for the
formation and capitalization of a new company, the sale of the Company's online
publishing business to BHIL and the granting by the Company of certain rights to
the new company with respect to the Company's end-user business.
The Company will contribute to the new company its assets and
liabilities that relate exclusively to its Electric Library products and
technology which are used in the educational market and the international
market. However, the Company will not contribute certain assets that relate
directly to the distribution of the Electric Library products and technology in
the end-user market. In exchange for its contribution, the Company will receive
a cash payment of $20 million and a 27% equity interest in the new company.
BHIL will contribute to the new company $20 million in cash and the
assets and liabilities of BHIL that relate exclusively to or arise from sales to
public and private preschool, K-12 programs, teachers and administrators of such
K-12 institutions and students and parents of students of such K-12 institutions
who are targeted through such K-12 institutions for at home use ("K-12
Segment"). In exchange for its contribution, BHIL will receive a 73% equity
interest in the new company. The new company will also perform certain services
under customer contracts transferred to the new company by BHIL.
Additionally, the Company will sell to BHIL, and BHIL will purchase
from the Company, the assets and liabilities of the Company that relate
exclusively to the Company's e-commerce online publishing markets and customers.
In exchange for the Company's e-commerce online publishing business, BHIL will
pay to the Company $2 million in cash.
Infonautics will continue to develop and market its suite of Sleuth
services. Infonautics will also retain rights to market Electric Library
Personal Edition to end-users (subject to an option granted to BHIL to purchase
the end-user business). There
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will be no change in the stock owned by Infonautics shareholders.
The completion of the transaction is subject to certain conditions
including shareholder approval and no assurance can be given that the new
company will be formed.
Even though there can be no assurance that the agreement will be
finalized, the Company will incur costs and fees while working to complete the
transaction and such costs will be expensed as incurred.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1998, AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues were $5,977,000 for the three months ended June 30,
1999, and $3,582,000 for the three months ended June 30, 1998. Total revenues
were $11,208,000 for the six months ended June 30, 1999 compared to $6,165,000
for the six months ended June 30, 1998.
Educational revenues accounted for $3,042,000 or 51% of revenue for the three
months ended June 30, 1999 and $1,462,000 or 41% of revenue for the three months
ended June 30, 1998. Total educational revenues were $5,747,000 for the six
months ended June 30, 1999 compared to $2,611,000 for the six months ended June
30, 1998. The Company had over 4,000 educational contracts at June 30, 1999,
approximately 3,200 at December 31, 1998 and 2,400 at June 30, 1998. The 4,000
contracts cover approximately 17,000 institutions.
End-user revenue accounted for $2,154,000 or 36% of revenue for the three months
ended June 30, 1999 and $1,138,000 or 32% of revenue for the three months ended
June 30, 1998. Total end-user revenues were $3,921,000 for the six months ended
June 30, 1999 compared to $2,178,000 for the six months ended June 30, 1998. The
Company had more than 85,000 subscribers at June 30, 1999 compared to
approximately 54,000 at June 30, 1998.
E-commerce online publishing (formerly content management and custom archive
services) revenue was $192,000 or 3% of revenue in the three months ended June
30, 1999, compared to $216,000, or 6% of revenue in the three months ended June
30, 1998. Content management and custom archive services revenue was generated
from primarily archive services. Revenue for the six months ended June 30, 1999
amounted to $415,000 as compared to $372,000 for the six months ended June 30,
1998. Revenue has increased as a result of the increase in the number of hosting
and archive customers. The Company had 15 content management and custom archive
customers at June 30, 1999 compared to 7 at June 30, 1998.
Extranet and intranet knowledge management services (IntelliBank) revenue was
$22,000, or less than 1% of revenue in the three months ended June 30, 1999,
compared to $648,000, or 18% of revenue for the three months ended June 30,
1998. Revenue was $137,000 and $831,000 for the six months ended June 30, 1999
and 1998 respectively. In the beginning of 1999, the Company announced that
Intellibank services would no longer be sold by the Company, and all existing
customer commitments would be serviced until the agreements expired. The Company
expects no material revenues from Intellibank services after the three months
ended June 30, 1999.
Company Sleuth revenues were $230,000, or 4% of revenues for the three months
ended June 30, 1999, and $370,000, or 3% of revenues for the six months ended
June 30, 1999. There were no Company Sleuth revenues for the three months or six
months ended June 30, 1998. All Company Sleuth revenues consist of advertising
revenues, approximately half of which comes from barter transactions from other
internet content providers.
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Other revenue was $337,000, or 6% of revenues for the three months ended June
30, 1999, and $118,000, or 3% of revenues for the three months ended June 30,
1998. For the six months ended June 30, 1999, other revenue amounted to $618,000
as compared to $174,000 in the six months ended June 30, 1998. Other revenue
consists of international and reseller revenue. The increases in other revenue
are a result of international sales arrangements with Korea and Australia.
COST OF REVENUES. The principal elements of the Company's cost of revenues are
royalty and license fees paid to providers of content, hardware and software, as
well as communication costs associated with the delivery of the online services.
Cost of revenues was $1,819,000 for the three months ended June 30, 1999, as
compared to $1,051,000 for the three months ended June 30, 1998. Cost of
revenues as a percentage of revenue for the three months ended June 30, 1999 and
1998 was 30% and 29%, respectively. Cost of revenues were $3,528,000 and
$1,927,000 for the six months ended June 30, 1999 and 1998, respectively. As a
percentage of revenues, this amounted to 31% and 31%, respectively. The increase
in cost of revenues for each period primarily reflects costs incurred to provide
services to an increased number of users.
