<PAGE>
As filed with the Securities and Exchange Commission on November 3, 1999
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
INFONAUTICS, INC.
------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee of $9,100 has been calculated on the basis of Exchange
Act Rule 0-11(c)(1) as one-fiftieth of one percent of $45.5 million, the
underlying value of the transaction received by registrant. The
underlying value of the transaction has been calculated pursuant to
Exchange Act Rule 0-11(a)(4) by (i) multiplying the approximate assumed
enterprise value of the entity in which the registrant is acquiring an
equity interest presented to the registrant's board of directors (or $87
million) (no book value for an entity to be formed being available) by
the percentage interest the registrant will acquire (or 27%), resulting
in a value of $23.5 million for the securities to be received by the
registrant in the transaction and (ii) adding to that amount $22.0
million, which is the cash to be received by the registrant in the
transaction.
(4) Proposed maximum aggregate value of transaction: $45.5 million
------------------------------------------------------------------------
(5) Total fee paid:
$9,100
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
INFONAUTICS, INC.
900 WEST VALLEY ROAD
SUITE 1000
WAYNE, PA 19087
November 3, 1999
Dear Shareholder:
We cordially invite you to attend a Special Meeting of the shareholders
of Infonautics, Inc. (the "Company") to be held on November 29, 1999 at 10:00
a.m., local time, at the Philadelphia Marriott West, Matson Ford at Front
Street, 111 Crawford Avenue, West Conshohocken, PA 19428.
At the Special Meeting we will ask you to consider and to vote on a
proposal (the "Combination Proposal") to approve the contribution of certain
assets and liabilities of the Company and its wholly-owned subsidiary,
Infonautics Corporation, to a new company to be formed with Bell & Howell
Information and Learning Company ("BHIL"), a subsidiary of Bell & Howell Company
("Bell & Howell") and the sale of certain other assets and liabilities of the
Company to BHIL. We anticipate that the new company will be a leading provider
of online research and reference services in the K-12 educational and public
library markets. The new company will be organized as a limited liability
company and will initially be headquartered in Wayne, Pennsylvania. The name of
the new entity will be BHW/INFO/EDCO.COM, LLC, and we have referred to it as
"EDCO".
If you approve the Combination Proposal, the Company will contribute to
EDCO the Company's assets and liabilities that relate directly to the sales,
marketing and distribution of the Company's Electric Library service to schools
and public libraries (the "Contributed Business"). In exchange, the Company will
receive, before taxes, $20 million in cash from EDCO, and a 27% equity interest
in EDCO. The Company will also sell to BHIL the Company's e-commerce online
publishing services business in exchange for $2 million in cash from BHIL
(payable on January 3, 2000). BHIL will contribute to EDCO $20 million in cash
(of which $5 million is payable at closing and $15 million is payable on January
3, 2000) and certain assets and liabilities that relate directly to the sales,
marketing and distribution of its ProQuest service to schools through the
secondary school level. In exchange, BHIL will receive a 73% equity interest in
EDCO. EDCO will also perform certain services for BHIL and the Company.
We believe that the cash payments the Company will receive in
connection with the proposed transactions will provide the necessary capital to
permit it to continue to expand its Infonautics Sleuth businesses and to develop
other new Internet information services. In addition, EDCO will provide
opportunities to develop new and innovative products and services and expanded
business opportunities in the growing school and library online markets. We
believe that, over time, EDCO will provide a significantly better return on the
assets from our Contributed Business than the Company could have achieved by
operating the Contributed Business independently.
The board of directors of the Company has unanimously approved the
Combination Proposal and has unanimously recommended that shareholders vote
"FOR" the Combination Proposal described in the accompanying Proxy Statement.
In addition, at the Special Meeting we will ask you to approve an
amendment to the Company's 1996 Equity Compensation Plan to increase the number
of authorized shares to 2,500,000. The 1996 Equity Compensation Plan helps the
Company to attract, retain and motivate employees and other key personnel and to
encourage them to devote their best efforts to the business and financial
success of the Company. The board of directors of the Company has approved and
recommends a vote "FOR" the amendment.
DETAILS ABOUT THE PROPOSED TRANSACTIONS AND THE 1996 EQUITY
COMPENSATION PLAN ARE SET FORTH IN THE ACCOMPANYING PROXY STATEMENT. YOU SHOULD
CONSIDER THE PROXY STATEMENT CAREFULLY.
<PAGE>
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
Special Meeting, please take the time to vote by completing and mailing the
enclosed proxy card to us. You may, of course, attend the Special Meeting and
vote in person, even if you have previously returned your proxy card.
Yours very truly,
-------------------------------------
David Van Riper Morris
President and Chief Executive Officer
This proxy statement is first being mailed to shareholders on
November 3, 1999.
2
<PAGE>
INFONAUTICS, INC.
900 West Valley Road, Suite 1000
Wayne, PA 19087
-------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
NOVEMBER 29, 1999
-------------------------------
TO THE SHAREHOLDERS OF
INFONAUTICS, INC.:
You are notified that a special meeting of shareholders (the "Special
Meeting") of Infonautics, Inc. (the "Company") will be held at the Philadelphia
Marriott West, Matson Ford at Front Street, 111 Crawford Avenue, West
Conshohocken, PA 19428 on November 29, 1999, at 10:00 a.m. local time, for
consideration of and action on the following matters:
1. To approve the proposal described in the accompanying Proxy
Statement providing for:
(i) the contribution to BHW/INFO/EDCO.COM, LLC
("EDCO"), a new company to be formed by the
Company and Bell & Howell Information and
Learning Company ("BHIL"), of the assets and
liabilities of the Company that relate
exclusively to the sales, marketing and
distribution of its Electric Library service
to schools and public libraries (but not
including certain assets and liabilities
that relate to the sales, marketing and
distribution of the Electric Library service
directly to end-users);
(ii) the sale to BHIL of the assets and
liabilities of the Company that relate
exclusively to the Company's online
publishing business; and
(iii) the grant by the Company to BHIL of an
option to purchase the assets and
liabilities of the Company that relate to
the sales, marketing and distribution of the
Company's Electric Library service directly
to end-users and the sale of those assets if
BHIL exercises the option; and
2. To adopt and approve an amendment to the Company's Amended and
Restated 1996 Equity Compensation Plan increasing the
authorized shares thereunder to 2,500,000; and
3. To transact such other business as may properly come before
the Special Meeting or any adjournments thereof.
Only shareholders of record as of the close of business on October 22,
1999 will be entitled to notice of the Special Meeting and to vote at the
Special Meeting and any adjournments thereof. A list of shareholders of the
Company as of the close of business on October 22, 1999 will be available for
inspection during normal business hours
<PAGE>
for ten days prior to the Special Meeting at the Company's executive offices at
900 West Valley Road, Suite 1000, Wayne, PA 19087.
By order of the board of directors,
Gerard J. Lewis, Jr.
Secretary
Wayne, Pennsylvania
November 3, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, WE URGE YOU TO
COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU DECIDE TO ATTEND THE MEETING, YOU MAY, IF YOU SO DESIRE, REVOKE THE
PROXY AND VOTE THE SHARES IN PERSON.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS...............1
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS.............................2
SUMMARY..................................................................6
THE SPECIAL MEETING......................................................6
Time and Place..................................................6
Matters to be Considered at the Special Meeting.................6
Vote Required...................................................6
Appraisal Rights................................................7
THE TRANSACTIONS.........................................................8
Overview........................................................8
The Formation of EDCO...........................................8
Sale of Online Publishing Business..............................9
Rights of EDCO to Purchase End-User Business....................9
Possible Future Transactions....................................9
The Closing.....................................................9
Reasons for the Transactions...................................10
Recommendation of the Company's Board of Directors.............10
Opinion of the Financial Advisor...............................10
THE MASTER TRANSACTION AGREEMENT........................................11
Governance.....................................................11
Conditions to the Transactions.................................11
Termination....................................................12
AMENDMENT OF 1996 EQUITY COMPENSATION PLAN..............................12
THE SPECIAL MEETING.....................................................13
Time and Place.................................................13
Matters to be Considered at the Special Meeting................13
Voting Rights; Votes Required for Approval.....................14
Voting by Directors and Executive Officers of the Company;
Voting Agreement...............................................14
Proxies........................................................15
PROPOSAL NO. 1 - THE COMBINATION PROPOSAL...............................16
THE TRANSACTIONS........................................................16
Background.....................................................16
Reasons for the Transaction....................................17
Recommendation of the Board of Directors of the Company........18
Opinion of Financial Advisor to the Company....................18
Certain Consequences of the Transactions.......................21
Accounting Treatment...........................................22
Federal Income Tax Consequences of the Transactions............22
No Appraisal Rights............................................22
</TABLE>
i
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<TABLE>
<S> <C>
Closing Date...................................................22
Regulatory Approvals...........................................22
THE PARTIES.............................................................24
Infonautics....................................................24
Bell & Howell..................................................24
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF THE COMPANY.................25
SELECTED FINANCIAL DATA - BELL & HOWELL INFORMATION AND
LEARNING K-12 BUSINESS..................................................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
BELL & HOWELL INFORMATION AND LEARNING K-12 BUSINESS....................33
Results of Operations..........................................33
Liquidity and Capital Resources................................34
BUSINESSES TO BE TRANSFERRED............................................35
Overview.......................................................35
Infonautics....................................................35
BHIL Contributed Business......................................36
CERTAIN RELATED PARTY TRANSACTIONS......................................38
INTEREST OF INFONAUTICS DIRECTORS AND
EXECUTIVE OFFICERS IN THE TRANSACTIONS..................................38
Positions of Certain Officers and Directors with EDCO..........38
Vesting of Options.............................................38
THE MASTER TRANSACTION AGREEMENT........................................39
Formation of EDCO and Contribution of Assets...................39
Sale of Online Publishing Business.............................39
Rights of EDCO to Purchase End-User Business...................39
Operations Following the Closing...............................39
The Capitalization Agreements..................................40
Services Agreements............................................41
License Agreements.............................................42
Noncompetition Agreements......................................43
Other Provisions of the Master Transaction Agreement...........44
Conditions to Closing..........................................46
Termination....................................................47
Post-Closing Agreements........................................48
Dissolution of the Alliance....................................49
THE LIMITED LIABILITY COMPANY AGREEMENT.................................49
The Management Board...........................................50
Capitalization of EDCO.........................................50
Distributions..................................................50
MANAGEMENT OF EDCO......................................................50
Executive Officers.............................................50
Management Board...............................................51
PROPOSAL NO. 2 - AMENDMENT OF 1996 EQUITY COMPENSATION PLAN.............52
Vote Required for Approval.....................................52
Description of the Plan.......................................52
</TABLE>
ii
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<TABLE>
<S> <C>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................................57
COMPENSATION OF EXECUTIVE OFFICERS......................................60
FUTURE SHAREHOLDER PROPOSALS............................................63
WHERE YOU CAN FIND MORE INFORMATION.....................................63
</TABLE>
iii
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement contains, in addition to historical
information, forward-looking statements concerning financial results and
other aspects of the operations of the Company and the proposed operations of
EDCO, the new company formed by the Company and Bell & Howell Information and
Learning Company. These statements involve risks and uncertainties and may be
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. The Company
does not intend to update these Cautionary Statements. You should understand
that the following important factors, as well as the factors described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (a
copy of which is attached to this Proxy Statement as Exhibit B) under the
heading "Risk Factors", could affect the future results of Infonautics and
EDCO and could cause those results to differ materially from those described
in the forward-looking statements:
- changes in Internet usage and online commerce;
- future environment for online research and reference services;
- competitive factors;
- liquidity needs;
- reliance on online and traditional advertising and business
alliances;
- changes in business relationships with other online content
providers;
- dependence on key personnel;
- possible effects of changes in government regulation;
- exposure to Year 2000 issues;
- possible system failures and capacity constraints; and
- changes in pricing policies.
1
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
<TABLE>
<S> <C> <C> <C>
Q: WHAT IS EDCO? Q: WHAT PART OF INFONAUTICS WILL
BE TRANSFERRED TO EDCO?
A: BHW/INFO/EDCO.COM, LLC (which we
have referred to as "EDCO") is a new A: Infonautics will transfer its school and public
company formed to operate the library Electric Library business and related
businesses to be contributed by Infonautics assets and liabilities to EDCO.
and Bell and Howell Information and
Learning Company (which we have referred
to as "BHIL"). It is likely that EDCO will
acquire other businesses in the future. The
initial owners of EDCO will be BHIL and
Infonautics.
Q: HOW WILL INFONAUTICS BENEFIT Q: WHAT BUSINESSES WILL
FROM THE PROPOSED INFONAUTICS KEEP AND NOT
TRANSACTIONS? CONTRIBUTE TO EDCO?
A: We believe the proposed transactions A: Infonautics will not contribute to EDCO its
represent a significant step in the Company's "Sleuth" services business including
strategic plan to enhance shareholder value. Company Sleuth, Sports Sleuth and Job
We believe that the cash payments the Sleuth and any future Sleuth-type services
Company will receive in connection with the that Infonautics may develop. In addition,
proposed transactions will provide the Infonautics will not contribute its business of
necessary capital to permit the Company to providing and distributing Electric Library
continue to expand the businesses it will directly to end-users via America Online and
retain and to develop new Internet products the Internet, for example.
and services. We believe that EDCO will provide
opportunities for significant cost savings and
expanded business opportunities, including
opportunities to develop new and innovative
products and services. We also believe that
EDCO will be a market leader in the K-12 and
public library markets and that, over time,
EDCO will provide a significantly better return
on the assets of our Contributed Business than
we could have achieved by operating that
business independently. To review the background
and reasons for the proposed transactions in
greater detail, see the discussion beginning
on page 10.
</TABLE>
2
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<TABLE>
<S> <C> <C> <C>
Q: WHAT DOES INFONAUTICS GET FOR
Q: WHAT OTHER ASSETS WILL ITS CONTRIBUTION TO EDCO AND
INFONAUTICS SELL? ITS SALE OF THE ONLINE
PUBLISHING BUSINESS?
A: Infonautics will also sell to BHIL its online
publishing business. In addition, Infonautics A: Infonautics will receive $22 million in cash
will grant to BHIL an option to purchase its (before taxes) and a 27% equity interest in
business of providing and distributing EDCO. If EDCO acquires other businesses
Electric Library directly to end-users. in the future, Infonautics' percentage interest
could be reduced.
Q: WHY IS INFONAUTICS RECEIVING Q: WHEN DO YOU EXPECT TO
27% OF EDCO WHILE BHIL COMPLETE THE PROPOSED
RECEIVES 73%? TRANSACTIONS?
A: The values of the businesses that each of the A: We are working toward completing the
companies will contribute to EDCO have proposed transactions as quickly as possible.
been carefully evaluated by Infonautics and The main condition that we must satisfy to
our independent financial advisor. The complete the proposed transactions is
ownership interests of Infonautics and BHIL approval by the shareholders of Infonautics.
in EDCO were adjusted to reflect the cash We must also satisfy certain other conditions
payment that Infonautics will receive. We that are summarized beginning on page 11.
believe that the equity interest Infonautics is We hope to complete the proposed
receiving in EDCO in exchange for the assets transactions on or before November 30,
and liabilities they are contributing is fair. 1999.
Infonautics has received an opinion from an
independent financial advisor that the
consideration to be received by Infonautics in
connection with the formation and capitalization
of EDCO is fair to Infonautics from a financial
point of view. This opinion is attached as
Exhibit D to this Proxy Statement.
</TABLE>
3
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<TABLE>
<S> <C> <C> <C>
Q: HOW WILL EDCO BE MANAGED? Q: WHAT ARE THE TAX
CONSEQUENCES TO ME OF THE
A: The day-to-day operations of EDCO will be PROPOSED TRANSACTIONS?
managed by its executive officers under the
supervision of its management board. The A: The proposed transactions will have no
management board will be made up of eight federal income tax consequences for the
representatives, six of whom will be shareholders of Infonautics.
designated by BHIL and two by Infonautics.
David Van Riper Morris will be responsible
for the smooth transition of the Contributed
Business into EDCO. Mr. Morris also will
remain as the President and Chief Executive
Officer and as a director of Infonautics.
The other executives of EDCO are listed under
"Management of EDCO" (page 50) The chairman of
the board of directors of Bell & Howell, James
P. Roemer, will become the chairman of the
management board of EDCO.
Q: WHAT VOTE IS REQUIRED IN ORDER Q: IF MY SHARES ARE HELD IN
TO APPROVE THE PROPOSED "STREET NAME" BY MY BROKER,
TRANSACTIONS? WILL MY BROKER VOTE MY SHARES
FOR ME?
A: At the Company's special meeting, the
proposed transactions will be approved if we A: Your broker will vote your shares ONLY if
receive the affirmative vote of a majority of you provide instructions on how to vote.
votes cast by holders of the Company's Class You should instruct your broker to vote your
A Common Stock and a majority of the votes shares, following the directions provided by
cast by holders of the Company's Class B your broker. Without instructions, your
Common Stock, voting as separate classes. shares WILL NOT be voted.
Shares of Class A Common Stock
beneficially owned by the holder of Class B
Common Stock are excluded from the shares
entitled to vote on the proposed transactions.
The only holder of the Company's Class B
Common Stock has already agreed to vote his
shares of Class B Common Stock "FOR" the
proposed transactions.
</TABLE>
4
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<TABLE>
<S> <C> <C> <C>
Q: SHOULD I SEND IN MY STOCK Q: WHEN WILL THE SPECIAL MEETING
CERTIFICATES? OCCUR?
A: No. Your stock certificates will not be A: The Special Meeting will take place at 10:00
affected by this transaction. You will a.m., local time, on November 29, 1999, at
continue to hold shares in Infonautics and, if the Philadelphia Marriott West, Matson Ford
the proposed transactions are completed, at Front Street, 111 Crawford Avenue, West
Infonautics will own an equity interest in Conshohocken, PA 19428. You may attend
EDCO. the Special Meeting and vote your shares in
person, rather than signing and mailing your
proxy card. In addition, you may take back your
proxy up to and including the day of the Special
Meeting by following the directions on page 15
and change your vote by either signing a new
proxy or attending the Special Meeting and
voting in person.
Q: WHAT DO I NEED TO DO NOW? Q: WHO CAN HELP ANSWER YOUR
QUESTIONS?
A: Just indicate on your proxy card how you
want to vote, and sign and mail it in the A: If you have more questions about the
enclosed return envelope AS SOON AS proposed transactions, you should contact:
POSSIBLE, so that your shares may be
represented at the Special Meeting. If you Infonautics, Inc.
sign and send in your proxy and do not 900 West Valley Road, Suite 1000
indicate how you want to vote, your proxy Wayne, PA 19087
will be counted as a vote FOR the proposed Attention: Gerard J. Lewis, Jr.
transactions. If you do not vote, your shares Phone Number: (610) 971-8840
will not be counted for any purpose, including
determining whether there is a quorum so that
business can be done at the Special Meeting.
If you abstain, your shares will be counted for
determining whether there is a quorum, but will
otherwise have no effect.
</TABLE>
5
<PAGE>
SUMMARY
This summary highlights certain information contained in this Proxy
Statement. It does not contain all of the information that is important to you.
To understand the transactions fully and for a more complete description of the
terms of the transactions, you should read carefully the entire Proxy Statement
and the Master Transaction Agreement which is attached to this Proxy Statement
as Exhibit A.
THE SPECIAL MEETING (pages 13-15)
TIME AND PLACE
The Company will hold the Special Meeting at the Philadelphia Marriott
West, Matson Ford at Front Street, 111 Crawford Avenue, West Conshohocken, PA
19428, on November 29, 1999, convening at 10:00 a.m. (local time).
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider
and vote on the following:
- A proposal (the "Combination Proposal") described in this Proxy
Statement providing for:
- the contribution to EDCO of the assets and
liabilities of the Company that relate exclusively to
the sales, marketing and distribution of its Electric
Library service to schools and public libraries (but
not including certain assets and liabilities that
relate to the sales, marketing and distribution of
the Electric Library service directly to end-users)
in exchange for $20 million in cash and a 27% equity
interest in EDCO;
- the sale to BHIL of the assets and liabilities of the
Company that relate exclusively to the Company's
online publishing business in exchange for $2 million
in cash;
- the grant by the Company to BHIL of an option to
purchase the assets and liabilities of the Company
that relate to the sales, marketing and distribution
of the Company's Electric Library service directly to
end-users and the sale of those assets if BHIL
exercises the option for a purchase price in cash
equal to twice the net revenue of that business for
the preceding twelve months; and
- A proposal (the "Plan Amendment Proposal") to adopt and approve an
amendment to the Company's Amended and Restated 1996 Equity
Compensation Plan increasing the authorized shares thereunder to
2,500,000; and
- Such other business as may properly come before the Special
Meeting or any adjournments thereof.
VOTE REQUIRED
Only holders of record of the Company's Class A Common Stock and Class
B Common Stock at the close of business on October 22, 1999 will be entitled to
notice of and to vote at the Special Meeting.
At the Special Meeting:
- each holder of record of Class A Common Stock is entitled to one
vote for each share of Class A Common Stock in such shareholder's
name, and each holder of record of Class B Common Stock is
entitled to 50 votes for each share of Class B Common Stock in
such shareholder's name;
6
<PAGE>
- the presence, either in person or by proxy, of the holders
entitled to cast a majority of all votes entitled to be cast at
the Special Meeting is necessary to constitute a quorum;
- approval of the Combination Proposal requires the affirmative
vote, in person or by proxy, of a majority of the votes cast at
the meeting by the holders of the Company's Class A Common Stock
and a majority of the votes cast at the meeting by the holders of
the Company's Class B Common Stock, voting as separate classes
(except that shares of Class A Common Stock beneficially owned by
any holder of Class B Common Stock) are excluded from the shares
entitled to vote on the Combination Proposal); and
- approval of the Plan Amendment Proposal requires the affirmative
vote, in person or by proxy, of a majority of the votes cast at
the meeting by the holders of the Company's Class A Common Stock
and Class B Common Stock, voting together as a single class.
APPRAISAL RIGHTS
Shareholders of the Company will not be entitled to appraisal rights
under Pennsylvania law in connection with the Combination Proposal.
7
<PAGE>
THE TRANSACTIONS (pages 16-23)
OVERVIEW
On July 8, 1999, the Company, Infonautics Corporation (the Company's
wholly owned operating subsidiary), Bell & Howell Company ("Bell & Howell") and
its wholly owned subsidiary Bell & Howell Information and Learning Company
("BHIL") entered into the Master Transaction Agreement (the "Master Transaction
Agreement"). The Master Transaction Agreement provides for the formation and
capitalization of EDCO, the sale of the Company's online publishing business to
BHIL and the granting by the Company of certain rights to EDCO with respect to
the Company's Electric Library end-user business (the "Transactions").
The Company and BHIL are currently engaged in certain complementary
businesses. The Company provides and distributes its Electric Library service, a
broad research and reference service providing access to a diverse collection of
content, to educational institutions, such as schools and public libraries, and
to individual end-users over the Internet and through online services. BHIL
provides and distributes its ProQuest service, which provides information from
periodicals and newspapers, dissertations, out-of-print books and other
scholarly collections through the Internet and other electronic media, to
elementary and secondary schools, colleges and universities, public, corporate
and government libraries and other information providers that resell BHIL's
electronic content.
EDCO will combine certain aspects of these businesses and will focus
primarily on providing research and reference services to public and private
preschool, kindergarten, primary, middle and secondary schools and home school
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 (the "K-12 Market"). EDCO will
also provide research and reference services to publicly owned and government
funded libraries (the "Public Library Market"). It is likely that EDCO will
acquire other businesses in the future.
BHIL will continue to provide research and reference services to
private and public educational institutions and programs suited for students who
have completed secondary education (the "Post-Secondary Education Market"). The
Company will continue to provide its Electric Library service to customers that
are actual end-users of the products, both individuals and corporations that are
not in the K-12 Market or the Public Library Market and are not resellers (the
"End-User Business").
The Company will also sell to BHIL its online publishing business,
which consists of providing publishing or hosting services to a third party for
the third-party's publication (the "Online Publishing Business").
After the Transactions are completed, the Company will be primarily
engaged in Sleuth type businesses, such as Company Sleuth, Sports Sleuth and
Job Sleuth, developing new Infonautics Sleuth services, marketing and
servicing the End-user Business and in developing other new Internet
information services.
THE FORMATION OF EDCO
Under the Master Transaction Agreement, the Company and BHIL will form
EDCO. BHIL will contribute to EDCO the assets and liabilities of BHIL that
relate exclusively to or arise from sales to the K-12 Market and will provide
$20 million in cash to EDCO. In exchange for its contribution, BHIL will receive
a 73% equity interest in EDCO, and EDCO will perform certain services under
customer contracts transferred to EDCO by BHIL.
The Company will contribute to EDCO its assets and liabilities that
relate exclusively to its Electric Library service (including the related
technology). However, the Company will not contribute certain assets that relate
directly to the distribution of the Electric Library service in the End-User
Business. In exchange for its contribution, the Company will receive a cash
payment of $20 million (of which $5 million is payable at closing and $15
million is payable on January 3, 2000) and a 27% equity interest in EDCO.
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SALE OF ONLINE PUBLISHING BUSINESS
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 Online
Publishing Business. In exchange for the Company's Online Publishing Business,
BHIL will pay to the Company $2 million in cash payable on January 3, 2000.
RIGHTS OF EDCO TO PURCHASE END-USER BUSINESS
The Company has granted EDCO a right of first refusal and an exclusive
call option to purchase the End-User Business on a stand-alone basis (not as
part of a change in control of the Company) during the two years after the
closing at a purchase price in cash equal to twice the net revenue of that
business for the preceding twelve months. The call option can be exercised at
any time.
POSSIBLE FUTURE TRANSACTIONS
It is likely that EDCO will acquire other businesses in the future.
Depending on the terms of any such acquisition, it is possible that the
percentage interest of the Company in EDCO could be reduced.
THE CLOSING
The closing of the Transactions is expected to take place promptly
following the satisfaction or waiver of all conditions to the obligations of the
parties under the Master Transaction Agreement. The Company presently expects
that the closing will occur on or before November 30, 1999.
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REASONS FOR THE TRANSACTIONS
The Company believes the Transactions represent a significant step in
the Company's strategic plan to enhance shareholder value. The Company believes
that the cash payments the Company will receive in connection with the
Transactions will provide the necessary capital to permit the Company to
continue to expand the businesses it will retain and to develop new Internet
products and services. The Company believes that EDCO will provide opportunities
for significant cost savings and expanded business opportunities, including
opportunities to develop new and innovative products and services. The Company
also believes that EDCO will be a market leader in the K-12 and public library
markets and that, over time, EDCO will provide a significantly better return on
the assets of the Company's Contributed Business than the Company could have
achieved by operating the Contributed Business independently.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The board of directors of the Company believes that the Transactions
are in the best interests of the Company and its shareholders and unanimously
recommends that shareholders vote FOR the Transactions.
OPINION OF THE FINANCIAL ADVISOR
In deciding to approve the formation of EDCO, the board of directors of
the Company considered the opinion dated July 8, 1999 of Allen & Company
Incorporated ("Allen & Company"). The opinion, which is based upon and subject
to the considerations set forth therein, states that as of the date of the
opinion, the consideration to be received by the Company in connection with the
formation and capitalization of EDCO was fair to the Company from a financial
point of view. Allen & Company did not render an opinion regarding the
consideration to be received by the Company in connection with the sale of the
Online Publishing Business or the option granted to BHIL to purchase the
End-User Business. The opinion of Allen & Company is attached as Exhibit D to
this Proxy Statement. The Company encourages shareholders to read it carefully.
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THE MASTER TRANSACTION AGREEMENT (pages 39-49)
The Transactions are set forth in detail in a series of agreements
consisting of
- the Master Transaction Agreement;
- a Bill of Sale, Assignment and Assumption and Indemnity Agreement
("Capitalization Agreement") with respect to the contributions to
EDCO by each of the Company and BHIL and a similar agreement with
respect to the sale and purchase of the Company's Online
Publishing Business by BHIL; and
- a series of operating and service agreements, technical and
non-technical support services agreements, license agreements and
non-competition agreements.
The Master Transaction Agreement describes each party's rights and
obligations in connection with the Transactions. The Master Transaction
Agreement also contains representations and warranties of the parties,
agreements concerning the operation of the businesses to be contributed to EDCO
prior to the closing of the Transactions, conditions precedent to the
obligations of the parties, provisions for terminating the Master Transaction
Agreement (including the payment by the Company of a termination fee under
certain circumstances) and agreements concerning certain matters following the
closing.
The Capitalization Agreements set forth the assets being contributed or
sold, the liabilities being assumed, the representations and warranties with
respect to the assets and liabilities and certain indemnification obligations of
the parties.
The operating and service agreements and the technical and
non-technical support services agreements are intended to provide continuing
interim support for the businesses being contributed to EDCO and to permit the
Company to continue to conduct its End-User Business. The license agreements
provide for the license of certain intellectual property rights so that the
parties can use various rights owned by the other parties in their respective
businesses. The non-competition agreements restrict the Company and BHIL from
distributing products and services in the markets in which the businesses
contributed to EDCO currently operate; restrict EDCO from doing business in the
Post-Secondary Education Market and restrict the Company and EDCO from engaging
in the Online Publishing Business.
GOVERNANCE
Because of BHIL's 73% equity interest in EDCO, Bell & Howell will
control the operations and decision making of EDCO. The management board of EDCO
will consist of eight representatives, of whom six will be named by BHIL and two
will be named by the Company. David Van Riper Morris will be responsible for the
smooth transition of the Contributed Business into EDCO. Mr. Morris will remain
as the President and Chief Executive Officer and as a director of the Company.
The Chairman of the board of directors of Bell & Howell, James P. Roemer, will
become the Chairman of the management board of EDCO. EDCO will initially be
headquartered in Wayne, Pennsylvania.
CONDITIONS TO THE TRANSACTIONS
The obligations of the Company and Bell & Howell to complete the
Transactions are subject to a number of conditions, including the following:
- The shareholders of the Company must approve the Transactions;
- There must be no order, decree or other action by a court or other
governmental body restraining, enjoining or prohibiting the
Transactions;
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- Certain consents must be obtained; and
- All necessary regulatory approvals must be obtained. The Company
does not believe that any material federal or state regulatory
approvals will be necessary in connection with the Transactions
except for the expiration of the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. On August 5, 1999, the Company was notified that its
request for early termination of the waiting period was granted.
TERMINATION
The boards of directors of the Company and Bell & Howell can mutually
agree to terminate the Master Transaction Agreement at any time prior to the
closing. Each of the Company and Bell & Howell have the right to terminate the
Master Transaction Agreement under certain circumstances, including a material
breach of the Master Transaction Agreement by the other party, if there is a
change of control of the other party or if the closing has not occurred by
December 31, 1999.
Bell & Howell has the right to terminate the Master Transaction
Agreement if the Company's board of directors accepts certain alternate
proposals by third parties other than Bell & Howell, withdraws or modifies or
takes a public position inconsistent with its approval of the Transactions and
recommendation to the shareholders or has not submitted the Transactions to the
shareholders of the Company at a meeting to be held on or before November 30,
1999 (subject to certain limitations). If Bell & Howell terminates the Master
Transaction Agreement under these circumstances, or if Bell & Howell or the
Company terminates the Master Transaction Agreement under certain circumstances
and within 120 days of such termination the Company agrees to sell or announces
an agreement or intent to enter into an agreement to sell the businesses it was
to contribute to EDCO to a third party, the Company must pay to Bell & Howell a
termination fee of $4 million.
AMENDMENT OF 1996 EQUITY COMPENSATION PLAN
At the Special Meeting, the shareholders will vote on the Plan
Amendment Proposal under which the Company's Amended and Restated 1996 Equity
Compensation Plan, as previously amended (the "Plan"), would be amended to
increase the number of shares of Class A Common Stock reserved for issuance
under the Plan from 1,500,000 to 2,500,000. The Plan helps the Company to
attract, retain and motivate employees and other key personnel and to encourage
them to devote their best efforts to the business and financial success of the
Company. The Company's board of directors believes that it is in the best
interest of the Company to increase the number of shares authorized for issuance
under the Plan because the increase will allow the board to grant stock-based
compensation at levels it deems appropriate.
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THE SPECIAL MEETING
The board of directors of the Company is providing this Proxy Statement
to solicit your proxy for use at the Special Meeting. The Company is mailing the
Notice of Special Meeting of Shareholders, this Proxy Statement and accompanying
form of proxy on or about November 3, 1999 to shareholders of record on October
22, 1999.
TIME AND PLACE
The Company will hold the Special Meeting at the Philadelphia Marriott
West, Matson Ford at Front Street, 111 Crawford Avenue, West Conshohocken, PA
19428, on November 29, 1999, convening at 10:00 a.m. (local time).
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider
and vote on the following:
- The Combination Proposal described in this Proxy Statement
providing for:
- the contribution to EDCO of the assets and liabilities of the
Company that relate exclusively to the sales, marketing and
distribution of its Electric Library service to schools and
public libraries (but not including certain assets and
liabilities that relate to the sales, marketing and
distribution of the Electric Library service directly to
end-users) in exchange for $20 million in cash and a 27%
equity interest in EDCO;
- the sale to BHIL of the assets and liabilities of the Company
that relate exclusively to the Company's Online Publishing
Business in exchange for $2 million in cash; and
- the grant by the Company to BHIL of an option to purchase the
assets and liabilities of the Company that relate to the
sales, marketing and distribution of the Company's Electric
Library service directly to end-users and the sale of those
assets if BHIL exercises the option for a purchase price in
cash equal to twice the net revenue of that business for the
preceding twelve months; and
- The Plan Amendment Proposal to adopt and approve an amendment to
the Company's Amended and Restated 1996 Equity Compensation Plan,
as previously amended, increasing the authorized shares thereunder
to 2,500,000; and
- Such other business as may properly come before the Special
Meeting or any adjournments thereof.
Representatives of Pricewaterhouse Coopers LLP, the Company's
independent public accountants, will attend the Special Meeting and may
make a statement and will respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS OF INFONAUTICS HAS UNANIMOUSLY DETERMINED THAT
THE TRANSACTIONS ARE IN THE BEST INTERESTS OF INFONAUTICS AND ITS SHAREHOLDERS
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE TRANSACTIONS AND
THE PLAN AMENDMENT.
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VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The board of directors of the Company fixed the close of business on
October 22, 1999 as the record date for the Special Meeting. Only holders of
record of shares of the Company's Class A Common Stock, no par value, and Class
B Common Stock, no par value, are entitled to notice of, and to vote at, the
Special Meeting. On the record date, there were 11,783,858 shares of Class A
Common Stock outstanding, held by approximately 180 holders of record, and
100,000 shares of Class B Common Stock outstanding, held by one holder of
record. The high and low sale prices of the Company's common stock on the Nasdaq
Small Cap Market on July 7, 1999, the day before public announcement of the
Transactions, were $6.50 and $5.81.
At the Special Meeting:
- each holder of record of Class A Common Stock is entitled to one
vote for each share of Class A Common Stock in such shareholder's
name, and each holder of record of Class B Common Stock is
entitled to 50 votes for each share of Class B Common Stock in
such shareholder's name;
- the presence, either in person or by proxy, of the holders
entitled to cast a majority of all votes entitled to be cast at
the Special Meeting is necessary to constitute a quorum;
- approval of the Combination Proposal requires the affirmative
vote, in person or by proxy, of a majority of the votes cast at
the meeting by the holders of the Company's Class A Common Stock
and a majority of the votes cast at the meeting by the holders of
the Company's Class B Common Stock, voting as separate classes
(except that shares of Class A Common Stock beneficially owned by
any holder of Class B Common Stock are excluded from the shares
entitled to vote on the Combination Proposal); and
- approval of the Plan Amendment Proposal requires the affirmative
vote, in person or by proxy, of a majority of the votes cast at
the meeting by the holders of the Company's Class A Common Stock
and Class B Common Stock, voting together as a single class.
Under the Pennsylvania corporate law, shareholder approval is required
for the sale, lease, exchange or other disposition of all or substantially all,
of the property and assets of a corporation when not made in the usual and
regular course of the business of such corporation or for the purpose of
relocating the business of such corporation or in connection with the
dissolution or liquidation of such corporation. The Company believes that the
Transactions may not constitute "the sale, lease, exchange or other disposition
of all or substantially all, of the property and assets" of the Company;
however, there is no controlling authority as to the meaning of these terms in
the context of transactions like the Transactions, and as a result the Company
has concluded that it is prudent to require shareholder approval of the
Transactions.
VOTING BY DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; VOTING AGREEMENT
At the close of business on the record date for the special meeting,
directors and executive officers of the Company and its affiliates owned or were
entitled to vote 1,733,976 shares of Class A Common Stock (which represented
approximately 15% of the votes entitled to be cast at the Special Meeting by
holders of Class A Common Stock) and all of the 100,000 outstanding shares of
Class B Common Stock. Each director and executive officer of the Company has
indicated his present intention to vote, or cause to be voted, the Infonautics
common stock owned by him to approve the Transactions.
At the close of business on the record date for the Special Meeting,
Marvin Weinberger holds all of the Class B Common Stock and 1,345,722 shares of
Class A Common Stock. Under a Voting Agreement between Mr. Weinberger and the
Company, Mr. Weinberger has agreed to vote all of his shares in favor of the
Transactions. Under the
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Company's Amended and Restated Articles of Incorporation, shares of Class A
Common Stock held by Mr. Weinberger are excluded from the shares entitled to
consent or vote on the Transactions.
PROXIES
This Proxy Statement is being furnished to holders of the Company's
common stock in connection with the solicitation of proxies by and on behalf of
the Company for use at the Special Meeting.
COMPLETED PROXIES. If you sign, complete and return a proxy and the
Company receives the proxy prior to or at the special meeting, your proxy will
be voted as you indicate.
PROXIES WITH NO INSTRUCTIONS. If you sign and return a proxy but you do
not provide instructions as to your vote, your proxy will be voted "for" each of
the proposals considered at the Special Meeting.