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 $298,000 for the three months ended June 30, 1999,
compared to $257,000 for the three months ended June 30, 1998. As a percentage
of revenue, customer support expenses for the second quarter were 5% in 1999 and
7% in 1998. Customer support expenses were $570,000 for the six months ended
June 30, 1999, compared to $482,000 for the six months ended June 30, 1998. The
absolute dollar increase in 1999 resulted primarily from the continuing need for
the Company to provide additional support to its growing customer base. The
customer support expenses, as a percentage of revenues, declined in 1999, 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 expenses and data conversion costs as
well as the design, programming, testing, documentation and support of the
Company's new and existing software, services and databases. To date, all of the
Company's costs for technical operations and development have been expensed as
incurred. Technical development and operation expenses were $1,970,000 or 33% of
total revenues for the three months ended June 30, 1999, compared to $2,052,000
or 57% of total revenues for the three months ended June 30, 1998. For the six
months ended June 30, 1999 and 1998, the technical development and operations
costs were $4,187,000 and $3,836,000, or 37% and 62% of total revenues,
respectively. The absolute dollar change in technical operations and development
expenses was largely due to the Company's shifting of resources, with a greater
focus on product development and enhancements for the six month comparison,
while for the second quarter of 1999 alone, this increase was offset by a
decrease in costs to support Intellibank revenues and by general cost
containment efforts. The level of technical operations and development expenses
may 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
a 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.
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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 costs are expensed
when incurred and revenue from sales is deferred over the term of the
subscription or contract. Sales and marketing expenses were $3,021,000 for the
three months ended June 30, 1999, compared to $3,932,000 for the three months
ended June 30, 1998, representing a 23% decrease. As a percentage of revenue,
sales and marketing costs were 51% and 110% for the three months ended June 30,
1999 and 1998, respectively. Sales and marketing costs were $5,825,000 and
$6,893,000, or 52% and 112% of revenue, for the six months ended June 30, 1999
and 1998 respectively. The principal reasons for the decrease in absolute
dollars was the Company's decision to decrease marketing efforts for certain
products and services. The Company does not anticipate significantly increasing
its sales force during 1999.
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 $818,000 for the three months ended
June 30, 1999, compared to $1,101,000 for the three months ended June 30, 1998.
For the six months ended June 30, 1999, general and administrative expenses were
$1,569,000, as compared to $2,618,000 for the six months ended June 30, 1998.
Included in the six months ended June 30, 1998, was a one time charge of
approximately $500,000 for separation and related costs in connection with the
resignation of the former Chairman of the Board, Chief Executive Officer and
founder of the Company. Additionally, the Company has reduced expenses related
to headcount, investor relations, and other professional fees during 1999. The
Company expects to incur significant professional fees in association with the
work being performed on the Bell & Howell agreement. Such costs will be expensed
as incurred.
INTEREST INCOME (EXPENSE), NET. The Company incurred net interest expense of
$412,000 in the three months ended June 30, 1999, as compared to net interest
income of $36,000 in the three months ended June 30, 1998. Approximately
$172,000 of interest expense was incurred in the current quarter for the
remaining amount of the discount for the issuance of convertible debt below
market. Approximately $186,000 of interest expense was incurred for the
amortization of the warrant valuation and 7% interest on the convertible debt.
The remaining interest of $54,000 was for leases and the accounts receivable
financing. The Company incurred net interest expense of $699,000 in the six
months ended June 30, 1999, compared to net interest income of $145,000 for the
six months ended June 30, 1998. This is due to the decrease in the amount of
investments and the additional debt and related charges which were incurred in
1999. Interest expense in the third quarter of 1999 is expected to decrease as
the discount for the issuance of convertible debt below market is fully
amortized. The Company will continue to incur interest expense for the interest
incurred on the convertible debt, the amortization of the warrant valuation, the
utilization of the accounts receivable purchase line and leases.
INCOME TAXES. The Company has incurred net operating losses since inception
and accordingly, has not recorded an income tax benefit for these losses.
LIQUIDITY AND CAPITAL RESOURCES
To date the Company has funded its operations and capital requirements through
proceeds from the private sale of equity securities, its initial public
offering, proceeds from the issuance of preferred stock and, to a lesser extent,
operating leases. In February 1999, the Company also raised funds through
issuance of convertible debt. During the second quarter, the Company has
utilized the accounts receivable purchase agreement which it entered into in
May 1999 to fund cash needs. The Company intends to continue to utilize this
arrangement to minimize the effects of seasonality on the Company's cash
collections during July and August 1999. For the next twelve months, the
Company
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believes it will be able to fund its operations through existing cash and cash
generated through operations, including utilizing proceeds from the accounts
receivable purchase agreement.
The Company had cash, cash equivalents and investments of approximately
$1,577,000 at June 30, 1999, as compared to $3,268,000 at December 31, 1998, a
decrease of $1,691,000. The cash balance was fully funded by the related notes
payable. The Company raised $3.0 million in February 1999 through convertible
debt, to supplement its working capital. The Company monitors its cash and
investment balances regularly and invests excess funds in short-term money
market funds.
Working capital requirements are financed through a combination of internally
generated cash flow from operating activities, which fluctuate significantly
during the year due to the seasonal nature of the Company's business, managing
terms with vendors and equity or accounts receivable financing.
The Company's liquidity and capital resources may be affected by a number of
factors and risks (many of which are beyond the control of the Company),
including, but not limited to, the availability of cash flows from operations,
managing terms with vendors, and the availability of equity or working capital,
each of which may fluctuate from time to time and are subject to change on short
notice. If any such sources of liquidity were unavailable or substantially
reduced, the Company would explore other sources of liquidity. There can be no
assurance other sources of liquidity would be available or available on terms
acceptable to the Company. The rate of use by the Company of its cash resources
will depend, however, on numerous factors, including but not limited to the rate
of increases in end-user and educational subscribers and online publishing
contracts. 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.