PROXIES MARKED ABSTAIN. If you sign and return a proxy marked
"abstain", your proxy will count for purposes of determining whether there is a
quorum and for purposes of determining the voting power and number of shares
entitled to vote at the Special Meeting, but your proxy will not be voted. A
proxy marked "abstain" is not considered a cast vote. Proxies marked "abstain"
will have no effect on the approval of any of the proposals considered at the
meeting.
BROKER NON-VOTES. Broker-dealer rules generally preclude brokers and
nominees from exercising their voting discretion. Absent specific instructions
from the beneficial owner of shares, brokers and nominees will not vote on any
of the proposals considered at the Special Meeting. The Company will count
shares represented by broker non-votes for purposes of determining whether there
is a quorum at the special meeting. Broker non-votes will have the same effect
as abstentions on the approval of any of the proposals considered at the Special
Meeting.
OTHER BUSINESS. The Company is not aware of any business for
consideration at the Special Meeting other than as described in this Proxy
Statement. However, if matters are properly brought before the Special Meeting
or any adjournment or postponements of the meeting, then the persons appointed
as proxies will have the discretion to vote or act thereon according to their
best judgment.
ADJOURNMENT. The Company may adjourn the Special Meeting in order to
solicit additional proxies if a quorum is not present or if the Company believes
that additional time should be allowed to solicit proxies. If the Company
proposes any adjournment of the Special Meeting by a vote of the shareholders,
the persons named in the enclosed form of proxy will vote all shares of common
stock for which they have voting authority in favor of the adjournment.
REVOCATION. You may revoke your proxy at any time prior to its use. In
order to revoke your proxy, you must deliver to Gerard J. Lewis, Jr., Vice
President & General Counsel and Secretary of the Company, a signed notice of
revocation or you must deliver a later dated proxy changing your vote. In
addition, you may choose to attend the Special Meeting and vote in person.
Simply attending the Special Meeting will not in itself constitute the
revocation of your proxy.
CONFIDENTIALITY OF PROXIES. It is the Company's policy to keep
confidential proxy cards, ballots and voting tabulations that identify
individual shareholders. However, disclosure may be required by law and in other
limited circumstances.
COSTS OF SOLICITATION. The Company will pay the cost of soliciting
proxies from its shareholders, including the cost of preparing and mailing this
Proxy Statement. In addition to solicitation by mail, directors, officers and
employees of the Company may solicit proxies by telephone, facsimile
transmission or otherwise. Such directors, officers and employees of the Company
will not be specially compensated for such solicitation, but may be reimbursed
for out-of-pocket expenses incurred in connection therewith. Brokerage firms,
fiduciaries and other custodians who forward
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soliciting material to the beneficial owners of the Company's common stock will
be reimbursed for their reasonable expenses incurred in forwarding such
material. The Company has retained Beacon Hill Partners at a cost of
approximately $15,000, plus reimbursement of out-of-pocket expenses, to assist
in the solicitation of proxies from brokers, nominees, institutions and
individuals. The Company will reimburse the custodians, nominees and fiduciaries
for the forwarding of proxy solicitation materials to beneficial owners of
shares of the Company's common stock at the record date.
PROPOSAL NO. 1 - THE COMBINATION PROPOSAL
THE TRANSACTIONS
BACKGROUND
During the second half of 1998 the board of directors of the Company,
as part of an ongoing effort aimed at increasing the Company's shareholder
value, began to consider whether the Company should direct its efforts toward
finding a strategic partner or purchaser to continue the growth of the Company's
business. The board of directors viewed an acquisition or business combination
as a potential way to fund the cash needs of the Company's business at a time
when the Company's market capitalization prevented it from attracting
significant capital for the growth of its businesses. In the fall of 1998 the
Company held preliminary conversations with a limited number of companies in
businesses similar to the Company's, including Bell & Howell.
In late 1998 the board of directors decided to engage an investment
banker to explore strategic alternatives for the Company. After discussions with
several possible investment bankers, on December 30, 1998, the Company entered
into an engagement letter with Allen & Company, Incorporated ("Allen &
Company"). This engagement letter was amended on August 6, 1999 to modify the
payment terms and extend the term of engagement. Allen & Company directed its
initial efforts primarily toward finding a purchaser for the Company's entire
business. However, the efforts of the Company and its investment banker revealed
that interested parties were divided in their interests between the Company's
educational business and its Internet business. In March 1999, the Company held
due diligence meetings and preliminary discussions with three potential
purchasers, including Bell & Howell. At that time, only Bell & Howell indicated
preliminary interest in purchasing the Company, but at a price and on other
terms that were not acceptable to the board of directors; no firm offer ensued.
In April 1999 the board of directors decided to refocus its efforts to
find a purchaser with greater interest in the Company's recently launched
Company Sleuth and similar Internet businesses. In May 1999 the Company held
preliminary discussions with several potential purchasers, again including Bell
& Howell. Bell & Howell again indicated preliminary interest in purchasing the
Company, but still at a price that was not acceptable to the board of directors;
no firm offer ensued.
In late May 1999 the board of directors discussed the possibility of
forming a joint venture or similar business combination with another company to
develop the Electric Library and online publishing businesses, while retaining
the Company Sleuth and similar Internet businesses. The Company presented a
proposal for such a business combination to the three companies with which it
had held prior discussions regarding purchase of the Company. In June 1999 Bell
& Howell responded with a proposal which attributed a significantly higher value
to the Electric Library and online publishing businesses than in Bell & Howell's
previous proposals or in any other proposal the Company received during its
search for a strategic alternative. Negotiations were held in various meetings
in June and early July 1999. On July 7, 1999 the board of directors met in a
telephone meeting and approved the Master Transaction Agreement and the
transactions contemplated thereby, which was executed on July 8, 1999. Two
members of the board of directors were unable to attend the July 7, 1999
telephone meeting. A unanimous written consent of directors was subsequently
executed to confirm the board's unanimous approval of the Master Transaction
Agreement and the transactions contemplated thereby.
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On September 28, 1999, the Company entered into an amendment to the
Master Transaction Agreement and it was executed and delivered by the parties to
the Master Transaction Agreement on the same day. The amendment extends from
October 31, 1999 to November 30, 1999 the date by which the Special Meeting must
be held before the Master Transaction Agreement can be terminated. In addition,
in order to minimize state income taxes payable by the Company in connection
with the Transactions, the amendment modifies the payment terms for the payment
to the Company of the cash portion of the price at which the school and library
portion of the Company's Electric Library business is being sold to EDCO so that
$5 million is payable at closing and $15 million is payable on January 3, 2000
and for the payment of the purchase price for the Online Publishing Business so
that the $2 million purchase price for that business is paid on January 3, 2000.
REASONS FOR THE TRANSACTION
Under the Master Transaction Agreement the Company will receive a $20
million cash payment from EDCO and a 27% equity interest in EDCO in exchange for
the school and library market share of the Company's Electric Library business
and a $2 million payment from BHIL for the Company's Online Publishing Business
(of which $5 million is payable at closing and $17 million is payable on January
3, 2000). The Company believes that these cash payments, together with the
Company's 27% equity interest in EDCO, represent a fair valuation of the
businesses the Company is selling. In approving the Master Transaction
Agreement, the board of directors recognized that the Company needs cash to fund
its Internet business. The Company believes that the cash payments to the
Company in the Transactions provide the necessary sales and marketing capital to
permit the Company to expand its current Sleuth businesses (including Company
Sleuth, Sports Sleuth and Job Sleuth), to continue to develop new Sleuth
products and to develop other new Internet information services supported
primarily by advertising and sponsors. In addition, the Company believes that
the cash will be sufficient for the next 12 months to support the continued
marketing of the Electric Library to end-users.
The Company believes that combining its educational business with that
of an industry competitor having a complementary business will provide greater
operational leverage and a platform to distribute additional products and to
expand in the rapidly growing market for Internet delivery of educational
services.
The Company believes that the combination of the Company's Electric
Library business and BHIL's ProQuest business in the K-12 Market and the Public
Library Market will result in significant efficiencies. The Company expects
that, over time, the combination of the businesses will reduce equipment and
staffing costs by reducing the need to support two complete data centers,
eliminate duplicative licensing costs with content providers and permit
consolidation of sales and marketing staffs.
The Company believes EDCO will provide customers with varying levels of
skill and varying needs for content with easier access to the reference and
research services of the combined businesses than was available when the
businesses were operating independently. In addition, the Company believes that
the Electric Library service, which the Company believes is viewed by customers
as easier to use than ProQuest, and ProQuest, which the Company believes is
viewed by customers as more sophisticated and with greater content, are
complementary technologies. The Company believes that the combination of these
technologies will permit EDCO to expand its customer base in the K-12 Market and
the Public Library Market from the initial base of approximately 40,000 schools
currently served by the Company and BHIL and will provide a platform to
significantly increase the product offerings available to the expanded customer
base. Most importantly, the Company believes that EDCO will have both the
resources and the market position to develop, market and exploit new product
offerings and technology, including the incorporation of Internet-related
content and technology into the current on-line offerings. The Company believes
that consolidation is likely in the fragmented market for Internet-delivered
educational products and that the marketplace is looking for integrated
community, content, curriculum and services that reach teachers, students,
parents and school administrators through a common platform such as the platform
EDCO will be able to provide. The Company believes that, over time, EDCO will
provide a better return on the assets being contributed than the Company could
achieve by operating the public
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school and library businesses independently. To the extent that these benefits
are realized, the Company should benefit from increased value of its equity
interest in EDCO.
Because of the inherent risks and uncertainties in combining businesses
such as the businesses being contributed, the synergies discussed above may not
be achieved. The formation and operation of EDCO involve the integration of
entities that have previously operated independently. Future acquisitions by
EDCO would add other businesses that would require integration. This integration
will require the dedication of significant management resources. The
difficulties of integrating businesses include:
- The coordination of geographically separated organizations;
- Integrating personnel with differing sales and business
backgrounds;
- Combining different financial reporting systems, processes and
corporate cultures;
- Attracting talented management; and
- Possible diversion of management attention from other business
concerns.
The process of integrating operations could cause an interruption of, or a loss
of momentum in, the activities of EDCO, including any anticipated growth.
Difficulties encountered in integrating the contributed businesses could
materially adversely affect the business, results of operations and financial
condition of EDCO and could reduce the value of the Company's equity interest in
EDCO.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
At a telephone meeting of the Company's board of directors held on July
7, 1999, the board determined that the Transactions are in the best interests of
the Company and its shareholders, approved the Transactions and recommended that
the holders of the Company's common stock vote FOR approval of the Transactions.
Two members of the board of directors were unable to attend the July 7, 1999
telephone meeting. A unanimous written consent of directors was subsequently
executed to confirm the board's unanimous approval of the Master Transaction
Agreement and the transactions contemplated thereby.
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
At a telephone meeting of the Company's board of directors on July 7,
1999, Allen & Company rendered its oral opinion that, as of such date, the
consideration to be received by the Company in connection with the formation and
capitalization of EDCO (the "EDCO Transaction") is fair from a financial point
of view. Allen & Company did not render an opinion regarding the consideration
to be received by the Company in connection with the sale of the Online
Publishing Business or the option granted to BHIL to purchase the End-User
Business. Allen & Company has confirmed its oral opinion by delivering to the
Company's board of directors a written opinion to the same effect dated July 8,
1999.
THE FULL TEXT OF THE WRITTEN OPINION OF ALLEN & COMPANY, DATED JULY 8,
1999, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS EXHIBIT D TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF THE COMPANY ARE URGED TO READ
THE OPINION IN ITS ENTIRETY. ALLEN & COMPANY'S WRITTEN OPINION IS ADDRESSED TO
THE BOARD OF DIRECTORS OF THE COMPANY, IS DIRECTED ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE RECEIVED IN THE EDCO
TRANSACTION PURSUANT TO THE MASTER TRANSACTION AGREEMENT AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY
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SHAREHOLDER OF THE COMPANY AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF ALLEN & COMPANY SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In arriving at its opinion, Allen & Company considered, among other
factors, (i) the terms of the draft Master Transaction Agreement and related
documentation (which prior to the delivery of this opinion had not been executed
by the parties); (ii) the nature of the operations and financial history of the
Company, including discussions with senior management of the Company of the
business and prospects of the Company relating to, among other things, the
Company's operating budget and financial outlook; (iii) the nature of the
operations and financial history of the online information services business of
BHIL serving the K-12 and small public library marketplace, ("the BHIL K-12
Business", referred to in the Master Transaction Agreement as the "BHIL
Contributed Business"), including discussions with senior management of Bell &
Howell of the business and prospects of the BHIL K-12 Business relating to,
among other things, the operating budget and financial outlook of the BHIL K-12
Business; (iv) the Company's filings with the Securities and Exchange Commission
(the "SEC"), including audited and unaudited financial statements of the
Company; (v) the familiarity of the Company's board of directors with the
regulatory implications of the EDCO Transaction; (vi) the historical trading
information for the common stock of the Company; (vii) certain financial and
stock market information for certain other companies in businesses related to
those of the Company; and (viii) certain financial information relating to
certain merger and acquisition transactions involving companies in businesses
related to those of the Company.
In addition to Allen & Company's review and analyses of the specific
information set forth above, Allen & Company's opinion reflects and gives effect
to its assessment of general economic, monetary, industry, regulatory, market
and other conditions existing as of the date thereof as they may affect the
business and prospects of the Company.
The Allen & Company opinion reflects and gives effect to Allen &
Company's general familiarity with the Company over a period of time, as well as
information concerning the Company which Allen & Company acquired during the
course of its assignment, including information provided by senior management in
the course of a number of discussions. Allen & Company was not engaged to and
did not, however, conduct an independent appraisal of the Company's assets, or
independently verify the information concerning the Company's operations or
other data which Allen & Company considered in its review. In rendering its
opinion, Allen & Company relied upon and assumed the accuracy and completeness
of all of the financial and other information that was available from public
sources, that was provided by the Company or its representatives, or that was
otherwise reviewed by Allen & Company.
With respect to the financial projections provided by the Company's
management, Allen & Company assumed that the financial projections had been
reasonably prepared in good faith reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. With respect to the
financial projections provided by management of the BHIL K-12 Business, Allen &
Company assumed that the financial projections had been reasonably prepared in
good faith reflecting the best currently available estimates and judgments of
the management of Bell & Howell as to the future operating and financial
performance of the BHIL K-12 Business. With respect to the financial projections
for EDCO provided by the Company's management, Allen & Company assumed that the
financial projections had been reasonably prepared in good faith reflecting the
best currently available estimates and judgments of the management of the
Company as to the future operating and financial performance of EDCO. In
connection with rendering its opinion, Allen & Company was not authorized to
solicit, and did not solicit, interest from any third party with respect to the
Company or any of its assets. The Allen & Company opinion was necessarily based
on economic, market, financial and other conditions as they existed on, and on
the information made available to Allen & Company as of, the date of its
opinion.
The following is a summary of the material analyses performed by Allen
& Company in connection with its opinion and its presentation to the board of
directors of the Company.
19
<PAGE>
PUBLIC COMPANY ANALYSIS. Allen & Company compared certain financial
information of the Company with that of a group of publicly traded companies
involved in the institutional information services business, which were
identified as a representative sampling of companies engaged in businesses
similar in some respects to that of the Company, including The Dialog
Corporation plc, InfoUSA, Inc., NewsEDGE Corporation and Primark Corporation
(collectively, the "Comparable Public Companies"). Allen & Company noted that as
of July 6, 1999, the Comparable Public Companies traded at a multiple range of
1.3x to 1.9x enterprise value (equity value plus debt minus cash) to expected
1999 ("1999E") revenues. Allen & Company compared the 1999E revenue multiples
provided by the Comparable Public Companies with the 3.0x 1999E revenue multiple
at which the businesses being contributed by the Company to EDCO (the "Electric
Library Educational Edition Business") is being valued in the EDCO Transaction.
RELATED TRANSACTION ANALYSIS. Allen & Company considered certain
financial information relating to Walters Kluwer's 1998 acquisition of Ovid
Technologies (the "Related Transaction"), a company which operated in a business
related to that of the Electric Library Educational Edition Business. Allen &
Company noted that the financial dynamics of the Related Transaction were
substantially different from those of the EDCO Transaction, in that Walters
Kluwer was acquiring a company that was expected to be profitable in the year of
the acquisition and whose profitability on a stand-alone basis was expected to
grow substantially in the year following the acquisition. As a result, Allen &
Company concluded that multiples of expected and projected profitability
(earnings before interest, taxes, depreciation and amortization, or "EBITDA")
were more relevant in analyzing the valuation of the Related Transaction than
were revenues of expected and projected revenue. Allen & Company noted that the
transaction value in the Related Transaction represented multiples of 4.4x
current year (1998) revenue. Allen & Company compared the current year (1998)
revenue multiple provided by the Related Transaction with the 3.0x 1999E revenue
multiple at which the Electric Library Educational Edition Business is being
valued in the EDCO Transaction. Allen & Company stated its belief that the
revenue multiple indicated by the Related Transaction was less relevant in
determining its valuation than the current year EBITDA multiple of the Related
Transaction (21.0x). Since the Electric Library Educational Edition Business is
not expected to generate positive EBITDA in 1999, the current year EBITDA
multiple indicated by the Related Transaction is not applicable in implying a
comparable valuation for the EDCO Transaction.
No company utilized in the public company or related transaction
analyses is identical to the Company. Accordingly, an analysis of the results of
the foregoing necessarily involves complex considerations and judgments
concerning differences in the financial and operating characteristics of the
Company relative to other companies to which it may be compared.
CONTRIBUTION ANALYSIS. The EDCO Transaction calls for the Electric
Library Educational Edition Business and the BHIL K-12 Business to be
contributed to EDCO both to be valued at 3.0x 1999E revenues to determine the
equity ownership of EDCO by the Company and BHIL following the $20.0 million
cash payment by BHIL to EDCO and by EDCO to the Company. In order to assess the
appropriateness of valuing the BHIL K-12 Business at the same 1999E revenue
multiple as the Electric Library Educational Edition Business, Allen & Company
compared the businesses and considered the qualitative and quantitative
implications of their respective operating trends and characteristics on their
values relative to each other. Allen & Company considered, among other things,
the following key factors: the perceived strength of the sales force of the
Electric Library Educational Edition Business relative to that of the BHIL K-12
Business, the low concentration of customer contracts of the Electric Library
Educational Edition Business relative to those of the BHIL K-12 Business,
favorable royalty arrangements of the BHIL K-12 Business with its content
providers (an economic benefit in which the Electric Library Educational Edition
Business would share) and the depth of content of the BHIL K-12 Business
relative to that of the Electric Library Educational Edition Business. In
reviewing and considering the factors comparing the two businesses, Allen &
Company concluded that the contribution of the two businesses at the same
multiple of 1999E revenues was justifiable.
DISCOUNTED CASH FLOW ANALYSIS. In order to gauge the possible value of
the equity interest in EDCO that the Company is to receive pursuant to the terms
of the EDCO Transaction, Allen & Company performed a discounted cash flow
analysis of EDCO. The discounted cash flow analysis was based upon financial
projections for EDCO for the years ending December 31, 1999 through December 31,
2003, prepared by the management of the Company. Unleveraged
20
<PAGE>
free cash flow was calculated as EBITDA less taxes, less capital expenditures,
plus increases in deferred revenue. Allen & Company calculated terminal values
by applying a range of exit multiples to EBITDA for the year ending December 31,
2003. The cash flow streams and terminal values were then discounted to present
value using a range of discount rates, representing an estimated range of the
Company's weighted average cost of capital. Based on this analysis, Allen &
Company calculated the present value of the Company's equity in EDCO, before any
adjustments for working capital, as ranging between $33.4 million and $44.5
million. Allen & Company compared this range of values to the implied value at
which the Company is to contribute the Electric Library Educational Edition
Business to EDCO, which, at 3.0x 1999E revenues, equals approximately $24.0
million (net of the $20.0 million in cash specific to the Electric Library
Educational Edition Business that the Company is to receive pursuant to the
terms of the EDCO Transaction). Allen & Company's analysis, as well as its
discussions with Company management, indicated that the greater cash flow
expected to accrue to the Company's benefit as a result of the EDCO Transaction
from the combined operations of EDCO surpassed the cash flow of the Electric
Library Educational Edition Business on a stand-alone basis.
The summary set forth above does not purport to be a complete
description of the analyses performed by Allen & Company, but describes, in
summary form, the material elements of the analyses performed by Allen & Company
in connection with its opinion and included in the presentation made by Allen &
Company to the board of directors of the Company. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis to be applied to particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Each of the analyses conducted by Allen & Company was carried out in order to
provide a different perspective on the transaction and add to the total mix of
information available. Allen & Company did not conclude whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to the fairness of the consideration from a financial point of view. Rather, in
reaching its conclusion, Allen & Company considered the results of each analysis
in light of each other and ultimately reached its opinion based on the results
of its analyses taken as a whole. Allen & Company did not place particular
reliance or weight on any individual analysis, but instead concluded that its
analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, Allen & Company believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and the factors considered by it, without considering all analyses
and factors, could create an incomplete or misleading view of the evaluation
process underlying its opinion.
The analyses performed by Allen & Company are not necessarily
indicative of actual value or future results, which may be significantly more or
less favorable than suggested by such analyses. In its analyses, Allen & Company
made numerous assumptions with respect to the Company, industry performance,
regulatory, general business, economic, tax, market and financial conditions and
other matters, many of which are beyond the control of the Company. No company,
transaction or business used in such analyses as a comparison is identical to
the Company or the EDCO Transaction, nor is an evaluation of the results of such
analyses entirely mathematical; rather such analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses.
The Company and Allen & Company are parties to a letter agreement dated
December 30, 1998, as amended August 6, 1999 (the "Engagement Letter"). Pursuant
to the Engagement Letter, Allen & Company will receive a fee of approximately
$1,381,000 not including Allen and Company's out of pocket expenses to date or
its legal expenses upon consummation of the Transactions.
CERTAIN CONSEQUENCES OF THE TRANSACTIONS
After the closing, EDCO will be engaged in delivering products and
services (including Electric Library and ProQuest) to the K-12 Market and the
Public Library Market; the Company will be primarily engaged in Sleuth type
businesses and in the distribution of Electric Library in the End-User Business;
and BHIL will be engaged in the
21
<PAGE>
distribution of ProQuest to the Post Secondary Education Market, in the online
publishing business and in its other continuing businesses. The Company has also
granted BHIL an option to purchase the End-User Business. Each of the Company,
EDCO and BHIL may engage in other businesses following the closing, subject to
the obligations contained in the noncompetition agreements each of them will
enter into at the closing. See "The Master Transaction Agreement -
Noncompetition Agreements."
The Master Transaction Agreement provides that the management board of
EDCO will consist of eight representatives, of whom six will be named by BHIL
and two will be named by the Company. Because of BHIL's 73% equity interest in
EDCO, Bell & Howell will control the operations and decision making of EDCO. The
initial headquarters of EDCO shall be in Wayne, Pennsylvania.
ACCOUNTING TREATMENT
The Company will account for its equity interest in EDCO on an equity
basis, effective as of the closing date. EDCO will not be treated as a joint
venture for accounting purposes. This accounting treatment is reflected in the
pro forma financial statements of the Company that are included in this proxy
statement.
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
EDCO. EDCO will be a limited liability company and thus will be treated
as a partnership for federal income tax purposes and will not pay federal income
taxes. Partnerships are flow-through operating tax entities in which business
income is taxed at the owner level. Accordingly, a partnership is not a taxable
entity, but the partner's tax liabilities are affected by the activities of the
partnership.
THE COMPANY. Generally, no gain or loss is recognized for tax purposes
upon the contribution of property to a partnership in exchange for a partnership
interest. However, the receipt of property (i.e. cash) in connection with the
contribution will result in a realized gain for federal income tax purposes.
Additionally, the sale of the Online Publishing Business will also result in a
realized gain for federal income tax purposes. However, with the Company's
available federal net operating loss carryovers, it is expected that the
realized gain resulting from the transaction will not be recognized for federal
income tax purposes. Accordingly, no current federal income taxes should result
upon consummating the Transactions.
THE COMPANY'S SHAREHOLDERS. The Transactions will have no federal
income tax consequences for the Company's shareholders.
NO APPRAISAL RIGHTS
Under Pennsylvania corporate law, the Company's shareholders are not
entitled to appraisal or dissenters' rights in connection with the Transactions.
CLOSING DATE
The closing is expected to take place promptly following the
satisfaction or waiver of all conditions set forth in the Master Transaction
Agreement, including without limitation, receipt of approval by the shareholders
of the Company. The Company presently anticipates that the Transactions will be
completed during the fourth quarter of 1999.
REGULATORY APPROVALS
The Company does not believe that any material federal or state
regulatory approvals will be necessary in connection with the Transactions
except for the expiration of the applicable waiting period under the
Hart-Scott-Rodino
22
<PAGE>
Antitrust Improvements Act of 1976, as amended. On August 5, 1999, the Company
was notified that its request for early termination of the waiting period was
granted.
23
<PAGE>
THE PARTIES
INFONAUTICS
Infonautics is an Internet information services company providing
access to a diverse collection of content to schools, libraries, individuals and
businesses. The Company's subscription-based Electric Library service combines
content from magazines, newspapers, books, wire services, television and radio
transcripts, photo archives and maps. Electric Library is marketed to
educational institutions, such as schools and libraries, and to individuals over
the Internet and through online services such as America Online.
Infonautics also provides a variety of advertising and sponsorship
supported Sleuth services that are currently provided free to the user over the
Internet. The Company Sleuth service aggregates free content from selected World
Wide Web sites, and provides e-mail notification of new information posted to
these Web sites on specific public companies. The content on the site is drawn
from a variety of sources, and includes information on new patents, Internet
domain name registrations, stock prices, insider trading activity, SEC filings
and news reports. The Sports Sleuth service searches hundreds of national and
local Web sites to provide users with comprehensive daily e-mail reports on
their favorite teams and sports based on a personal profile created by the user.
The Job Sleuth service searches job sites on the Internet and databases for job
postings based on users' profiles. The service is intended to save users from
the task of searching the many online job-related sources one by one. Job Sleuth
users receive a daily e-mail containing job opportunities from over a dozen job
sites on the Internet that match users' career interests based on profiles they
create.
The Company's e-commerce online publishing services, formerly referred
to as content management and custom archive services, make use of the Company's
technology, systems-operation and customer service functions to provide
e-commerce archive services to publishers who wish to make their content
available, for a fee, on the Internet.
BELL & HOWELL
Bell & Howell, together with its subsidiaries, is a leading global
information solutions and services provider. In each of its businesses, Bell &
Howell transforms information through software and services, helping its
customers operate more effectively and efficiently. Within its three business
segments, Information Access, Mail and Messaging Technologies and Imaging, Bell
& Howell focuses on well-defined market niches where it is or can become the
leader, with an emphasis on adding value to information through software, and on
providing world class service and support to create strong recurring revenue
streams. Within its Information Access segment, Bell & Howell develops and
markets information services and systems that are focused on the needs of its
customers in select vertical niches, including libraries of all kinds (including
college and university, and elementary and secondary schools as well as public)
and transportation and vehicle dealers. Within its Mail and Messaging
Technologies segment, Bell & Howell develops and markets a complete range of
high volume mail processing systems and services, which increasingly utilize
Bell & Howell's proprietary software to expand the capabilities and improve the
efficiency and effectiveness of customers' mailing operations. Within its
Imaging segment, Bell & Howell develops and markets imaging systems and
components that enable its customers to effectively file and access their
documents and records, with a focus on financial institutions, governmental
agencies and other paper intensive industries.
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF THE COMPANY
The following Pro Forma Balance Sheet as of June 30, 1999, and the Pro
Forma Statements of Operations for the period ended June 30, 1999 and the year
ended December 31, 1998, are presented to give effect to the sale of the
Electric Library and Online Publishing (OLP) businesses.
Historical financial data used to prepare the pro forma financial
statements were derived from the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, which is attached to this Proxy Statement as Exhibit B and made a part
hereof, and the unaudited consolidated financial statements included in the
Company's quarterly report on Form 10-Q for the period ended June 30, 1999,
which is attached to this Proxy Statement as Exhibit C and made a part hereof.
These pro forma financial statements should be read in conjunction with such
historical financial statements.
The pro forma adjustments reflected herein are based on available
information and certain assumptions that the Company's management believes are
reasonable. Pro forma adjustments made in the Pro Forma Balance Sheet assume
that the sales of the Electric Library and OLP businesses were consummated on
June 30, 1999, and do not reflect the impact of the Electric Library or OLP
businesses' operating results or changes in balance sheet amounts subsequent to
June 30, 1999. The pro forma adjustments to the Pro Forma Statements of
Operations assume that the sales of the Electric Library and OLP businesses were
consummated on January 1, 1998.
The Pro Forma Balance Sheet and Pro Forma Statements of Operations are
based on assumptions and approximations and therefore, do not reflect in precise
numerical terms the impact of the transaction on the historical financial
statements. In addition, such pro forma financial statements should not be used
as a basis for forecasting the future operations of the Company.
25
<PAGE>
INFONAUTICS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
Less
Electric Less
Library OLP
Net Assets Net Assets Pro Forma
Historical Sold Sold Adjustment Pro Forma
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS 1 2(A) 2(A)
Current assets:
Cash and cash equivalents.............................. $ 1,577 $ -- $ -- $ 22,000 2(B) $ 23,577
Receivables:
Trade, less allowance for doubtful accounts
of $90............................................. 5,173 4,710 85 -- 378
Trade, assigned..................................... 1,916 1,734 182 -- --
Other............................................... 176 28 20 -- 128
Prepaid royalties, expenses and other assets........... 581 372 -- -- 209
---------- ---------- ---------- --------- --------
Total current assets 9,423 6,844 287 22,000 24,292
Property and equipment, net................................ 2,318 1,726 51 -- 541
Equity investment.......................................... 5,852 2(C) 5,852
Other assets ............................................. 225 198 9 -- 18
---------- ---------- ---------- --------- --------
Total assets $ 11,966 $ 8,768 $ 347 $ 27,852 $ 30,703
---------- ---------- ---------- --------- --------
---------- ---------- ---------- --------- --------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Less
Electric Less
Library OLP
Net Assets Net Assets Pro Forma
Historical Sold Sold Adjustment Pro Forma
---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, bank.................................... $ 1,533 $ -- $ -- $ -- $ 1,533
Current portion of obligations under capital lease..... 320 320 -- -- --
Accounts payable....................................... 1,331 373 18 -- 940
Accrued expenses....................................... 1,179 634 24 -- 521
Accrued royalties...................................... 1,759 1,050 22 -- 687
Deferred revenue....................................... 9,684 8,410 120 -- 1,154
-------- -------- -------- -------- --------
Total current liabilities 15,806 10,787 184 -- 4,835
Noncurrent portion of obligations under capital lease...... 121 121 -- --
Noncurrent portion of deferred revenue..................... 954 954 -- --
Convertible debt........................................... 2,486 -- -- -- 2,486
-------- -------- -------- -------- --------
Total liabilities 19,367 11,862 184 -- 7,321
-------- -------- -------- -------- --------
Commitments and contingencies
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, no par value, 5,000
Shares authorized, 0 shares issued and
outstanding at June 30, 1999....................... -- -- -- -- --
Class A common stock, no par value; 25,000,000
Shares authorized; one vote per share; 11,594,616
Shares issued and outstanding at June 30, 1999..... -- -- -- -- --
Class B common stock, no par value; 100,000 shares
Authorized, issued and outstanding.................. -- -- -- -- --
Additional paid-in capital................................. 57,930 -- -- -- 57,930
Deferred compensation...................................... (63) -- -- -- (63)
Accumulated deficit........................................ (65,268) -- -- 30,783 2(C) (34,485)
-------- -------- -------- -------- --------
Total shareholders' equity (deficit) (7,401) -- -- 30,783 23,382
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity (deficit) $ 11,966 $ 11,862 $ 184 $30,783 $ 30,703
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
27
<PAGE>
INFONAUTICS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
Less
Electric Less Pro Forma
Historical Library OLP Adjustment Pro Forma
---------- ------- ----- ---------- ---------
1 2(D) 2(D)
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $ 11,208 $ 6,176 $ 422 $ -- $ 4,610
---------- --------- ------- --------- -----------
Costs and expenses:
Cost of revenues........................................ 3,528 1,782 15 (1,148) 2(E) 1,567
984 2(E)
Customer support expenses............................... 570 422 91 -- 57
Technical operations and development expenses........... 4,187 2,055 500 410 2(F) 2,042
Sales and marketing expenses............................ 5,825 3,539 215 -- 2,071
General and administrative expenses..................... 1,569 557 243 -- 769
Loss from equity investment............................. -- -- -- 1,124 1,124
---------- --------- ------- --------- ----------
Total costs and expenses........................... 15,679 8,355 1,064 1,370 7,630
---------- --------- ------- --------- ----------
Loss from operations......................................... (4,471) (2,179) (642) (1,370) (3,020)
Interest income (expense), net............................... (699) (49) -- (650)
Net loss........................................... (5,170) (2,228) (642) (1,370) (3,670)
Redemption of preferred stock in excess of carrying amount... (75) -- -- -- (75)
---------- --------- ------- --------- -----------
Net loss attributable to common shareholders................. $ (5,245) $ (2,228) $ (642) $ (1,370) $ (3,745)
---------- --------- ------- --------- -----------
---------- --------- ------- --------- -----------
Loss per common share- basic and diluted..................... $ (.45) $ (.32)
---------- -----------
---------- -----------
Weighted average shares
outstanding- basic and diluted........................... 11,664,700 11,664,700
---------- ------------
---------- ------------
</TABLE>
28
<PAGE>
INFONAUTICS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Less
Electric Less Pro Forma
Historical Library OLP Adjustment Pro Forma
---------- ------- --- ---------- ---------
1 2(D) 2(D)
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $ 14,925 $ 7,272 $ 701 $ -- $ 6,952
----------- -------- ---------- -------- ----------
Costs and expenses:
Cost of revenues........................................ 4,384 2,280 26 (1,267) 2(E) 2,026
1,215 2(E)
Customer support expenses............................... 1,093 896 87 -- 110
Technical operations and development expenses........... 7,606 4,286 1,016 506 2(F) 2,810
Sales and marketing expenses............................ 14,835 8,720 269 -- 5,846
General and administrative expenses..................... 4,609 2,579 567 -- 1,463
Loss from equity investment............................. -- -- -- 3,934 3,934
---------- ---------- ---------- ----------- ----------
Total costs and expenses........................... 32,527 18,761 1,965 4,388 16,189
---------- ---------- ---------- ----------- ----------
Loss from operations......................................... (17,602) (11,489) (1,264) (4,388) (9,237)
Interest income (expense), net............................... 154 (140) -- -- 294
---------- ---------- ---------- ----------- ----------
Net loss........................................... $ (17,448) $ (11,629) $ (1,264) $ (4,388) $ (8,943)
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
Loss per common share- basic and diluted..................... $ (1.77) $ (.91)
---------- ----------
---------- ----------
Weighted average shares
outstanding- basic and diluted........................... 9,830,900 9,830,900
---------- ---------
---------- ---------
</TABLE>
29
<PAGE>
INFONAUTICS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
1. HISTORICAL:
The historical balances represent the financial position as of
June 30, 1999, and the results of operations for the six months ended June 30,
1999 and for the year ended December 31, 1998 as reported in the historical
consolidated financial statements of Infonautics, Inc. (the Company), included
elsewhere in this Proxy Statement by reference to Infonautics, Inc. Form 10-K
for the year ended December 31, 1998 and Form 10-Q for the quarter ended June
30, 1999.
2. SALE OF THE ASSETS AND LIABILITIES OF THE ELECTRIC LIBRARY BUSINESS AND
ECOMMERCE ONLINE PUBLISHING BUSINESS:
The Company will sell, subject to shareholder approval, all of the net
assets of its Electric Library (Elibrary) services to schools and universities
as well as the net assets of its e-commerce online publishing business. The
sales will be accounted for as taxable sales of assets.
A new company, currently referred to as EDCO, will be formed with the
net assets of Infonautics' Elibrary service and assets of Bell and Howell
Information and Learning Company. Infonautics will receive a 27% equity interest
in EDCO.
The following pro forma adjustments for the sale of the Elibrary assets
and liabilities and the e-commerce online publishing business are reflected as
of June 30, 1999 in the case of the pro forma consolidated balance sheet, or as
of December 31, 1998 and June 30, 1999, in the case of the pro forma
consolidated statements of operations for the year and six months, respectively,
then ended:
A. Net assets purchased by buyer.
B. Gross cash proceeds to be received in connection with the sale
of the:
<TABLE>
<S> <C> <C>
Elibrary business $20,000
E-commerce online publishing business $ 2,000
-------
Total gross cash proceeds $22,000
-------
-------
C. Net change in retained earnings (deficit) is calculated as
follows:
Gross proceeds from sale $22,000
Plus liabilities transferred in
excess of assets $ 2,931
Plus investment in EDCO $10,910
-------
Total gain $35,841
-------
-------
Less:
1998 loss from equity investment $ 3,934
1999 loss from equity investment $ 1,124
--------
change in retained earnings
through June 30, 1999 $30,783
-------
-------
</TABLE>
30
<PAGE>
The gain recorded in connection with the sale of the Elibrary and OLP
businesses is as follows:
Elibrary business $34,004
E-commerce online publishing business $ 1,837
--------
Total Gain $35,841
--------
--------
D. Electric Library includes revenues earned from the sales of
Elibrary to educational and international customers; costs of
sales incurred from the sale of Elibrary to educational and
international customers; and costs associated with the customer
support, technical operations and development, sales and marketing
and general and administrative expenses needed to operate the
Elibrary services.
OLP includes revenues earned from the sale of e-commerce online
publishing services to e-commerce online publishing customers,
costs of sales and other costs associated with delivering these
services to their customers.
E. A content licensing agreement between Infonautics and EDCO
provides for EDCO to pay royalties to the content providers for
all Elibrary revenue, including end-user revenue. As a result of
this agreement, Infonautics will no longer be recording royalties
owed directly to content providers, but will pay to EDCO a royalty
equal to a specified percentage of net Elibrary end-user revenues.
This pro forma adjustment reduces the cost of revenues for actual
royalties expenses incurred by the end-user version of Elibrary
and adds a specified percentage of revenues as is stipulated
in the agreement.