The Company has recently decreased certain expenses, and may not be able to
significantly decrease expenses further. Additionally, the Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. However, any projection of future cash needs and cash flows is
subject to substantial uncertainty. If the cash and cash equivalents balance and
cash generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional debt or equity
securities, or seek other financing. The sale of additional equity or debt
securities, if available, could result in dilution to the Company's shareholders
and an increase in interest expense. There can be no assurance, however, that
the Company will be successful in such efforts or that additional funds will be
available on acceptable terms, if at all. There can be no assurance that the
bank will purchase any receivables offered under the accounts receivable
purchase agreement. In the event the Company does not meet its expected cash
flows and the efforts to raise financing are unsuccessful, this would have a
material adverse effect on the Company.
The Company used cash in operations of approximately $5,624,000 for the six
months ended June 30, 1999 compared with $8,841,000 for the comparable period in
1998. This decrease in cash used is primarily a result of a decrease in net loss
of approximately $4.3 million.
Net cash used in investing activities was $236,000 for the six months ended June
30, 1999. This compares to cash provided by investing activities of $8,136,000
for the six months ended June 30, 1998. The cash provided in the six months
ended June 30, 1998 is a result of investments maturing during the year which
were not reinvested. Net cash used for capital expenditures was $236,000 and
$766,000, respectively, for the six months ended June 30, 1999 and 1998. There
was no cash provided by or used in investment purchases and proceeds for the six
months ended June 30, 1999. Net cash provided by investment purchases and
proceeds was $8,902,000, net, for the six months ended June 30, 1998.
The Company's principal commitments at June 30, 1999 consisted of commitments
under
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royalty licenses and other agreements, as well as obligations under
operating and capital leases. In connection with the America Online, Inc. (AOL)
Agreement entered into during March 1998, the Company has agreed to pay AOL $4.0
million in placement fees. The Company paid $1.2 million to AOL in 1998. In
March 1999, AOL and the Company amended the AOL Agreement to revise the payment
schedule for placement fees. The Company paid $223,333 at execution of the
amendment. The Company's revised payment terms require monthly payments of
$223,333 through July 1999, and $500,000 due in August 1999, $500,000 in
November 1999, and $500,000 due in February 2000. Included in accrued
liabilities is $249,000 as of June 30, 1999. In addition to the placement fees,
AOL will receive additional fees based on a sliding scale of end-user revenues.
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. Additionally, the Company committed to
invest $280,000 in a former employees new company as follows: $30,000 in July
1999, $50,000 in August 1999, $80,000 in September 1999, and $120,000 in October
1999 in return for an equity interest in the former employees new company.
Capital expenditures have been, and future expenditures are anticipated to be,
primarily for facilities and equipment to support the expansion of the Company's
operations and systems. The Company expects that its capital expenditures will
increase as the number of Electric Library subscribers and archive hosting
contracts increase. Although the Company anticipates that its planned purchases
of capital equipment and leasehold improvements will require additional
expenditures of less than $250,000 for 1999, there can be no guarantee the
Company will obtain future lease financing. The Company does not anticipate that
any Year 2000 issues will require any significant expenditures.
Net cash provided by financing activities was $4,169,000 in the six months ended
June 30, 1999, compared to cash used in financing activities of $120,000 in the
six months ended June 30, 1998. In February 1999, the Company raised an
additional $3 million through the issuance of convertible debt. In May 1999, the
company entered a receivable purchase agreement with a bank which provided a net
amount of $1.5 million to the Company.
At June 30, 1999, the Company had available cash, cash equivalents and
investments of approximately $1,577,000. The Company has a working capital
deficiency of approximately $6,383,000. This working capital deficiency includes
deferred revenue of $9,684,000. The Company will change its planned expenditures
or take additional cost cutting measures, if its expected rate of revenue and
subscriber growth is not achieved. If the cash and cash equivalents balance and
cash generated by operations and utilization of the accounts receivable purchase
line is insufficient to satisfy the Company's liquidity requirements, the
Company may be required to sell additional debt or equity securities. The sale
of additional equity or debt securities, if available, could result in dilution
to the Company's shareholders and an increase in interest expense. There can be
no assurance, however, that the Company will be successful in such efforts or
that additional funds will be available on acceptable terms, if at all. In the
event the Company does not meet its expected cash flows and the efforts to raise
financing are unsuccessful this would have a material adverse effect on the
Company.
YEAR 2000 COMPLIANCE
The Year 2000 problem arises because many currently installed computer systems
and software programs accept only two-digit (rather than four-digit) entries to
define the applicable year and as a result are not able to distinguish 21st
century dates from 20th century dates. Commencing in the year 2000, this could
result in a systems failure or miscalculations causing disruptions of
operations, including, among other things, an inability to provide services,
process transactions, send invoices or engage in similar normal business
activities. The Company's review of its Year 2000 compliance covers the
information technology systems used in the Company's operations ("IT Systems"),
the Company's non-IT Systems, such as building security, voice mail and other
systems and
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the computer hardware and software systems used by the Company's
customers who use the Company's products and services ("Products"). The
Company's Year 2000 compliance effort has already covered or will cover the
following phases: (i) identification of all Products, IT Systems, and non-IT
Systems; (ii) identification of and communication with the Company's significant
suppliers, customers, vendors and business partners whose failure to remedy
their own Year 2000 problems will affect the Company; (iii) assessment of repair
or replacement requirements; (iv) repair or replacement; (v) testing; (vi)
implementation; and (vii) creation of contingency plans in the event of Year
2000 failures. The project is being managed internally and the Company currently
plans to complete its Year 2000 compliance, and have contingency plans
developed, by the end of the third quarter of 1999, subject to the discussion
below.