F. A Technical Services agreement between EDCO and Infonautics
provides for EDCO to support the content and technical service of
the end-user version of Elibrary for a service fee equal to a
specified percentage of net Elibrary end-user revenues. This
pro forma adjustment reflects the estimate of the fee owed to
EDCO.
3. TAXES
The new company will be a limited liability company and thus will be
treated as a partnership for Federal income tax purposes. Partnerships are
flow-through operating tax entities in which business income is taxed at the
owner level. Accordingly, a partnership is not a taxable entity, but the
partner's tax liabilities are impacted by the activities of the entity.
Generally, no gain or loss is recognized for tax purposes upon the
contribution of property to a partnership in exchange for a partnership
interest. However, the receipt of property (i.e. cash) in connection with the
contribution will result in a realized gain for Federal income tax purposes.
Additionally, the sale of the Company's e-commerce online publishing business
will also result in a realized gain for Federal income tax purposes. However,
with the Company's available Federal net operating loss carryovers, it is
expected that the realized gain resulting from the transaction will not be
recognized for Federal income tax purposes. Accordingly, no current Federal
income taxes should result upon consummating the transaction.
31
<PAGE>
SELECTED FINANCIAL DATA -
BELL & HOWELL INFORMATION AND LEARNING K-12 BUSINESS
The following tables present selected financial information of the Bell
& Howell Information and Learning K-12 Business with respect to each of the
three fiscal years ended December 28, 1996, January 3, 1998 and January 2, 1999
and with respect to the 1999 fiscal year to date through June 1999 (under the
caption Consolidated Statements of Operations Data) and with respect to the
fiscal years ended January 3, 1998 and January 2, 1999 and the fiscal month
ended June 1999 (under the caption Consolidated Balance Sheet Data). The data
for the fiscal years ended December 28, 1996, January 3, 1998 and January 2,
1999 are derived from the audited financial statements of the Bell & Howell
Information and Learning K-12 Business, presented elsewhere is this proxy
statement. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Bell & Howell Information and Learning K-12 Business and the
financial statements and notes thereto of the Bell & Howell Information and
Learning K-12 Business.
<TABLE>
<CAPTION>
FISCAL YEAR TO DATE
FISCAL YEAR THROUGH
CONSOLIDATED STATEMENTS OF OPERATIONS June June
DATA: 1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(in thousands) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue $ 5,835 $ 6,722 $10,006 $ 3,004 $ 5,561
------- ------- ------- ------- -------
Costs and expenses:
Costs of revenues 1,317 2,221 3,916 1,602 2,867
Customer support expenses -- -- -- -- --
Technical operations and
development expenses -- 1,856 875 438 450
Sales and marketing expenses 1,995 4,236 6,617 3,166 4,026
General and administrative
expenses -- -- -- -- --
------- ------- ------- ------- -------
Total costs and expenses 3,312 8,313 11,408 5,206 7,343
------- ------- ------- ------- -------
Net Earnings (Loss) $2,523 $(1,591) $(1,402) $(2,202) $(1,782)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
<CAPTION>
FISCAL YEAR END
CONSOLIDATED BALANCE SHEET DATA: 1997 1998 JUNE 30, 1999
---- ---- -------------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and investments $ -- $ -- $ --
Working capital (deficit) (3,406) (7,528) (6,324)
Total assets 2,472 2,985 2,339
Long term obligations, net of current portion -- -- --
Business equity (deficit) (3,174) (7,223) (5,910)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
BELL & HOWELL INFORMATION AND LEARNING K-12 BUSINESS
This section should be read in conjunction with the Financial
Statements of Bell & Howell Information and Learning K-12 Business ("Bell and
Howell K-12 Business") and the notes thereto.
RESULTS OF OPERATIONS
First Half 1999 Compared to First Half 1998. Bell and Howell K-12
Business's net sales increased $2.6 million, or 85%, to $5.6 million in the
first half of 1999 as the electronic subscription base continued its rapid
growth. The strong sales of ProQuest Direct(TM) (Bell and Howell K-12 Business's
internet-based product offering), was partially offset by lower CD-ROM
subscriptions as customers continue to migrate to the on-line delivery of
information via the internet. The number of schools subscribing to Bell and
Howell K-12 Business's electronic products increased to more than 21,000,
resulting from a variety of product enhancements (additional content, improved
interface, and increased search capabilities) and an expanded sales force.
Bell and Howell K-12 Business's cost of sales increased $1.3 million,
or 79%, to $2.9 million in the first half of 1999, with the gross profit (net
sales less cost of sales) percentage decreasing by 1.8 percentage points to
48.4%. The lower gross profit percentage in the first half of 1999 primarily
resulted from increased data center costs, which resulted from acquiring the
additional capacity needed to address the strong sales growth.
Research and development expense of $.5 million was virtually constant
with the prior year level. Bell and Howell K-12 Business continually seeks to
take advantage of new product/technology opportunities with an emphasis on
internet capabilities and software solutions. Bell and Howell K-12 Business's
research and development expenditures include expenses primarily for database
and software development, and information delivery systems.
Selling and administrative expense increased $.9 million, or 27%, to
$4.0 million in the first half of 1999 reflecting Bell and Howell K-12
Business's increased investment in sales and marketing resources (which reflects
an increase in the sales force to capitalize on the sales growth opportunities
of internet-based products).
The net loss decreased $.4 million, or 19%, to $1.7 million in the
first half of 1999 as the benefit of the higher sales volume was offset by the
aforementioned sales force expansion and the costs to provide additional data
center capacity to accommodate future sales growth opportunities.
Cash used by operations increased $1.7 million to $2.9 million in the
first half of 1999 due to increased working capital requirements.
Fiscal 1998 Compared to Fiscal 1997. Bell and Howell K-12 Business's
net sales increased $3.3 million, or 49%, to $10.0 million in 1998 as the
electronic subscription base continued its rapid growth. The strong sales of
ProQuest DirectTM (Bell and Howell K-12 Business's internet-based product
offering), was partially offset by lower CDROM subscriptions as customers
continue to migrate to the on-line delivery of information via the internet. The
number of schools subscribing to Bell and Howell K-12 Business's electronic
products increased to more than 16,000, resulting from a variety of product
enhancements (additional content, improved interface, and increased search
capabilities) and an expanded sales force.
Bell and Howell K-12 Business's cost of sales increased $1.7 million,
or 76%, to $3.9 million in 1998, with the gross profit (net sales less cost of
sales) percentage decreasing by 6.1 percentage points to 60.9%. The lower gross
profit percentage in 1998 resulted from a higher royalty rate (based on a shift
in the mix of publications being accessed by Bell and Howell K-12 Business's
products).
33
<PAGE>
Research and development expense of $.9 million in 1998 was below the
prior year level as Bell and Howell K-12 Business invested significantly in 1997
to develop/enhance software interfaces specifically tailored for the K-12
market. Bell and Howell K-12 Business continually seeks to take advantage of new
product/technology opportunities with an emphasis on internet capabilities and
software solutions. Bell and Howell K-12 Business's research and development
expenditures include expenses primarily for database and software development,
and information delivery systems.
Selling and administrative expense increased $2.4 million, or 56%, to
$6.6 million in 1998 reflecting Bell and Howell K-12 Business's increased
investment in sales and marketing resources (which reflects an increase in the
sales force to capitalize on the sales growth opportunities of internet-based
products).
The net loss decreased $.2 million, or 12%, to $1.4 million in 1998 as
the benefit of the higher sales volume was offset by the aforementioned sales
force expansion and the costs to provide additional data center capacity to
accommodate future sales growth opportunities.
Fiscal 1997 Compared to Fiscal 1996. Net sales increased $.9 million,
or 15%, to $6.7 million in 1997 as Bell and Howell K-12 Business started to
significantly invest in developing and expanding its presence in the K-12
education market with focused products and sales personnel.
Bell and Howell K-12 Business's cost of sales increased $.9 million, or
69%, to $2.2 million in 1997, with the gross profit (net sales less cost of
sales) percentage decreasing by 10.4 percentage points to 67.0%. The lower gross
profit percentage in 1997 primarily resulted from increased data center costs,
which resulted from acquiring the additional capacity needed to address the
strong sales growth.
Research and development expense of $1.9 million in 1997 related to the
development/enhancement of specifically tailored software interfaces for the
K-12 market. Bell and Howell K-12 Business continually seeks to take advantage
of new product/technology opportunities with an emphasis on internet
capabilities and software solutions. Bell and Howell K-12 Business's research
and development expenditures include expenses primarily for database and
software development, and information delivery systems.
Selling and administrative expense increased $2.2 million, or 112%, to
$4.2 million in 1997 reflecting Bell and Howell K-12 Business's increased
investment in sales and marketing resources (which reflects an increase in the
sales force to capitalize on the sales growth opportunities of internet-based
products).
Net income decreased $4.1 million, to an operating loss of $1.6 million
in 1997, as the benefit of the higher sales volume was more than offset by the
aforementioned investments to develop/enhance the K-12 software interface,
expand the sales force, and to provide additional data center capacity to
accommodate both current and future sales growth opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Since Bell and Howell K-12 Business's inception, the Bell & Howell
Company has provided funding for working capital. Bell and Howell K-12 Business
participates in Bell & Howell Company's cash management system. All cash
generated from and cash required to support Bell and Howell K-12 Business's
operations are deposited and received through the Bell & Howell Company's cash
accounts. Cash provided by operations was $2.9 million in 1998, versus cash used
by operations of $1.1 million in 1997 resulting from the cash inflows related to
the increased customer subscription base.
The cash used by operations was $1.1 million in 1997, versus cash
provided by operations of $2.9 million in the prior year. The lower operating
cash flows in 1997 resulted from the aforementioned investments to
34
<PAGE>
develop/enhance the K-12 software interface, expand the sales force, and to
provide additional data center capacity to accommodate both current and future
sales growth opportunities.
In July 1999, Bell & Howell Company announced that it has reached
agreement with Infonautics, Inc. to combine the Infonautics' K-12 Business with
the Bell & Howell Information and Learning K-12 Business, into a newly created
limited liability corporation, with Bell & Howell Company as the majority owner.
The transaction is expected to close during the fourth quarter of 1999, subject
to the approval of Infonautics' shareholders. Bell & Howell Company has made a
commitment to continue to provide financing to Bell and Howell K-12 Business
until the transaction is consummated.
BUSINESSES TO BE TRANSFERRED
OVERVIEW
The Company and BHIL are currently engaged in certain complementary
businesses. The Company provides and distributes its Electric Library service to
educational institutions, such as schools and public libraries, and to
individual end-users over the Internet and through online services. BHIL
provides and distributes its ProQuest service, which provides information from
periodicals and newspapers, dissertations, out-of-print books and other
scholarly collections through the Internet and other electronic media, to
elementary and secondary schools, colleges and universities, public, corporate
and government libraries and other information providers that resell BHIL's
electronic content.
EDCO will combine certain aspects of these businesses and will focus
primarily on sales in the K-12 Market. EDCO will also provide research and
reference services to the Public Library Market. It is likely that EDCO will
acquire other businesses in the future.
BHIL will continue to provide research and reference services to the
Post-Secondary Education Market. The Company will continue to provide its
Electric Library service in its End-User Business. Bell and Howell K-12 Business
will also sell its Online Publishing Business to BHIL. See "Summary - The
Transactions - Overview" on page 12 for a more complete description of these
markets and businesses.
INFONAUTICS
Business to be Contributed to EDCO. The Company will contribute to EDCO
its assets and liabilities that relate exclusively to its Electric Library
service (including the related technology). However, the Company will not
contribute certain assets that relate directly to the distribution of the
Electric Library service in the End-User Business or its assets and liabilities
related to Company Sleuth and similar businesses. However, the Company has
granted to BHIL an option to purchase the End-User Business.
Electric Library 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. The 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).
35
<PAGE>
The Company has developed several versions of Electric Library that are
marketed through different channels. These versions differ primarily in the
interface used and in the content available. A version of Electric Library
marketed to schools and libraries has been optimized with a customized interface
in order to be more student-friendly, including more educationally-specific
content and no advertising. The assets and liabilities of the Company relating
to this version of Electric Library are those being contributed to EDCO.
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. The Company offers discounts in certain
circumstances, including high-volume purchases and site licenses associated with
district and state contracts.
The Company has also created or is creating a customized version or
versions of Electric Library for use outside the United States that will
include, among other things, local content. The Company currently has
international marketing agreements to provide such services in Canada, the
Republic of Korea, Australia, New Zealand and certain Southeast Asian and South
Pacific locations.
Online Publishing Business. The Company's e-commerce-based Online
Publishing Business will be sold to BHIL under the Master Transaction Agreement.
These services are designed for publishers or other content creators who wish to
make their own content available online and who wish to outsource the entire
operation (or a portion of it) to the Company. The Company converts a
publisher's content to a manageable digital format, implements the chosen
pricing and 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 online
publishing 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. In February 1999, the Company
announced the launch of a new technology platform for its online publishing
business.
Further Information. A more complete description of the businesses
which are owned and operated by the Company is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, copies of which are attached to
this Proxy Statement as Exhibits B and C. These reports also include the
Company's financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the periods covered by the
reports.
BHIL CONTRIBUTED BUSINESS
BHIL will contribute to EDCO its assets and liabilities that relate
exclusively to its ProQuest service (included the related technology) for the
K-12 market. BHIL will continue to provide research and reference through its
ProQuest service to the Post-Secondary Education Market.
ProQuest reference database collections online is designed to allow
users to locate magazine, newspaper, and reference material articles quickly and
easily. ProQuest offers access to this material through a range of
comprehensive, modular, and subject-specific databases built from the over 8,000
publication titles BHIL currently has rights to. In the K-12 market, database
subsets are designed to suit elementary, middle, and high school libraries, as
well as professional libraries at the district level and special libraries like
career & technical schools.
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<PAGE>
ProQuest allows users to search magazines, newspapers, and reference
material by keyword, publication, topic, or subject searches. Users may enter
key words using Boolean search strategies, phrase searching, or by building a
complex search using Advanced Search and Search Wizard.
ProQuest offers students and teachers site licensing and remote home
access that provides maximum opportunity for research and helps learners pursue
class assignments and personal study after hours. Schools may choose to
authenticate through IP address or account name with password.
The following ProQuest online collections are being contributed to
EDCO:
- - ProQuest Platinum, Gold, Silver, and Bronze: general reference collections
built for high school research
- - ProQuest JuniorQuest: general reference collection built for middle school
research
- - ProQuest KidQuest: general reference collection built for elementary
school reference available with a unique children's graphical topic search
interface
- - ProQuest Professional Education: specialty research database built for
K-12 educators, administrators, technology and curriculum coordinators, and
library/media specialists for continuing education and staff development
- - ProQuest Career & Technical Education: specialty reference database built
for vocational schools with special emphasis on trade publications
- - ProQuest Health & Science: specialty reference database built for schools
with heavy health and science research needs
- - ProQuest Newspapers: general reference collections that deliver local,
regional, national, international, and premium primary source newspaper
coverage
- - ProQuest Religion: specialty reference database built for schools with
religious and philosophical research needs
- - Periodical Archive: a future collection of deep-archive material from the
BHIL digital vault
ProQuest collections on CD-ROM offer periodical, newspaper, and topical
research collections assembled from the more than 8,000 publication titles BHIL
currently has rights to. Collections run on Windows 3.X and higher operating
systems. Users may search by topic or key word. Users may enter key words using
Boolean search strategies, phrase searching, or build a complex search using the
advanced search indexes. Results are returned in reverse chronological order.
Users choose to view the article's abstract and citation, ASCII full text, or
the page image where the original article is reproduced as it appeared in the
publication. Access to abstracting begins on average from 1983 to present; ASCII
full text 1992 to present; and page image 1988 to present. All ASCII full text
CD-ROM databases are fully networkable to provide opportunity for broad access.
The following ProQuest CD-ROM collections are being contributed to EDCO:
- - Periodical Abstracts Plus Text
- - Resource One Full Text
- - Resource One Select Full Text
- - Magazine Express
- - IssueQuest
- - Individual newspaper collections
37
<PAGE>
CERTAIN RELATED PARTY TRANSACTIONS
At the closing of the proposed transaction, EDCO, BHIL and the Company will
enter into a variety of operating and service agreements, technical and
non-technical support services agreements and license agreements. See "The
Master Transaction Agreement - Services Agreements" and "The Master Transaction
Agreement - License Agreements" for a more complete description of these
agreements.
INTEREST OF INFONAUTICS DIRECTORS AND EXECUTIVE OFFICERS IN THE
TRANSACTIONS
In considering the recommendation of the Infonautics board with respect to
the Transactions, shareholders should be aware that officers of Infonautics,
including an officer who is also a director, have interests in the Transactions
that are different from, or in addition to, the interests of shareholders.
POSITIONS OF CERTAIN OFFICERS AND DIRECTORS WITH EDCO
Under the Master Transaction Agreement David Van Riper Morris will continue
for at least six months in a position responsible for the smooth transition of
the Contributed Business into EDCO. Mr. Morris will also serve as a member of
the management board of EDCO. Mr. Morris will remain as the President and Chief
Executive Officer and as a director of the Company. Lloyd N. Morrisett, a
director of the Company, will serve as a member of the management board of EDCO.
VESTING OF OPTIONS
The terms of the 1996 Equity Compensation Plan and employment agreement and
other arrangements provide that the options to purchase shares which have been
granted to various parties will automatically vest upon the closing of the
Transactions. The following table identifies executive officers of Infonautics
and the options that vest as a result of the Transactions. Value is based on the
closing price of Infonautics common stock on the Nasdaq Small Cap Market on
July 30, 1999 less the exercise price per share of the Infonautics options.
<TABLE>
<CAPTION>
Number of Number of options
vested options which become Value of options Value of all options
as of vested at the exercisable as a exercisable at
Name July 1, 1999 closing of the merger result of the merger closing of the merger
---- ------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
William Burger 27,500 32,500 $ 110,000 $ 218,750
Gerard J. Lewis, Jr. 46,250 23,750 $ 74,688 $ 261,875
David Van Riper Morris 316,150 122,050 $ 320,375 $1,269,000
Federica F. O'Brien 5,500 12,500 $ 66,054 $ 85,530
Alan Preston 6,750 18,500 $ 91,358 $ 121,716
Ram Mohan 11,750 21,750 $ 89,705 $ 135,663
</TABLE>
38
<PAGE>
THE MASTER TRANSACTION AGREEMENT
The Master Transaction Agreement was executed on July 8, 1999 and
amended on September 28, 1999. The following summarizes its principal terms. The
Master Transaction Agreement, together with the amendment thereto, is attached
as Exhibit A to this proxy statement. This summary is qualified in its entirety
by reference to the Master Transaction Agreement. The Company encourages all
shareholders to read the Master Transaction Agreement carefully.
FORMATION OF EDCO AND CONTRIBUTION OF ASSETS
Under the Master Transaction Agreement Bell & Howell agreed to cause
BHIL to organize EDCO. EDCO is a Delaware limited liability company.
BHIL will contribute to EDCO the assets and liabilities of BHIL that
relate exclusively to or arise from sales to the K-12 Market and will provide
$20.0 million in cash to EDCO. In exchange for its contribution, BHIL will
receive a 73% equity interest in EDCO, and EDCO will perform certain services
under customer contracts transferred to EDCO by BHIL.
The Company will contribute to EDCO its assets and liabilities that
relate exclusively to its Electric Library service (including the related
technology). However, the Company will not contribute certain assets that relate
directly to the distribution of the Electric Library service in the End-User
Business. In exchange for its contribution, the Company will receive a cash
payment of $20 million from EDCO (of which $5 million is payable at closing and
$15 million is payable on January 3, 2000) and a 27% equity interest in EDCO.
SALE OF ONLINE PUBLISHING BUSINESS
Under the Master Transaction Agreement the Company has agreed to sell
to BHIL, and Bell & Howell has agreed to cause BHIL to purchase, the assets and
liabilities of the Company that relate exclusively to the Company's Online
Publishing business. In exchange for the Company's online publishing business,
BHIL will pay to the Company $2 million in cash, payable on January 3, 2000.
RIGHTS OF EDCO TO PURCHASE END-USER BUSINESS
The Company has granted EDCO a right of first refusal and an exclusive
call option to purchase the End-User Business on a stand-alone basis (not as
part of a change of control of the Company) during the two years after the
closing. The price payable under the call option is twice the net revenue of the
End-User Business for the preceding twelve months. See " - Post-Closing
Agreements - Rights of EDCO with Respect to the Company's End-User Business."
OPERATIONS FOLLOWING THE CLOSING
After the closing EDCO will be primarily engaged in the delivering
products and services (including Electric Library and ProQuest) to the K-12
Market and the Public Library Market. The parties expect EDCO to fund its
working capital on a stand-alone basis if possible. If EDCO is not able to fund
its working capital on a stand-alone basis, the equity owners of EDCO will have
the option to lend cash to EDCO, pro rata based on their then-current equity
ownership positions, at market rates. If either equity owner does not elect to
lend cash on a pro rata basis, the other owners may provide financing which may
be convertible into additional equity ownership, thereby increasing the
ownership position of the equity owner that contributed more than its pro rata
share of the financing.
After the closing the Company will be primarily engaged in its Sleuth
type businesses and in the distribution of Electric Library in the End-User
Business; and BHIL will be primarily engaged in the distribution of ProQuest to
the Post-Secondary Education Market, in the online publishing business and in
its other continuing businesses.
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<PAGE>
Each of the Company, EDCO and BHIL may engage in other businesses
following the closing, subject to the obligations contained in the
noncompetition agreements each of them will enter into at the closing, and it is
likely that EDCO will acquire other businesses. See " - Noncompetition
Agreements."
THE CAPITALIZATION AGREEMENTS
The Master Transaction Agreement provides that at the closing EDCO and
each of the Company and BHIL will execute and deliver a Bill of Sale, Assignment
and Assumption and Indemnity Agreement (each, a "Capitalization Agreement")
providing for the contributions of assets by the Company and BHIL and the
assumption of the liabilities by EDCO, as described under " - Formation of EDCO
and Contribution of Assets." Under the Capitalization Agreements, the Company
and BHIL (each, a "Seller") will make to EDCO customary representations and
warranties in connection with the contributed assets and liabilities to be
assumed, including (but not limited to) representations relating to:
- the absence of material adverse changes in the business being
contributed;
- the Seller's title to the assets;
- the right of the Seller to use the intellectual property being
contributed and the absence of notice of any claims that the
intellectual property infringes the rights of others;
- the validity and binding effect of the material contracts being
contributed on the Seller and, to the Seller's knowledge, on the
other parties to the contracts;
- the absence of any commitments between the business being
contributed and the Seller or its affiliates except as disclosed;
- the absence any material litigation affecting the business being
contributed or any material violation of law by the business being
contributed except as disclosed;
- the compliance with various provisions of the federal Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), of
the employee benefit plans of the business being contributed;
- the compliance by the business being contributed with applicable
environmental laws and the absence of claims that the Seller is
liable under the federal Comprehensive Environmental Response,
Compensation and Liability Act; and
- the absence of complaints of unfair labor practices or other
proceedings and of strikes, work stoppages, arbitration
proceedings or union organizing efforts.
EDCO will make customary representations and warranties to each Seller
relating to its organization, power and authority to own, lease and operate its
properties and to carry on its business; authorization of its execution and
delivery of the Capitalization Agreement; absence of any required governmental
filings, consents or permits that have not been obtained; and absence of
conflict with its charter documents, agreements and other obligations to which
it is a party or by which it or its properties are bound and with applicable
laws, orders, rules and regulations.
The Capitalization Agreements also provide that each Seller will
indemnify EDCO, and EDCO will indemnify each Seller, for various losses, costs
and expenses to the extent they result from a breach of a representation of
warranty made by such party or failure of such party to perform any covenant or
agreement under the Capitalization Agreement. No indemnification is required
until damages exceed $100,000 and then only to the extent of the excess over
$100,000. In addition, no indemnification is required to the extent that all
such payments by the Seller would exceed $20.0 million.
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<PAGE>
The sale and purchase of the Company's Online Publishing Business to
BHIL will also be completed under an agreement similar to the Capitalization
Agreements.
SERVICES AGREEMENTS
At the closing, the parties will enter into a series of agreements
intended to provide continuing interim support for the businesses being
contributed to EDCO as well as to permit the Company to continue to distribute
the Electric Library to the End-User Business. The parties intend that,
following an interim period, EDCO and the Company will be able to independently
provide such services for themselves. These agreements are:
- A Technical Services Agreement between BHIL and EDCO (the "BHIL
Technical Services Agreement") under which BHIL will agree to
perform certain data center and information technology support
services to support the use of ProQuest by EDCO's customers in the
K-12 Market. The BHIL Technical Services Agreement will have a
term of 36 months, renewable by mutual agreement of the parties.
EDCO will have the right to terminate the BHIL Technical Services
Agreement upon 90 days written notice, subject to certain
limitations if EDCO desires to contract with a third party to
perform the services called for by the BHIL Technical Services
Agreement. EDCO will pay to BHIL a specified amount for the first
12 months and thereafter the cost to BHIL of providing these
services, including an allocable share of interest, depreciation,
amortization and corporate overhead during the preceding 12
months.
- A Non-Technical Support Service Agreement between BHIL and EDCO
(the "BHIL Non-Technical Support Services Agreement") under which
BHIL will provide customer support, billing and accounting
support, human resources, office space, office equipment, trade
show and promotional materials and other services required on the
same basis as BHIL currently provides such services to the
business it is contributing to EDCO. These services will be
provided at no cost, except that office space and office equipment
will be provided at a market rate and trade show and promotional
materials will be provided at their actual cost. The term of the
BHIL Non-Technical Support Services Agreement is six months.
- A Representation Agreement between BHIL and EDCO (the "BHIL
Representation Agreement") under which, at a cost to be mutually
agreed upon, BHIL will act as a sales agent for sales of EDCO's
products to customers other than in the K-12 Market and the Public
Library Market (the "Excluded Markets") and to customers outside
North America. BHIL and EDCO will also agree that they will
cooperate in bids to customers that span the K-12 Market and the
Excluded Markets; that BHIL has the right to include certain
products of BHIL that are not being contributed to EDCO in certain
bids, whether made jointly with EDCO or independently; and that in
bids to the Public Library Market, if ProQuest is used in a joint
bid, BHIL will determine the terms and conditions, if Electric
Library is used in a joint bid, EDCO will determine the terms and
conditions, and if the parties cannot agree, either party can make
an independent bid with respect to markets served by it. EDCO also
agrees that it will not renew any contracts that are assigned to
it by the Company with customers in the Post Secondary Education
Market and will use its best efforts to cause such customers to
use ProQuest on expiration of such contracts.
- A Technical Services Agreement between EDCO and the Company (the
"EDCO Technical Services Agreement") under which EDCO will agree
to perform certain data center and information technology support
services to support the Company's continued distribution of the
Electric Library to customers in the End-User Business. The EDCO
Technical Services Agreement will have a term of 36 months,
renewable by mutual agreement of the parties. The Company will
have the right to terminate the EDCO Technical Services Agreement
upon 90 days written notice, subject to certain limitations if the
Company desires to contract with a third party to perform the
services called for by the EDCO Technical Services Agreement. The
Company will pay to EDCO a specified amount for the first 12
months, and thereafter the cost to EDCO of providing these
services, including an allocable share of interest, depreciation,
amortization and corporate overhead during the preceding 12
months.
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- A Service Agreement between EDCO and BHIL under which EDCO will
agree to perform all services required under the customer
contracts transferred by BHIL to EDCO in exchange for a $3.5
million cash payment by BHIL to EDCO at closing.
- A Non-Technical Support Service Agreement between the Company and
EDCO (the "Infonautics NonTechnical Support Services Agreement")
under which the Company and EDCO agree to provide to each other
customer support, billing and accounting support and other
services as required. These services will be provided at no cost,
except that office space and office equipment will be provided at
a market rate and trade show and promotional materials will be
provided at their actual cost. The term of the Infonautics
Non-Technical Support Services Agreement is six months.
LICENSE AGREEMENTS
At the closing, the parties will enter into the following license
agreements:
- A Content License Agreement between BHIL and EDCO under which BHIL
will license to EDCO all materials included at the time of the
closing in BHIL's products for the K-12 Market in exchange for
specified royalty payments. The license will be limited to the
K-12 Market and the Public Library Market. The term of this
agreement will be five years.
- A Software License Agreement between BHIL and EDCO under which
BHIL will grant to EDCO a perpetual, royalty-free, nontransferable
license to ProQuest and ProQuest Searchware for Windows and DOS.
EDCO will have the right to use the licensed software only in the
K-12 Market. In addition, EDCO will have the right to use the
ProQuest family of trademarks and domain names registered to BHIL
in the K-12 Market and the Public Library Market for 12 months
following the closing and thereafter only so long as EDCO's use
does not create confusion to customers of BHIL.
- A Content License Agreement between EDCO and the Company under
which EDCO will license to the Company all materials included at
the time of the closing in the Company's End-User Business and
Sleuth-type applications in exchange for specified royalty
payments. The license will be limited to the End-User Business and
subject to certain other limitations. The term of this agreement
will be five years.
- A Software and Technology License Agreement between EDCO and the
Company under which EDCO will grant to the Company a perpetual,
royalty-free, nontransferable license to use certain patents,
software and technology contributed by the Company to EDCO in the
End-User Business, for Sleuth-type products and for new products
of the Company so long as the Company's use does not violate its
noncompetition agreement (See " - Noncompetition Agreements"). The
Company will also have the right to use the Electric Library
trademarks and domain names so long as the Company makes the
Electric Library products or services available in its end-user
business. EDCO may terminate this license on a change of control
of the Company.
- An Online Publishing License Agreement among BHIL, the Company and
EDCO under which BHIL will grant to the Company and EDCO a
perpetual, royalty-free license to use the online publishing
software sold by the Company to BHIL, except that neither the
Company nor EDCO may use such software to provide online
publishing services.
- An INFO Sleuth Software and Technology License Agreement among the
Company, BHIL and EDCO under which the Company will grant to BHIL
and EDCO a perpetual, royalty free, nontransferable license to use
the software and technology related to its Sleuth products. EDCO
will have the right to use such software and technology only in
the K-12 Market and the Public Library Market, and BHIL will have
the
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right to use such software and technology only in its online
publishing business and in the Post Secondary Education Market.
The Company may terminate this agreement as to either BHIL or EDCO
on a change of control of such entity.
NONCOMPETITION AGREEMENTS
At the closing, each of the Company, BHIL and EDCO will enter into a
Noncompetition Agreement. Each of the Noncompetition Agreements will have a term
of three years. The Noncompetition Agreements provide that:
- The Company will not, without the prior written consent of EDCO,
engage in the distribution of products or services delivered
electronically or in machine readable format to the K-12 Market,
the Public Library Market or the Post Secondary Education Market
or which are targeted primarily for distribution to customers in
any of those markets (except that the Company can engage in the
End-User Business subject to certain limitations).
- EDCO will not, without the prior written consent of the Company
and BHIL, engage in the distribution of products or services to
the Post Secondary Education Market or that are targeted primarily
for distribution to customers in that market.
- BHIL will not, without the prior written consent of EDCO, engage
in the distribution of products or services delivered
electronically or in machine readable format to the K-12 Market or
that are targeted primarily for distribution to customers in that
Market.
- Each of the Company and EDCO will not, without the prior written
consent of BHIL, engage in any online publishing services anywhere
in the world.
Each Noncompetition Agreement also provides that the party agreeing not
to compete will not, without the prior written consent of the party or
parties benefited by the Noncompetition Agreement:
- Own, manage, operate, be compensated by, participate in, render
advice to, have any right to or interest in any other business
directly or indirectly engaged in any restricted activities, with
the exception of the Company's ownership interest in Electric
Schoolhouse, LLC or its successor;
- Divulge, communicate, use or disclose any nonpublic information
concerning the other party or parties or any of their affiliates
or their personnel, business and affairs;
- Interfere with the business relationships or disparage the good
name or reputation of the other party or parties or any of their
affiliates or take any action which brings the other party or
parties or any of their affiliates or business into public
ridicule or disrepute; or
- Solicit for employment or employ any employee of the other party
or parties or any of their affiliates, or request, induce or
advise any employee to leave the employ of the other party or
parties or any of their affiliates.
In the case of each of the Noncompetition Agreements, the ownership of
less than one-tenth of one percent of a publicly traded corporation engaged in
any of the restricted activities will not in and of itself be deemed to be a
violation of the noncompetition covenant.
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OTHER PROVISIONS OF THE MASTER TRANSACTION AGREEMENT
Representations and Warranties. In the Master Transaction Agreement
each of the parties has made certain customary representations and warranties
relating to
- its power and authority to enter into the Master Transaction
Agreement and related agreements and own the equity interests in
EDCO provided under the Master Transaction Agreement;
- the authorization of, and taking of all necessary corporate action
in connection with, its execution, delivery and performance of the
Master Transaction Agreement and related agreements (subject, in
the case of the Company, to receipt of shareholder approval);
- the validity and binding effect of the Master Transaction
Agreement and related agreements;
- the absence of conflict with its charter documents, agreements and
other obligations to which it is a party or by which it or its
properties are bound and with applicable laws, orders, rules and
regulations;
- the absence of any required governmental filings, consents or
permits that have not been obtained except for filings required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the Securities Act of 1933, as amended;
- the due organization of such party;
- the accuracy and completeness of financial information provided by
such party and its conformity with generally accepted accounting
principles;
- the absence of brokers and finders fees and the like relating to
the Transactions (except for fees payable to Allen & Company by
the Company and to BT Wolfenson by Bell & Howell);
- the fact that information contained in this proxy statement
supplied by such party will not, at the time of mailing of this
proxy statement to the Company's shareholders, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated herein or necessary in order to make such
statements, in light of the circumstances under which they are
made, not misleading; and
- the accuracy of the representations and warranties of such party
contained in the Capitalization Agreements.
In addition, the Company has represented and warranted that it has
received the report of Allen & Company that the consideration to be received by
the Company in connection with the Transactions is fair from a financial point
of view to the Company and that the Company's board of directors has concluded
that the transactions are in the best interest of the Company's shareholders.
CERTAIN COVENANTS. Each of the parties has agreed that, from the date
of the Master Transaction Agreement until the closing:
- it will preserve, protect and maintain the business it is to
contribute to EDCO and, in the case of the Company, the online
publishing business, consistent with current practice and in the
ordinary course of business and that it will not take certain
actions in connection with such business without the prior written
consent of the other party;
- the parties agree to give each other and their representatives
full access during normal business hours and with reasonable
notice to their respective properties, books, contracts,
commitments and records and to provide certain reports and other
information;
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- each party will use its reasonable commercial efforts to hold in
confidence all non-public documents and information provided by
the other party;
- each party will cooperate to take such actions as may be necessary
to obtain governmental and other third party approvals required to
preserve their material contractual relationships and to complete
the Transactions;
- the parties will consult with each other prior to issuing any
press release or other public statement and will not issue any
such release or statement without the prior written approval of
the other party, which approval shall not unreasonably be
withheld; and
- the parties will notify each other of certain material events.
The Company also has agreed to submit the Transactions to its
shareholders as promptly as practicable and to use its reasonable best efforts
to obtain shareholder approval of the transactions.
COVENANT OF THE COMPANY RELATING TO ALTERNATIVE TRANSACTIONS. The
Company agreed that after the date of the Master Transaction Agreement and prior
to the date of the closing or earlier termination of the Master Transaction
Agreement, it will not, and will not permit any of its affiliates or their
representatives to, directly or indirectly:
- initiate or solicit any discussion in relation to or any inquiries
or the submission of any proposal or offer relating to a change of
control of the Company that is inconsistent with or provides a
competitive impediment to the Transactions and the ongoing
operations and prospects of EDCO as determined by Bell & Howell
(any such inconsistent or competitive transaction is referred to
as an "Alternative Transaction"), or
- participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, the making
of any proposal that constitutes, or may reasonably be expected to
or lead to, any Alternative Transaction; except that prior to the
vote of shareholders of the Company for approval and adoption of
the Transactions, the Company may take such actions to the extent
that the Company's board of directors determines, in good faith
after consultation with the Company's investment bankers and
outside counsel, that the Alternative Transaction, taken as a
whole, is superior to the Transactions.
The Company has agreed that it will immediately cease and cause to be
terminated any existing initiation, solicitation, encouragement, discussions or
negotiations with parties other than Bell & Howell with respect to Alternative
Transactions.
If the board of directors of the Company receives an Alternative
Transaction that, taken as a whole, it determines to be superior to the
Transactions, as determined in good faith after consultation with the Company's
investment bankers and outside counsel, the board of directors must give Bell &
Howell five days written notice of such an Alternate Transaction and of the
person making such proposal and its principal terms and conditions. If the
shareholders of the Company have not yet voted on the Master Transaction
Agreement, the Company's board of directors may withdraw or modify its approval
or recommendation of the Master Transaction Agreement and terminate the Master
Transaction Agreement, subject to payment of the termination fee discussed under
" - Termination." The Company has agreed that, except as described above, the
Company's board of directors will not amend or modify its resolutions relating
to the Master Transaction Agreement.
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CONDITIONS TO CLOSING
CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to consummate the Transactions are subject to the fulfillment of the
following conditions (which may be waived by the Company):
- The shareholders of the Company must have approved the
Transactions;
- The representations and warranties of Bell & Howell and BHIL must
be true, complete and accurate in all respects if they contain a
materiality qualification and true, complete and accurate in all
material respects if they do not contain a materiality
qualification as if they were made on and as of the date of the
closing;
- EDCO, Bell & Howell and BHIL must have complied in all material
respects with their covenants, agreements and conditions required
to be performed or complied with on or prior to the closing;
- There must be no order, decree or other action by a court or other
governmental body restraining, enjoining or prohibiting the
Transactions;
- All consents of third parties required to consummate the
Transactions or to prevent a breach of or default under any
contract, agreement or other obligation must be obtained, unless
the failure to obtain such consent would not be reasonably likely
to have a material adverse effect on EDCO after the date of the
closing;
- All necessary regulatory approvals must have been obtained;
- None of Bell & Howell, BHIL, the Company, EDCO and any of the
assets to be contributed to EDCO must be a party to or subject to
any litigation related to the Master Transaction Agreement and the
Transactions which is reasonably expected to have a material
adverse effect on the contributed businesses, taken as a whole, as
conducted at closing; and
- The audited financial statements of the business contributed by
BHIL for the three years ended December 31, 1998 must be completed
and must not be materially different from the unaudited financial
statements of that business for the three-year period ended
December 31, 1998 that have been provided to the Company (using
the same accounting methodologies with respect to revenues).