The Company has completed testing of all current versions of its core products
and believes they are Year 2000 compliant, with the exceptions described below.
The Company will continue testing to ensure that upgrades and updates to the
products maintain compliance. The Company has obtained verification from
substantially all third party vendors that their products are compliant, and is
currently testing such compliance. Even so, the assessment of whether a system
or device in which a Product is embedded will operate correctly for an end-user
depends in large part on the Year 2000 compliance of the system or device's
other components, many of which are supplied by parties other than the Company.
The supplier of the Company's current financial and accounting software has
informed the Company that a fully Year 2000 compliant version of such software
is available. The Company is in the process of completing the implementation and
testing of such financial and accounting software on its IT Systems and
Products, and expects this testing and evaluation to be completed by September
1, 1999. The supplier of the Company's credit card processing services and
related software has made certain contractual representations to the Company
that the supplier will comply with all applicable Visa and MasterCard rules and
regulations as they relate to credit card processing and Year 2000 compliance.
Further, the Company relies, both domestically and internationally, upon various
vendors, governmental agencies, utility companies, telecommunications service
companies, delivery service companies and other service providers who are
outside of the Company's control. There is no assurance that such parties will
not suffer a Year 2000 business disruption, which could have a material adverse
effect on the Company's financial condition and results of operations.
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. The cost to date of
the Year 2000 compliance effort is approximately $250,000. The Company expects
to incur up to an additional $350,000 in Year 2000 compliance related costs
through the end of the year, which will include the cost of consultants. Most of
its current expenses to date have related to the opportunity cost of time spent
by employees of the Company evaluating prior and current versions of the
Products, purchases of equipment and Year 2000 compliance matters generally. At
this time, the Company has obtained verification from substantially all of its
third party vendors that their products are compliant. The Company does not
possess the information necessary to estimate the potential impact of Year 2000
compliance issues relating to its other IT-Systems, non-IT Systems, prior or
current versions of its Products, its suppliers, its vendors, its business
partners, its customers, and other parties. Such impact, including the effect of
a Year 2000 business disruption, could have a material adverse effect on the
Company's financial condition and results of operations.
The magnitude of the Company's Year 2000 problem (if any), the costs to complete
its Year 2000 program and the dates on which the Company believes it will be
Year 2000 compliant are based on management's best estimates and current
knowledge. These estimates were derived using numerous assumptions, including,
but not limited to, continued availability of resources and third party
compliance plans. However, there can be no assurance that these estimates will
be achieved and actual results could differ
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materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to identify
and correct all Year 2000 impacted areas, the availability and cost of
personnel, and the availability and cost of third party Year 2000 solutions.
The audit, analysis and assessment phase of the Company's Year 2000 compliance
effort is based on numerous assumptions, one of the most significant of which
has to do with the percentage of non-compliant systems and program code of all
systems and program code. The Year 2000 compliance effort assumes that the
percentage of non-compliant code will be consistent with general software
industry practices, and as such, the Company plans to have all core lines of
business systems compliant and contingency plans in place for all systems
(compliant as well as non-compliant) by the end of the third quarter of 1999.
The Company has revised its estimated compliance and contingency completion date
based in part on meeting with and discussing Year 2000 issues with its key third
party vendors later than originally expected. In addition, the Company spent
additional time establishing a suitable test environment for its Year 2000
compliance efforts. Finally, any significant differences between the assumptions
and actual percentage of non-compliant code will have an impact on the estimated
completion date and the costs of the Year 2000 compliance effort.
The Company believes that the most current versions of its Products are Year
2000 compliant, with the exception of its e-commerce online publishing sites.
The Company has successfully migrated an e-commerce online publishing site to a
Year 2000 compliant platform, but the migration of the remaining sites is still
to be completed. Currently, the Company expects to complete the migration of the
remaining e-commerce online publishing sites by the beginning of the fourth
quarter of 1999, and is dedicating resources to this project in order to meet
this date. However, the Company has also developed a contingency plan for the
remaining e-commerce online publishing sites in the event that they are not
migrated to a Year 2000 compliant platform by October 31, 1999. The Company
believes the cost to make the remaining e-commerce online publishing sites Year
2000 compliant, as well as to implement the contingency plan, if required, will
not require any material expenditures or dedication of resources.
ELECTRIC SCHOOLHOUSE
In February 1998, the Company entered into an agreement with Marvin I.
Weinberger, the former Chairman of the Board, Chief Executive Officer and
founder of the Company, pursuant to which he resigned as Chairman and Chief
Executive Officer of the Company to become the Chief Executive Officer of a
newly formed company called Electric Schoolhouse, LLC that will pursue the
Company's Electric Schoolhouse project. Performance of certain obligations under
the February 1998 agreement remains to be completed, and the Company continues
to attempt to finalize with Electric Schoolhouse, LLC performance of these
obligations. These obligations include, for example, the Company's 10% equity
interest in Electric Schoolhouse, LLC, which as a result of capital
restructuring by Electric Schoolhouse, LLC may result in the Company owning less
than a 10% equity interest, and the issuance by the Company of 125,000 shares of
Class A Common Stock to Mr. Weinberger. In addition, under the February 1998
agreement, Electric Schoolhouse, LLC is obligated to repay the Company for
certain expenses and costs. The Company is continuing to pursue collection of
these amounts, repayment of which was originally due on September 30, 1998 under
the February 1998 agreement and remains outstanding. The Company has expensed as
bad debt the balance due from Electric Schoolhouse, LLC, approximately $172,000
which was owed to the Company.