CONDITIONS TO OBLIGATIONS OF BELL & HOWELL AND BHIL. The obligations of
Bell & Howell and BHIL to consummate the Transactions are subject to the
fulfillment of the following conditions (which may be waived by Bell & Howell):
- The shareholders of the Company must have approved the
Transactions;
- The representations and warranties of the Company must be true,
complete and accurate in all respects if they contain a
materiality qualification and true, complete and accurate in all
material respects if they do not contain a materiality
qualification as if they were made on and as of the date of the
closing;
- EDCO and the Company must have complied in all material respects
with their covenants, agreements and conditions required to be
performed or complied with on or prior to the closing;
- There must be no order, decree or other action by a court or other
governmental body restraining, enjoining or prohibiting the
Transactions;
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- All consents of third parties required to consummate the
Transactions or to prevent a breach of or default under any
contract, agreement or other obligation must be obtained, unless
the failure to obtain such consent would not be reasonably likely
to have a material adverse effect on EDCO or on the Company's
Online Publishing Business after the closing date;
- All necessary regulatory approvals must have been obtained;
- None of Bell & Howell, BHIL, the Company, EDCO and any of the
assets to be contributed to EDCO must be a party to or subject to
any litigation related to the Master Transaction Agreement and the
Transactions which is reasonably expected to have a material
adverse effect on the contributed businesses, taken as a whole, as
conducted at closing; and
- The audited financial statements of the business contributed by
the Company for the three years ended December 31, 1998 must be
completed and must not be materially different with respect to
revenues from the unaudited financial statements of that business
for the three-year period ended December 31, 1998 that have been
provided to Bell & Howell.
TERMINATION
TERMINATION. The Master Transaction Agreement and the related
agreements may be terminated and the Transactions may be abandoned at any time
prior to the closing:
(a) by mutual written consent of the parties;
(b) by either the Company or Bell & Howell if the closing does not
occur for any reason by failure to fulfill a condition to closing
by the other party (see " - Conditions to Closing") results in a
failure to close by December 31, 1999, provided that party failing
to satisfy such condition may not terminate the Master Transaction
Agreement under this provision;
(c) by the Company if Bell & Howell materially breaches the Master
Transaction Agreement and that breach is not cured within 30 days
of notice thereof;
(d) by the Bell & Howell if the Company materially breaches the Master
Transaction Agreement and that breach is not cured within 30 days
of notice thereof;
(e) by Bell & Howell, if the Company's board of directors or a
committee of the Company's board of directors:
- resolves to accept or recommend to the Company's shareholders
an Alternative Transaction,
- withdraws or adversely modifies or takes a public position
materially inconsistent with its approval or recommendation to
the Company's shareholders of the Transactions, or
- has not submitted the Master Transaction Agreement and the
Transactions for the approval of the Company's shareholders at
a meeting of shareholders to be held on or prior to November
30, 1999 (or such other later date as mutually agreed to in
writing by the parties as a result of action or inaction by
the SEC solely and exclusively with respect to the
Transactions) and used its reasonable best efforts to obtain
such shareholder approval;
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(f) by Bell & Howell, if there has been a change of control of the
Company or if a tender offer or exchange offer has been commenced
or publicly announced that, if consummated, would have the effect
of a change of control of the Company; or
(g) by the Company, if there has been a change of control of Bell &
Howell or if a tender offer or exchange offer has been commenced
or publicly announced that, if consummated, would have the effect
of a change of control of Bell & Howell; or
(h) by the Company or Bell & Howell, if the approval of the
shareholders of the Company of the Transactions is not obtained
prior to December 1, 1999.
TERMINATION FEES. The Company is obligated to pay to Bell & Howell a
fee of $4.0 million if:
- Bell & Howell terminates the Master Transaction Agreement under
the circumstances described in item (e) under " - Termination";
- Bell & Howell terminates the Master Transaction Agreement under
the circumstances described in item (b), (d) or (h) under " -
Termination" or the Company terminates the Master Transaction
Agreement under the circumstances described in item (h) under " -
Termination" and within 120 days the Company enters into or
announces an agreement or an intent to enter into an agreement to
sell all or substantially all of the assets to be contributed by
the Company to EDCO.
If the Company is not in a position to make the $4.0 million payment in
full because of a lack of available funds, the parties will agree to a payment
schedule including interest on the amount of any unpaid fee at the publicly
announced prime rate of Citibank, N.A. plus 5% from the date the fee was
required to be paid. Any remaining unpaid amount becomes immediately due and
payable in full upon the closing of any sale, assignment or transfer of all or
substantially all of the business that was to be contributed by the Company to
EDCO. If the Company fails to promptly pay to Bell & Howell any termination fee
when due, the Company must pay the costs and expenses (including reasonable
legal fees and expenses) in connection with any action, including the filing of
any lawsuit or other legal action, taken to collect payment, together with
interest on the amount of any unpaid fee at the publicly announced prime rate of
Citibank, N.A. plus 5% from the date the fee was required to be paid.
The termination fee is the sole remedy of Bell & Howell and BHIL with
respect to termination of the Master Transaction Agreement.
POST-CLOSING AGREEMENTS
WORKING CAPITAL. The parties expect EDCO to fund its working capital on
a stand-alone basis if possible. If EDCO is not able to fund its working capital
on a stand-alone basis, the equity owners of EDCO will have the option to lend
cash to EDCO, pro rata based on their then-current equity ownership positions,
at market rates. If either equity owner does not elect to lend cash on a pro
rata basis, the other owners may provide the financing which may be convertible
into equity ownership, thereby increasing the ownership position of the equity
owner that contributed more than its pro rata share of the financing.
CONFIDENTIALITY. The parties agree to use their reasonable commercial
efforts to keep confidential all non-public information relating to the
ownership, governance or operation of EDCO, except for disclosure that is
required by law or judicial or administrative order. The parties also agree not
to use any non-public information or other confidential or proprietary knowledge
of EDCO for any purpose other than in connection with EDCO without the prior
written consent of the other parties, except for information that is publicly
available or was obtained from a third party without breach of the third party's
duties. If either party ceases to be an equity owner of EDCO, it must deliver to
EDCO all
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non-public written material provided to such party and must destroy all
materials prepared by such party based on that information.
MANAGEMENT BOARD OF EDCO. The Master Transaction Agreement provides
that BHIL anticipates that the management board of EDCO will consist of eight
representatives, of which six will be named by Bell & Howell and two will be
named by the Company. The initial headquarters of EDCO shall be in Wayne,
Pennsylvania.
RIGHTS OF EDCO WITH RESPECT TO THE COMPANY'S END-USER BUSINESS. The
Company has granted to EDCO a right of first refusal for two years to purchase
the End-User Business, but only as a stand-alone business and not as part of a
change of control of the Company. If the Company receives a bona fide offer from
a third party to purchase the End-User Business, the Company will notify EDCO of
the terms and conditions of the proposed sale and the identity of the proposed
purchaser, and EDCO will have the right, for 30 days after the notice, to
purchase the End-User Business at the price specified in the offer. If EDCO does
not elect to purchase the End-User Business, the Company may sell it in
accordance with the bona-fide offer. During the two-year period after the
closing, EDCO also has an exclusive call option to acquire the End-User Business
at a price equal to twice the net revenue of the End-User Business for the
preceding twelve months.
EMPLOYEES. Each of the Company and BHIL has agreed to use its
reasonable best efforts to ensure that a sufficient number of employees will
join EDCO so that EDCO can continue to operate the contributed businesses in the
ordinary course consistent with past practice. EDCO will provide appropriate
compensation, benefit and incentive package offers to employees. Each party has
agreed not to solicit for employment any employee of the other party or any of
its affiliates or to request, induce or advise any such employee to leave his or
her employment.
RECORDS AND DOCUMENTS. Subject to the confidentiality provisions
described above, EDCO will grant to each party reasonable access and the right
to make copies of the records and documents of EDCO as may reasonably be
necessary for litigation, preparation of financial statements and tax returns
and tax audits.
DISSOLUTION OF THE ALLIANCE
Beginning on the third anniversary of the date of the closing and
continuing until the earlier of the closing of an underwritten public equity
offering of EDCO or an event which results in a change of control of either the
Company or Bell & Howell or a change of more than 20% in the percentage interest
of either the Company or Bell & Howell in EDCO, Bell & Howell will have an
option to purchase, and the Company will have an option to require Bell & Howell
to purchase, the Company's equity position in EDCO at a valuation determined by
a fair value appraisal (with no discount applied for illiquidity or minority
interest).
The Company has also granted Bell & Howell a right of first offer to
acquire the Company's equity interest in EDCO between the date of the closing
and the date on which EDCO becomes a publicly traded company on the New York
Stock Exchange or the Nasdaq Stock Market, but only if such acquisition is on a
stand-alone basis and not as part of a change of control of the Company. If the
Company desires to sell its equity interest in EDCO, it must notify Bell &
Howell of the terms and conditions on which it will sell its equity interest. If
Bell & Howell does not elect to purchase the Company's interest on the specified
terms within 30 days after receipt of the Company's notice, the Company may sell
its interest to a third party within 90 days after the date of the Company's
notice free of Bell & Howell's right.
THE LIMITED LIABILITY COMPANY AGREEMENT
EDCO will be governed by the terms of a Limited Liability Company
Agreement (the "LLC Agreement") between BHIL and the Company, as the members of
EDCO (the "Members").
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THE MANAGEMENT BOARD
The LLC Agreement provides that EDCO will have a management board
consisting of eight representatives (the "Representatives"), six of whom will be
appointed by BHIL and two of whom will be appointed by the Company. If a
Representative on the management board is removed, resigns or dies, his
replacement will be filled by the Member who appointed the departing
Representative. Each Representative may be removed and replaced with a
substitute at any time with or without cause by the Member who appointed the
Representative. The management board will manage and conduct the business and
affairs of EDCO.
CAPITALIZATION OF EDCO
Neither the Company nor BHIL will have any obligation to make any
capital contribution to EDCO other than the initial capital contributions as
provided in the Master Transaction Agreement. See "The Master Transaction
Agreement - Formation of EDCO and Contribution of Assets." If EDCO needs
additional capital and Members holding more than 50% of the percentage interests
of EDCO agree that an additional capital contribution is desirable, each Member
has the right, but not the obligation, to loan or advance to EDCO its
proportionate share of the total amount of capital required. Loans will bear
interest at market rates and have such other terms as the management board
determines. If a Member does not provides its full proportionate share of any
additional capital contribution, the contributing Members may make up the
deficiency in the form of additional equity, debt or debt convertible into
equity, and the percentage interests of the Members in EDCO will be
appropriately adjusted.
DISTRIBUTIONS
Distributions to Members will be made at such time and in such amounts
as determined by the management board in proportion to the Members' percentage
interests in EDCO. EDCO is required to distribute to each Member on a quarterly
basis, the amount of the Member's estimated tax liability relating to EDCO. Any
shortfall between the estimated amounts distributed on a quarterly basis and a
Member's actual tax liability for any fiscal year will be distributed no later
than March 13 of the following fiscal year. All other distributions will be made
only in the discretion of the management board.
MANAGEMENT OF EDCO
EXECUTIVE OFFICERS
John Lynch, Jr. will be the President and Chief Executive Officer and a
member of the management board of EDCO. Since 1996 Mr. Lynch has worked with new
media companies and played a principal role in the launching of an Internet
venture, Jnana Technologies. From 1989 until 1995 Mr. Lynch served in various
capacities with CCH Incorporated, including President of CCH Legal Information
Services, one of the three major content companies within CCH.
David Van Riper Morris will be a member of the management board of EDCO
and will serve EDCO for at least six months in a position responsible for the
smooth transition of the contributed businesses into EDCO. Mr. Morris has served
as the Chief Executive Officer, President and as a director of the Company since
March 1998. He 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 and later as Vice President of Marketing. Goal was purchased by Legent
in 1992. Prior to his service at Goal, Mr. Morris had various positions with
UCCEL, Inc., a software firm, and IBM Corporation.
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MANAGEMENT BOARD
In addition to Mr. Lynch and Mr. Morris, the initial members of the
management board of EDCO are:
James P. Roemer will be the Chairman of the board of directors of EDCO.
Mr. Roemer, 51, has been Chairman of the Board of Bell & Howell since January
1998 and has been a Director of Bell & Howell since February 1995. In February
1997 he was elected President and Chief Executive Officer of Bell & Howell. From
February 1995 to February 1997 he served as President and Chief Operating
Officer of Bell & Howell. Prior to that, he served as President and Chief
Executive Officer of UMI Company from January 1994 to June 1995. Mr. Roemer
joined Bell & Howell as Vice President and Bell & Howell Publication Systems
Company ("PSC") as President and Chief Operating Officer in October 1991 and was
promoted to President and Chief Executive Officer of PSC in September 1993.
Prior to joining Bell &Howell, Mr. Roemer was President of the Michie Group,
Mead Data Central from December 1989 to October 1991. From January 1982 to
December 1989 he was Vice President and General Manager of Lexis, an on-line
information service. From April 1981 to December 1982 he served as acting
President of Mead Data Central.
Nils Johansson, 50, has been a Director of Bell & Howell since April
1990. Since January 1994, he has held the office of Executive Vice President and
Chief Financial Officer of Bell & Howell. Mr. Johansson served as Senior Vice
President, Finance and Chief Financial Officer of Bell & Howell from December
1991 to January 1994. From May 1989 to December 1991, he was Vice President,
Finance, Treasurer and Chief Financial Officer of Bell & Howell. From February
1981 to May 1989 he held various executive positions with Bell & Howell,
including Corporate Treasurer, and positions in financial planning, analysis and
control, as well as business development.
Lloyd N. Morrisett, 69, has been a director of Infonautics since
February 1994 and as chairman of the board of directors since March 1998. He is
the co-founder of the Children's Television Workshop and served from 1969-1998
as President of The Markel Foundation, a charitable organization. Dr. Morrisett
is a director of WEBS Index Fund, Inc.
William E. Oberndorf, 45, has been a director of Bell & Howell since
July 1988. He has served as Managing Director of SPO Partners & Co. (a private
investment company) since March 1991. He is also a director of Plum Creek Timber
Co., L.P.
Joseph Reynolds, 49, has been President and Chief Executive Officer of
BHIL since April 1998. Prior to joining Bell & Howell, he was Chief Executive
Officer of the School and Career Education Group of Thomson Corporation from
June 1997 to April 1998 and was Chief Operating Officer of that Group from June
1995 to June 1997. From 1982 to June 1995 he held various positions in
management, sales and marketing at Thomson and its Delmar Publishers subsidiary.
Mr. Morris and Mr. Morrisett are the persons named by Infonautics to
serve on the management board of EDCO, and Mr. Lynch, Mr. Roemer, Mr. Johansson,
Mr. Reynolds and Mr. Oberndorf have been named by BHIL. It is anticipated that
BHIL will name one additional representative to the management board of EDCO.
EDCO is currently seeking a Chief Financial Officer and intends to
announce other executive officers prior to the closing of the Transactions.
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PROPOSAL NO. 2 - AMENDMENT OF 1996 EQUITY COMPENSATION PLAN
At the Special Meeting, the shareholders will vote on a proposal to
amend the Company's Amended and Restated 1996 Equity Compensation Plan, as
previously amended (the "Plan") to increase the number of shares of Class A
Common Stock reserved for issuance under the Plan from 1,500,000 to 2,500,000.
The board of directors approved the amendment at its August 18, 1999 meeting,
subject to shareholder approval. One director was unable to attend the August
18, 1999 meeting. A unanimous written consent of directors was subsequently
executed to confirm the board's unanimous approval of the amendment to the Plan.
The board believes the Plan helps the Company to attract, retain and
motivate employees and other key personnel and to encourage them to devote their
best efforts to the business and financial success of the Company. The board
believes that by providing key employees, non-employee directors and consultants
with the opportunity to acquire an equity interest in the Company over time,
stock options serve to align their interests closely with other shareholders.
The Plan has been amended twice before to increase the number of authorized
shares from 500,000 to 1,500,000. As of July 31, 1999, the Company had granted,
net of cancellations, options to purchase 1,177,035 shares under the Plan. The
board of directors believes it is in the best interest of the Company to
increase the number of shares authorized for issuance under the Plan because the
increase will allow the Company to continue to grant stock-based compensation at
levels it deems appropriate.
VOTE REQUIRED FOR APPROVAL
Approval of the proposed amendment to the Plan requires the affirmative
vote of the holders of a majority of the votes cast by all the holders of Class
A Common Stock and Class B Common Stock entitled to vote thereon, voting
together as a single class.
DESCRIPTION OF THE PLAN
GENERAL. The Plan was adopted on February 26, 1996 in connection with
the Company's initial public offering of its common stock. The Plan provides for
grants of stock options to selected officers (including officers who are also
directors) of the Company or its subsidiaries, other employees of the Company or
its subsidiaries and independent contractors and consultants who perform
valuable services to the Company or its subsidiaries. Nonemployee directors of
the Company are entitled to receive formula stock option grants under the Plan.
In addition, the Plan provides for grants of restricted stock, stock
appreciation rights and performance units to participants other than
non-employee directors. Upon approval of the proposed amendment to the Plan,
2,500,000 shares of Class A Common Stock will be reserved for issuance under the
Plan.
ADMINISTRATION OF THE PLAN. The Plan is administered by a committee of
the board of directors (the "Committee"). The Committee can determine the
persons to whom grants may be made, the type, size and other terms and
conditions of each grant, including vesting schedules and the acceleration of
vesting and any other matters arising under the Plan. The members of the
Employee Stock Option Committee, a subcommittee of the Compensation Committee,
currently administer the Plan. The current members of the Committee are
Israel J. Melman and Lloyd N. Morrisett.
GRANTS. Grants under the Plan may consist of (i) options intended to
qualify as incentive stock options ("ISOs") within the meaning of section 422 of
the Internal Revenue Code or (ii) so-called "nonqualified stock options" that
are not intended to qualify. In addition, grants under the Plan may also consist
of grants of (i) restricted stock, (ii) stock appreciation rights or (ii)
performance units.
ELIGIBILITY FOR PARTICIPATION. Grants may be made to employees
(including officers and directors) of the Company or its subsidiaries and to
independent contractors or consultants to the Company or its subsidiaries.
Nonemployee directors are entitled only to formula grants of nonqualified stock
options. As of July 31, 1999, 185
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<PAGE>
employees and 7 directors (including 6 non-employee directors) were eligible to
receive grants under the Plan. During any calendar year, no participant may
receive grants under the Plan for more than 250,000 shares of Class A Common
Stock. As of July 31, 1999, 1,062,174 options were outstanding and held by all
participants as a group under the Plan, at an average exercise price of $4.54
per share. The last reported sales price of the Company's Class A Common Stock
as reported on the Nasdaq Small Cap Market on July 30, 1999 (July 31, 1999 being
a Saturday) was $7.00.