SEASONALITY
The Company experiences certain elements of seasonality related to the annual
school terms. A significant number of schools align their payments for the start
of school timeframe. As a result, the Company expects seasonally strong cash
collections in the third and fourth quarters. Additionally, new sales
commitments, or bookings, tend to be
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slower when schools are not in session, primarily during the summer months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On February 11, 1999, the Company entered into a Securities Purchase
Agreement with RGC International Investors, LDC ("RGC") under which it agreed to
issue convertible debentures in the amount of $3,000,000 and warrants to
purchase 522,449 shares of Class A Common Stock, no par value per share, of the
Company. Additionally, on February 11, 1999, the Company repurchased 283 shares
of Series A Preferred Stock from RGC, at a purchase price of $333,358, which
were previously issued to RGC on July 22, 1998. The Company and RGC have agreed
not to engage in additional financing under the July 1998 agreement.
The debentures bear interest at a rate of 7% per annum commencing on
February 11, 1999 and mature on August 11, 2000. The debentures became
convertible after 90 days from the closing date into that number of shares of
Class A Common Stock of the Company equal to the principal amount of the
debentures to be converted divided by $4.13, subject to adjustment pursuant to
the terms of the debentures.
The warrants may be exercised at any time during the five year period
following their issuance at an exercise price of $5.97 per share, which is equal
to 130% of the closing bid price of the Company's Common Stock on February 10,
1999. The Company has registered under the Securities Act of 1933, as amended,
the resale of the Common Stock to be issued upon conversion of the debentures or
exercise of the warrants.
Item 5. Other Information
Effective January 31, 1999, the Company and Israel J. Melman, a
director of the Company, mutually agreed to terminate his consulting agreement
with the Company. The consulting agreement with Mr. Melman called for him to
provide consulting services to the Company for a monthly consulting fee of
$3,000. The consulting agreement was subsequently amended to provide for payment
of the consulting fee in Company stock in lieu of cash. Upon the termination of
Mr. Melman's consulting agreement, the Company paid Mr. Melman 3,918 shares of
Class A Common Stock for the final six months of the consulting agreement.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
10.1 - Amendment to Employment Agreement between Joshua Kopelman
and Infonautics, Inc. dated June 17, 1999.
10.2 - Amendment to 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).
27.0 - Financial Data Schedule
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(b) Reports on Form 8-K:
On June 1, 1999, the Registrant filed with the Securities and Exchange
Commission a current report on Form 8-K reporting that at the Company's annual
meeting of shareholders held on May 27, 1999, all the nominees for election as
directors as set forth in the Proxy Statement dated April 12, 1999 were elected
with the exception of Marvin I. Weinberger. On May 26, 1999, Mr. Weinberger
resigned from the board of directors of the Company and, prior to the annual
meeting, the board of directors of the Company reduced the size of the board by
one member to a total of seven members.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFONAUTICS, INC.
Date: August 13, 1999 /s/ David Van Riper Morris
----------------------------
David Van Riper Morris
Chief Executive Officer
Date: August 13, 1999 /s/ Federica F. O'Brien
----------------------------
Federica F. O'Brien
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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Exhibit 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment To Employment Agreement (the "Amendment") is an
amendment to the Employment Agreement dated January 1, 1993 (the "Employment
Agreement") by and between Infonautics, Inc., a Pennsylvania corporation
formerly known as Infonautics Corporation (the "Company" or the "Corporation")
and Joshua Kopelman (the "Employee"). This Amendment is made as of this 17 day
of June 1999.
WHEREAS, the Board of Directors of the Company (the "Board")
has previously determined that it is in the best interests of the Company and
its shareholders to assure that the Company will have the continued dedication
of the Employee and to provide the Employee with certain compensation and
benefits that meet the expectations of Employee and are competitive with those
of employees comparably engaged at other corporations.
WHEREAS, to accomplish these objectives, the Compensation
Committee of the Board has authorized the Corporation to enter into this
Amendment.
NOW, THEREFORE, the parties hereto intending to be legally
bound, and in exchange for valuable and sufficient consideration, agree as
follows:
1. Paragraph 7 of the Employment Agreement is hereby
amended and restated in its entirety to read as follows:
"7. NON-DISCLOSURE
(a) At all times after the date
hereof, including after termination of this Agreement for any
reason, Employee shall not, except with the express prior written
consent of the President of the Corporation, directly or
indirectly:
(1) communicate, disclose or
divulge to any Person, or use for his own benefit, any
confidential knowledge or confidential information
(collectively referred to as "Information") which he may have
acquired, pursuant to his employment hereunder, concerning the
conduct and details of the business of Corporation or its
shareholders, including, but not limited to, names of
customers or prospective customers, suppliers, trade secrets,
techniques, equipment, materials, pricing, royalties, costs,
marketing methods, operations, policies, prospects and
financial condition to the extent the Information is
confidential to the Corporation. The foregoing restrictions on
disclosure and use of Information do not extend to any item of
Information which is
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(a) publicly known at the time of delivery under this
Agreement, (b) is lawfully received by Employee from a third
party without violation of any obligation of confidentiality
to the Corporation, (c) is disclosed by the Corporation to a
third party without restrictions on its disclosure, or (d)
becomes publicly known through no fault of the Employee;
(2) solicit or induce any
employee, consultant or other agent of the Corporation or any
affiliate of the Corporation (a "Corporate Employee") to leave
the employ of the Corporation or otherwise terminate their
relationship with the Corporation, without prior consultation
with, and written approval from, the President of the
Corporation. So long as Employee is in compliance with the
foregoing non-solicitation provision of this Section 7(a)(2),
such non-solicitation provision shall not apply if a Corporate
Employee initiates contact with Employee. Furthermore,
notwithstanding the non-solicitation provision of this Section
7(a)(2), the Corporation acknowledges that Employee may,
without prior consultation with or written approval from the
President of the Corporation, solicit or induce not more than
four (4) Corporate Employees (consisting of two (2) technical
people, one (1) administrative person , and one (1)
non-technical or other administrative person, but in no event
including any current officer of the Corporation) to leave the
employ of the Corporation or otherwise terminate their
relationship with the Corporation;
(3) for a period of 2 years
after termination, make or endorse any statement which
criticizes, denigrates or otherwise reflects adversely on the
Corporation.
(b) If any portion of Section 7(a) or the application
thereof is deemed invalid or unenforceable, then the other portions of
Section 7(a), and of all other terms of this Agreement, or the
application thereof shall not be affected thereby and shall be given
full force and effect without regard to the invalid or unenforceable
portions."
2. Paragraph 8 of the Employment Agreement is hereby
amended and restated in its entirety to read as follows:
"8. TERMINATION.
8.1 The Board of Directors of the Company shall have
the right, at any time upon prior written Notice of
Termination satisfying the requirements of Section
8.5(c), to terminate Employee's employment, including
termination for just cause, but any termination other
than for just cause
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shall not prejudice Employee's right to compensation
or other benefits under this Agreement. For purposes
of this Agreement, "termination for just cause" shall
mean termination for personal dishonesty, willful
misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform
stated duties, willful violation of any law, rule or
regulation affecting the Company or final
cease-and-desist order to be enforced by any
regulatory agency with jurisdiction over the Company
or any of its affiliates or material breach of any
provision of this Agreement.
8.2 In the event employment is terminated for just
cause pursuant to Section 8.1, Employee shall have no
right to compensation or other benefits for any
period after such date of termination. In the event
employment is terminated for just cause, Employee
shall have the right, at his option, to appear at the
next scheduled regular or special meeting of the
Board of Directors of the Company at which a quorum
of the Board is present so that the Board may hear
argument from the Employee or his counsel or both and
reconsider the termination and the basis of
termination. The Board shall deliver to Employee its
determination in writing within seven business days
after such meeting, failing which, Employee's
termination shall be deemed to have been revoked. If
the Board timely delivers its written determination,
this procedure shall not prejudice the rights of
either party under Section 11 (Arbitration).
8.3. Employee shall have the right, upon prior
written Notice of Termination of not less than
fifteen (15) days satisfying the requirements of
Section 8.5(c) hereof, to terminate his employment
hereunder, but in such event, Employee shall have no
right after the date of termination to compensation
or other benefits. If Employee provides a Notice of
Termination for good reason, as defined, the date of
termination shall be the date on which Notice of
Termination is given.
8.4 In the event that Employee is terminated in a
manner which violates the provisions of Section 8.1,
as determined by arbitration in accordance with
Section 11, Employee shall be entitled to
reimbursement for all reasonable costs, including
attorneys' fees, in challenging such termination.
Such reimbursement shall be in addition to all rights
which Employee is otherwise entitled under this
Agreement. Notwithstanding the above, Employee shall
be entitled to indemnification from the Company to
the full extent contemplated by the bylaws of the
Company and under any written indemnification
agreement between the parties. In addition, if
Employee serves as a director, officer or employee of
any
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affiliate of the Company, he shall be entitled to
indemnification and exculpation from liability to the
full extent permitted by applicable law, and the
Company agrees to cause all necessary provisions to
be included in, or changes made to, the Articles of
Incorporation or by-laws of such affiliates required
to accomplish the foregoing.
8.5(a). Employee may terminate his employment
hereunder for good reason. For purposes of this
Agreement, "good reason" shall mean:
(i) A failure by the Company to comply with
any material provision of this Agreement,
which failure has not been cured within ten
(10) days after written notice of such
noncompliance has been given by Employee to
the Company; or
(ii) subsequent to a change in control of
the Company and without Employee's express
written consent:
(1) the assignment to Employee of
any duties inconsistent with
Employee's positions, duties,
responsibilities and status with the
Company; or
(2) a change in Employee's
reporting responsibilities,
titles or offices as in effect
immediately prior to a change in
control of the Company; or
(3) any removal of Employee from, or
any failure to re-elect Employee to,
any of such positions, except in
connection with a termination of
employment for just cause, death,
retirement or pursuant to Section
8.1; or
(4) a reduction by the
Company in Employee's annual salary
as in effect immediately prior to a
change in control or as the same may
be increased from time to time; or
(5) the failure of the Company to
continue in effect any bonus,
benefit or compensation plan, life
insurance plan, health and accident
plan or disability plan in which
Employee is participating at the
time of a change in control of the
Company, or the taking of any action
by the Company which would adversely
affect Employee's participation in
or materially reduce Employee's
benefits under any such plans; or
(6) any substantial change in
location of the Company's office or
place where Employee is required to
render services for the Company; or
4
<PAGE>
(iii) any purported termination of
Employee's employment which is not effected
pursuant to a Notice of Termination
satisfying the requirements of paragraph (c)
hereof (and for purposes of this Agreement
no such purported termination shall be
effective).
8.5(b). For purposes of this Agreement, a "change in
control of the Company" shall mean a change in
control of a nature that would be required to be
reported in response to Item 6(e) of Regulation 14A
promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") whether or not
the Company is then subject to such reporting
requirement; provided that, without limitation, such
a change in control shall be deemed to have occurred
if (I) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act in effect on the
date first written above), other than the Company or
any "person" who on the date hereof is a director or
officer of the Company, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined
voting power of the Company's then outstanding
securities, or (ii) during any period of two
consecutive years during the terms of this Agreement,
individuals who at the beginning of such period
constituted the Board of Directors of the Company
cease for any reason to constitute at least a
majority thereof, unless the election of each
director who was not a director at the beginning of
such period has been approved in advance by directors
representing at least two-thirds of the directors
then in office who were directors at the beginning of
the period.
8.5(c). Any termination of Employee's employment by
the Company or by Employee shall be communicated by
written Notice of Termination to the other party
hereto only after the expiration of any applicable
grace periods which may be set forth elsewhere in
this Agreement. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice
which shall (i) indicate the specific termination
provision in the Agreement relied upon; (ii) set
forth in reasonable detail the facts and
circumstances claimed to provide a basis for
termination of Employee's employment under the
provisions so indicated; (iii) specify a date of
termination which shall not be less than fifteen (15)
days after such Notice of Termination is given,
except in the case of the Company's termination of
Employee's employment for just cause pursuant to
Section 8.1, in which case the Notice of Termination
may specify a termination date as of
5
<PAGE>
the date such Notice of Termination is given; and
(iv) be given in the manner specified in Section 9.
8.5(d). If Employee terminates his Employment for
good reason pursuant to Subpart (ii) of Section
8.5(a) hereof, such employment termination may
specify a termination date as of the date such Notice
of Termination is given, provided such Notice is
given in the manner specified in Section 9."
3. The Company and Employee agree that the Royalty Agreement
entered into as of January 1, 1993 between Infonautics Corporation (now known as
Infonautics, Inc.) and Joshua Kopelman (the "Royalty Agreement") is revoked in
its entirety and canceled as of the date of this Amendment. Employee
acknowledges and agrees that the Company owes him no other monies under the
terms of the Royalty Agreement.
4. In consideration of the above modifications to the
Employment Agreement and the revocation of the Royalty Agreement, the Company
paid to Employee, on April 15, 1999, the total sum of Twenty Thousand Dollars
($20,000.00), which sum represented payment of (1) Fifteen Thousand Dollars
($15,000.00) for Employee's 1998 bonus; and (b) Five Thousand Dollars
($5,000.00) as an advance on Employee's 1999 bonus, which would not otherwise be
due and payable until on or after January 1, 2000.
5. In further consideration of the modifications to the
Employment Agreement and revocation of the Royalty Agreement, the Company shall
make a payment or investment on the following terms:
(a) By June 18, 1999, the Company shall provide written notice
to Employee of the Company's election to make the payment specified in Section
5(b) below or to make the investment specified in Section 5(c) below. In the
event the Company fails to provide the notice specified in the previous
sentence, the Company shall be deemed to have provided the required notice to
make the investment specified in Section 5(c). The Company is obligated to make
only the payment specified in Section 5(b) or the investment specified in
Section 5(c), but not both. The Company shall have no obligation to make the
payment or the investment specified in this Section 5 in the event that Employee
is terminated for just cause by the Company.
(b) If the Company so elects, the Company will pay Employee a
total lump sum of One Hundred and Sixty Thousand Dollars ($160,000.00), which
sum represents payment of wages from which all required withholdings will be
made. Payment of such $160,000.00 will be made by the Company to Employee on the
following terms:
(i) If Company has under Section 5(a) provided
written notice to Employee of the Company's election to make
the payment specified in this Section 5(b) by
6
<PAGE>
June 18, 1999, then the Company shall make such payment on the earlier of (x)
the Company's receipt of at least $1 million cash as a result of equity, debt or
alternative financing, or (y) $20,000.00 on July 1, 1999, $20,000.00 on August
1, 1999, $60,000.00 on September 1, 1999, and $60,000 on October 1, 1999; or
(ii) If Company has under Section 5(a) provided
written notice to Employee of the Company's election to make
the investment specified in Section 5(c) and Newco (as defined below) has not
been formed by Employee by July 1, 1999 (or Newco's formation, existence, and
validity has not been confirmed to the Company to its reasonable satisfaction)
as provided for in Section 5(c), then the Company shall make the payment
specified in this Section 5(b) on the earlier of (x) the Company's receipt of at
least $1 million cash as a result of equity, debt or alternative financing, or
(y) $20,000.00 on August 1, 1999, $20,000.00 on September 1, 1999, $60,000.00 on
October 1, 1999, and $60,000 on November 1, 1999.
(c) If the Company so elects and subject to the provisions of
Section 5(b)(ii) above, if Employee has formed a new company by July 1, 1999 to
pursue the business plan identified to and discussed with the Board on May 27,
1999 ("Newco") and Employee has provided the Company with confirmation to its
reasonable satisfaction of the formation, existence, and validity of Newco, the
Company will invest a total sum of Two Hundred Eighty Thousand Dollars
($280,000.00) in Newco in exchange for a ten percent (10%) equity ownership
interest in Newco. The Company's investment in Newco shall be made on the
earlier of (x) the Company's receipt of at least $1 million cash as a result of
equity, debt or alternative financing, or (y) $30,000.00 on July 1, 1999,
$50,000.00 on August 1, 1999, $80,000.00 on September 1, 1999, and $120,000.00
on October 1, 1999.
6. If the Company makes the investment in Newco as provided
for in Section 5(c) above, the Company shall have the right to nominate one
person to serve on the Board of Directors (or its equivalent should Newco be a
legal entity with other than a board of directors) of Newco. Employee shall vote
to approve the Company's nominee to serve on the Board of Directors of Newco and
shall take all appropriate and required steps with Newco and its Board of
Directors to secure the approval of the Company's nominee to serve on the Board
of Directors of Newco for a minimum term of one (1) year. However, Employee
reserves the right to approve in advance the Company's nominee for the Board of
Directors of Newco, such approval not to be unreasonably withheld.
7. If Employee terminates his employment with Company prior to
July 15, 1999, Company and Employee (or Newco) shall enter into a separate
consulting agreement for the personal services of Employee to provide up to
seven (7) days of consulting to Company during each of the two (2) months (where
months consist of thirty (30) consecutive calendar days) immediately following
Employee's termination of employment with Company, up to five (5) days of
consulting to the Company during each of the next two (2) months, and up to
three
7
<PAGE>
(3) days of consulting to the Company during each of the next two (2) months.
Infonautics will pay Employee (or Newco, as the case may be) $1,000 per day for
such consulting services of Employee. Payment shall be made net thirty (30) days
upon Company's receipt of Employee's monthly invoice for such consulting
services. Both parties shall have the option to terminate (or reduce the time
commitment) for the consulting agreement any time after September 1, 1999 by
their mutual written agreement.
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, have executed this Amendment as of the date first written above.
/s/ Joshua Kopelman
JOSHUA KOPELMAN
/s/ Van Morris
Infonautics, Inc.
By: Van Morris
Title: President
<PAGE>
Exhibit 10.2
-Infonautics, Inc. letterhead-
June 22, 1999
VIA FAX (215) 619-9521 AND OVERNIGHT CARRIER
Joel F. Sussman
Chief Financial Officer
CDnow, Inc.
1005 Virginia Drive
Fort Washington, PA 19034
Dear Joel:
As you know, Infonautics acknowledged in a letter dated February 2, 1999, a copy
of which is attached hereto, that it owed N2K the amount of $405,553.45 as of
December 31, 1998 under the Agreement of Termination and Assignment dated
October 30, 1992 (the "Contract")*. Intending to be legally bound hereby,
CDnow, Inc. and Infonautics agree to amend the payment terms of the Contract as
set forth in this letter and Infonautics has agreed to pay the total amount owed
under the Contract as of December 31, 1998 and all amounts which become due
under the Contract thereafter, to CDnow, Inc., as the successor-in-interest to
N2K, Inc., in accordance with the following schedule:
(1) Infonautics issued a check dated April 9, 1999 to CDnow in the
amount of $100,000. CDnow acknowledges receipt of this check
and payment of this $100,000 from Infonautics.
(2) Infonautics agrees to a monthly payment stream of $50,000 per
month, to be paid on the 15th of every successive month,
starting May 15th. CDnow acknowledges receipt of and payment
by Infonautics of $50,000 for May 15, 1999.
(3) In the event that Infonautics has a strategic investment or
change of control, all amounts owed to CDnow through the date
of the closing of such "strategic event", including without
limitation any portion of the $405,537.45 which has not been
paid (but not beyond) shall be due within 15 days of closure
of that "strategic event." A strategic event is defined for
purposes of this letter only as either a transfer of 40
percent or more of Infonautics common stock or an investment
of $5 million or more in Infonautics.
- --------
* The Contract was originally made between Telebase Systems, Inc. and two
individuals, Marvin I. Weinberger and Lawrence A. Husick. Each individual
subsequently assigned all of his rights under the Contract to Infonautics
Corporation (since renamed Infonautics, Inc.). Telebase Systems, Inc.
subsequently assigned all of its rights under the Contract to N2K, Inc. CDnow,
Inc. is the successor-in-interest to N2K, Inc. under the Contract.
<PAGE>
Joel F. Sussman
June 22, 1999
Page Two
(4) All outstanding receivables accrued based on the Contract
through October 15th (including without limitation amounts
owed for the quarter ended June 30, 1999) shall become due and
payable on that date.
(5) Infonautics will pay amounts which become due after October
15, 1999 in a timely fashion as required by the terms of the
Contract.
(6) If there is no overdue receivable as of 12/31/99, there is no
interest due on the above payments. However, if all
outstanding amounts owed to CDnow (including without
limitation amounts owed for the quarter ended September 30,
1999) are not paid in full by 12/31/99, interest at the rate
of 10 percent per annum shall become immediately due and
payable and shall continue thereafter to accrue on all such
amounts which were overdue at such time (or which become
overdue in the future), including without limitation, each of
the four quarterly amounts set forth in the attached February
2, 1999 letter. On each overdue amount, this interest shall
accrue from the date such amount first became overdue until
the date such amount was, or is, paid in full. For purposes of
this letter, overdue is defined as not paid within thirty (30)
days after the original due date. In the event that there is
an overdue balance after 12/15/99, CDnow will notify
Infonautics of such at least 3 working days prior to 12/31/99.
(7) In the event any of the above payments are not made when due,
all amounts owed to date, including without limitation any
portion of the $405,533.45 which has not been paid, shall
become immediately due and payable plus interest on any
overdue amounts at the rate and as calculated under Paragraph
6 of this letter.
Sincerely yours,
/s/ Van Morris
Van Morris
President & CEO
ACKNOWLEDGED:
/s/ Joel F. Sussman
- ------------------------
CDnow, Inc.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,576,583
<SECURITIES> 0
<RECEIVABLES> 7,179,886
<ALLOWANCES> 90,340
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<CURRENT-ASSETS> 9,422,716
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