OPTIONS. The exercise price of any ISO granted under the Plan will not
be less than the fair market value of the underlying shares of Class A Common
Stock on the date of grant, except that the exercise price of an ISO granted to
an employee who owns more than 10% of the total combined voting power of all
classes of the stock of the Company or its subsidiaries may not be less than
110% of the fair market value of the underlying shares of Class A Common Stock
on the date of grant. The exercise price of a non-qualified stock option may be
greater than, equal to or less than the fair market value of the underlying
shares of Class A Common Stock on the date of grant. The Committee will
determine the term of each option, except that the exercise period may not
exceed ten years from the date of grant and, in the case of an ISO granted to
any employee who owns more than 10% of the total voting power of all outstanding
stock of the Company or its subsidiaries, the exercise period may not exceed
five years from the date of the grant. A participant may pay the exercise price
(1) in cash, (2) with approval of the Committee, by delivering shares of Class A
Common Stock owned by the participant and having a fair market value on the date
of exercise equal to the exercise price or (3) by a combination of the above
methods.
NON-EMPLOYEE DIRECTORS. Non-employee directors are entitled to receive
nonqualified stock options pursuant to the formula grants under the Plan.
According to the formula grants, each non-employee director who was a member of
the board of directors as of the effective date of the Plan received a grant of
a nonqualified stock option to purchase 10,000 shares of Class A Common Stock at
an exercise price equal to the initial public offering price in the Company's
initial public offering. In addition, each non-employee director who first
became or becomes a member of the board of directors after the effective date of
the Plan received or will receive a grant of 10,000 shares of Class A Common
Stock on the date he or she became or becomes a member of the board of
directors, at an exercise price equal to the closing price on the Nasdaq Small
Cap Market on the date of grant. On each date on which the Company holds its
annual meeting of shareholders, each non-employee director in office immediately
before and after the annual election of directors will receive a grant of a
nonqualified stock option to purchase 2,500 shares of Class A Common Stock at an
exercise price equal to the mean between the last reported "bid" and "asked"
prices per share on the Nasdaq Small Cap Market on the date of the grant. The
term of each such option is five years, and each such option fully exercisable
upon the date of the grant.
STOCK APPRECIATION RIGHTS. The Committee may grant stock appreciation
rights alone or in tandem with any stock option pursuant to the Plan. The base
price of the stock appreciation right will be the greater of (i) the exercise
price of the related stock option or (ii) the fair market value of a share of
Class A Common Stock on the date of grant. Upon exercise, the participant will
receive the amount by which the fair market value of the Class A Common Stock on
the date of exercise exceeds the base price. The participant may elect to have
such appreciation paid in cash or in shares of Class A Common Stock, subject to
Committee approval. To the extent that a participant exercises a tandem stock
appreciation right, the related option terminates. Similarly, on exercise of a
stock option, any related stock appreciation right terminates.
PERFORMANCE UNITS. The Committee may grant performance unit awards
payable in cash or shares of Class A common stock at the end of a specified
performance period pursuant to the Plan. The Committee will determine the length
of the performance period, the maximum payment value of an award and the
required performance goals. Payment will be contingent upon achieving the
performance goals by the end of the performance period. The measure of a
performance unit may, in the Committee's discretion, be equal to the fair market
value of a share of Class A Common Stock. The performance goals will be
comprised of specified annual levels of one or more performance criteria
determined by the Committee, such as earnings per share, balance sheet
measurements, cash return on assets, shareholder return or return on capital.
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<PAGE>
AMENDMENT AND TERMINATION OF THE PLAN. The board of directors may amend
or terminate the Plan at any time, except that the board of directors may not
amend the plan without shareholder approval, to (i) increase the aggregate
number of shares of Class A Common Stock for which grants may be made, (ii)
modify the requirements for eligibility for participation in the Plan or (iii)
make any amendment that requires shareholder approval pursuant to Section 162(m)
of the Internal Revenue Code. The Plan will terminate on the date immediately
preceding the tenth anniversary of its effective date, unless terminated earlier
by the board of directors or extended by the board of directors with the
approval of the shareholders.
ADJUSTMENT PROVISIONS. Subject to the change of control provisions
discussed below, if certain transactions identified in the Plan occur, the board
of directors may appropriately adjust: (i) the number of shares of Class A
Common Stock (and the exercise price per share) subject to the unexercised
portion of any outstanding options or stock appreciation rights, (ii) the number
of shares of Class A Common Stock to be acquired pursuant to a grant which has
not vested and (iii) the number of shares of Class A Common Stock for which
grants may be made under the Plan.
CHANGE OF CONTROL OF THE COMPANY. If there is a change of control of
the Company, all options, restricted stock and stock appreciation rights will
become fully vested. The Company will provide each participant with advance
written notice prior to the change of control (to the extent possible), and each
participant will have the right, within 90 days after such notice, to exercise
the options and stock appreciation rights in full. Any options not exercised on
a timely basis will terminate unless they are exchanged for, or substituted
with, options of the successor corporation. In addition, if a participant
terminates employment with the Company (or its successor) within 12 months
following a change of control, a percentage of the performance unit payments, if
any, for the full performance period in which the participant terminates
employment equal to the percentage of the performance period during which the
participant was in the employ or service of the Company (or its successor) and
all amounts for the prior performance period if not then distributed will be
distributed to such participant in a lump sum.
A change of control is (i) a tender offer, merger or other transaction
as a result of which any person or group (other than the Company, any
subsidiary, any employee benefit plan or trust of the Company or any subsidiary,
or Marvin I. Weinberger, any affiliate of Marvin I. Weinberger or any holders of
the Class B Common Stock) becomes the owner of more than 40% of the common stock
or the combined voting power of the Company's then outstanding securities, (ii)
a liquidation or a sale of substantially all the Company's assets, (iii) the
individuals constituting the board of directors or individuals nominated or
elected by them cease to constitute a majority of the board of directors, or
(iv) the Company merges or consolidates with any other corporation (other than a
wholly owned subsidiary) and is not the surviving corporation (or survives only
as a subsidiary of another corporation).
SECTION 162(M). Under Section 162(m) of the Internal Revenue Code, the
Company may be precluded from claiming a federal income tax deduction for total
remuneration in excess of $1,000,000 paid to the chief executive officer or to
any of the other four most highly compensated officers in any one year. Total
remuneration would include amounts received upon the exercise of stock options
granted under the Plan and the value of shares received when the shares of
restricted stock became transferable (or such other time when income is
recognized). An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by shareholders that meets certain requirements. The
Plan is intended to allow grants of options and stock appreciation rights to
meet the requirements of "performance-based compensation." Grants of restricted
stock and performance units generally will not qualify as performance-based
compensation.
Options to purchase the following number of shares of Class A Common
Stock granted under the Plan from inception of the Plan through July 31, 1999
are as follows: Marvin I. Weinberger, formerly Chief Executive Officer, none,
David Van Riper Morris, President and Chief Executive Officer, 175,000,
Joshua M. Kopelman, formerly Executive Vice President and Secretary, 20,000,
William R. Burger, Vice President - Content and Media Services, 60,000;
Gerard J. Lewis, Jr., Vice President & General Counsel and Secretary,
115,000; and James T. Beattie, formerly Vice President - Intellibank
Services, none; current executive officers as a group, 578,750; non-employee
directors as a group, 90,000; and all other employees as a group, 508,285.
54
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES. The current federal income tax
treatment of grants under the Plan is generally described below. Local and state
tax authorities may also tax incentive compensation awarded under the plan, and
tax laws are subject to change. Participants are urged to consult with their
personal tax advisors concerning the application of the general principles
discussed below to their own situations and the application of state and local
tax laws.
NON-QUALIFIED STOCK OPTIONS. There are no federal income tax
consequences to a participant or to the Company upon the grant of a
non-qualified stock option under the Plan. Upon the exercise of a non-qualified
stock option, a participant will recognize ordinary compensation income in an
amount equal to the excess of the fair market value of the shares at the time of
exercise over the exercise price of a non-qualified stock option, and the
Company generally will be entitled to a corresponding federal income tax
deduction. Upon the sale of shares acquired by the exercise of a non-qualified
stock option, a participant will have a capital gain or loss in an amount equal
to the difference between the amount realized upon the sale and the
participant's adjusted tax basis in the shares. The tax rate of capital gain or
loss depends on the length of time the shares are held.
INCENTIVE STOCK OPTIONS. A participant who is granted an ISO will not
recognize taxable income for purposes of the regular income tax, upon either the
grant or exercise of the ISO. However, for purposes of the alternative minimum
tax imposed under the Internal Revenue Code, in the year in which an ISO is
exercised, the amount by which the fair market value of the shares acquired upon
exercise exceeds the exercise price will be treated as an item of adjustment and
included in the computation of the recipient's alternative minimum taxable
income. A participant who disposes of the shares acquired upon exercise of an
ISO after two years from the date the ISO was granted and after one year from
the date such shares were transferred to him or her upon exercise of the ISO
will recognize capital gain or loss in the amount of the difference between the
amount realized on the sale and the exercise price (or the participant's other
tax basis in the shares), and the Company will not be entitled to any tax
deduction by reason of the grant or exercise of the ISO. As a general rule, if a
participant disposes of the shares acquired upon exercise of an ISO before
satisfying both holding period requirements (a "disqualifying disposition"), his
or her gain recognized on such a disposition will be taxed as ordinary income to
the extent of the difference between the fair market value of such shares on the
date of exercise and the exercise price, and the Company will be entitled to a
deduction in that amount. The gain, if any, in excess of the amount recognized
as ordinary income on such a disqualifying disposition will be capital gain.
RESTRICTED STOCK GRANTS. A participant normally will not recognize
taxable income upon receiving a restricted stock grant, and the Company will not
be entitled to a deduction, until such stock is transferable by the participant
or no longer subject to a substantial risk of forfeiture for federal tax
purposes, whichever occurs earlier. When the stock is either transferable or is
no longer subject to a substantial risk of forfeiture, the participant will
recognize ordinary compensation income in an amount equal to the fair market
value of the shares (less any amounts paid for such shares) at that time, and
the Company will be entitled to a deduction in the same amount. A participant
may, however, elect to recognize ordinary compensation income in the year the
restricted stock grant is awarded in an amount equal to the fair market value of
the shares subject to the restricted stock grant (less any amounts paid for such
shares) at that time, determined without regard to the restrictions. In that
case, the Company generally will be entitled to a corresponding deduction in the
same year. Any gain or loss recognized by the participant upon subsequent
disposition of the shares will be capital gain or loss. If, after making the
election, any shares subject to a restricted stock grant are forfeited, or if
the market value declines during the restriction period, the participant will
not be entitled to any tax deduction or tax refund.
STOCK APPRECIATION RIGHTS. There are no federal income tax consequences
to a participant or to the Company upon the grant of a stock appreciation right
under the Plan. Upon exercise, if the participant receives the appreciation
inherent in the stock appreciation right in cash, the participant will recognize
ordinary compensation income in an amount equal to the cash received. If the
participant receives the appreciation in shares, the participant will recognize
ordinary compensation income in an amount equal to the fair market value of the
shares received. The Company generally will be entitled to a corresponding
federal income tax deduction at the time of the exercise of a stock appreciation
right. Upon the sale of any shares acquired by the exercise of a stock
appreciation right, a participant will
55
<PAGE>
have a capital gain or loss (long-term or short-term depending upon the length
of time the shares were held) in an amount equal to the difference between the
amount realized upon the sale and the participant's adjusted tax basis in the
shares (the amount of ordinary income recognized by the participant at the time
of exercise of the stock appreciation right).
PERFORMANCE UNITS. There are no federal income tax consequences to a
participant or to the Company upon the grant of performance units under the
Plan. When the participant receives payment of the performance units in cash,
the participant will recognize ordinary compensation income in an amount equal
to the cash received. If the participant receives payment of the performance
units in shares, the participant will recognize ordinary compensation income in
an amount equal to the fair market value of the shares received. The Company
generally will be entitled to a corresponding federal income tax deduction at
the time of the payment of the performance units. Upon the sale of any shares
acquired upon payment of the performance units, a participant will have a
capital gain or loss (long-term or short-term depending upon the length of time
the shares were held) in an amount equal to the difference between the amount
realized upon the sale and the participant's adjusted tax basis in the shares
(the amount of ordinary income recognized by the participant at the time of the
payment of the performance units).
TAX WITHHOLDING. The Company has the right to deduct from all grants
paid in cash or from other wages paid to an employee of the Company, any
federal, state or local taxes required by law to be withheld with respect to
grants, and the participant or other person receiving shares under the plan will
be required to pay to the Company the amount of any such taxes which the Company
is required to withhold with respect to such shares. A participant may elect to
satisfy the Company's income tax withholding obligation by withholding shares
received from the exercise of a stock option or a restricted stock grant. The
shares withheld may not exceed the participant's marginal tax rate for federal,
state and local tax liabilities.
NEW PLAN BENEFITS. Because grants are made from time to time by the
committee of the board of directors to those persons whom the Committee
determines in its discretion should receive grants, the benefits and amounts
that may be received in the future by persons eligible to participate in the
plan are not presently determinable, except as to those future formula grants to
be awarded to non-employee directors.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The table below sets forth certain information as of July 31, 1999
(except as otherwise noted) regarding the beneficial ownership of Class A Common
Stock and Class B Common Stock (i) by each person known by the Company to be the
beneficial owner of more than five percent of the outstanding common stock, (ii)
by each director of the Company, (iii) by each executive officer named in the
Summary Compensation Table and (iv) by all current executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY PERCENTAGE OF OUTSTANDING
----------------------------- -------------------------
NAME AND ADDRESS OWNED (1) SHARES (2)
- ---------------- --------- ----------
<S> <C> <C>
FIVE PERCENT HOLDERS
- --------------------
Marvin I. Weinberger (3) 1,620,722 14.0%
900 West Valley Road, Suite 1000
Wayne, PA 19087
OFFICERS AND DIRECTORS
David Van Riper Morris (4) 350,250 3.0
Joshua M. Kopelman (5) 262,004 2.3
Howard L. Morgan (6) 180,750 1.6
Israel J. Melman (7) 91,670 *
Lloyd N. Morrisett (8) 39,500 *
Gerard J. Lewis (9) 46,400 *
William R. Burger (10) 27,500 *
Barry Rubenstein (11) 17,500 *
Lester Wunderman (12) 17,500 *
Brian Segal (13) 12,500 *
James T. Beattie (14) 2,000 *
All current executive officers and
directors as a group (15 persons)
(15) 2,693,626 23.2%
</TABLE>
- ---------
* Less than one percent.
57
<PAGE>
(1) Nature of ownership consists of sole voting and investment power unless
otherwise indicated. The number of shares indicated includes shares
issuable upon the exercise of outstanding stock options held by each
individual or group to the extent such options are exercisable within
sixty days of July 1, 1999.
(2) The percentage for each individual or group is based on the aggregate
of the shares outstanding as of July 1, 1999 (11,594,991 shares) and
all shares issuable upon the exercise of outstanding stock options held
by such individual or group to the extent such options are exercisable
within sixty days of July 1, 1999.
(3) Represents 1,154,150 shares of Class A Common Stock, 100,000 shares of
Class B Common Stock; 160,000 shares of Class A Common Stock held by
Fran Solow Weinberger (Mr. Weinberger's wife) and Howard L. Morgan,
Trustees under The Marvin Weinberger 1996 Trust Agreement dated January
31, 1996 (the "1996 Trust"); 17,400 shares of Class A Common Stock held
by Fran Solow Weinberger and Howard L. Morgan, Trustees under The
Marvin Weinberger GST Trust dated January 31, 1996 (the "GST Trust");
and 114,172 shares of Class A Common Stock held by The Danna Company,
an Ohio corporation ("Danna"), of which Mr. Weinberger is the president
and a director. Mrs. Weinberger and Dr. Morgan have shared voting and
investment power with respect to the shares held by the 1996 Trust and
the GST Trust. Mr. Weinberger disclaims beneficial ownership with
respect to such shares. Mr. Weinberger has shared voting and investment
power with respect to the shares held by Danna and disclaims beneficial
ownership with respect to such shares.
(4) Represents 34,100 shares of Class A Common Stock and options to
purchase 316,150 shares of Class A Common Stock.
(5) Represents 117,004 shares of Class A Common Stock and options to
purchase 145,000 shares of Class A Common Stock. Mr. Kopelman resigned
as Executive Vice President and Secretary of the Company effective July
6, 1999. Mr. Kopelman is a consultant to the Company through January 6,
2000, unless his consulting agreement is terminated earlier or renewed
by mutual agreement of the Company and Mr. Kopelman.
(6) Represents 125,000 shares of Class A Common Stock, options to purchase
49,750 shares of Class A Common Stock, 2,000 shares of Class A Common
Stock held by Eleanor Morgan (Dr. Morgan's wife) and Beverly Budin,
Trustees under the Howard L. Morgan 1989 Indenture of Trust F/B/O
Kimberly D. Morgan, 2,000 shares of Class A Common Stock held by
Eleanor Morgan and Beverly Budin, Trustees under the Howard L. Morgan
1989 Indenture of Trust F/B/O Elizabeth S. Morgan, and 2,000 shares of
Class A Common Stock held by Eleanor Morgan and Beverly Budin, Trustees
under the Howard L. Morgan 1989 Indenture of Trust F/B/O Danielle A.
Morgan (such trusts being collectively referred to as the "Howard L.
Morgan Trusts"). Mrs. Morgan and Beverly Budin have shared voting and
investment power with respect to the shares held by the Howard L.
Morgan Trusts. Dr. Morgan disclaims beneficial ownership with respect
to such shares. Excludes 160,000 shares of Class A Common Stock held by
Fran Solow Weinberger and Howard L. Morgan, Trustees under the 1996
Trust, and 17,400 shares of Class A Common Stock held by Fran Solow
Weinberger and Howard L. Morgan, Trustees under the GST Trust. Mrs.
Weinberger and Dr. Morgan have shared voting and investment power with
respect to the shares held by the 1996 Trust and the GST Trust. Dr.
Morgan disclaims beneficial ownership with respect to such shares.
(7) Includes 66,918 shares of Class A Common Stock and options to purchase
17,500 shares of Class A Common Stock held by Mr. Melman. Also includes
7,252 shares of Class A Common Stock held by the Melman Trust, with
respect to which Mr. Melman has shared voting and investment power.
(8) Represents 22,000 shares of Class A Common Stock held jointly by Dr.
Morrisett and his wife and options to purchase 17,500 shares of Class A
Common Stock owned by Dr. Morrisett.
(9) Represents 150 shares of Class A Common Stock and options to purchase
46,250 shares of Class A Common Stock.
(10) Includes options to purchase 27,500 shares of Class A Common Stock.
(11) Includes options to purchase 17,500 shares of Class A Common Stock.
(12) Includes options to purchase 17,500 shares of Class A Common Stock.
58
<PAGE>
(13) Includes options to purchase 12,500 shares of Class A Common Stock.
(14) Represents 2,000 shares of Class A Common Stock. Effective December 1,
1998, Mr. Beattie ended his employment with the Company.
(15) Includes in addition to the shares of Class A Common Stock and Options
of the persons named in the table, 1,330 shares of Class A Common Stock
and options to purchase 24,000 shares of Class A Common Stock by
officers not named in the table.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth for the years ended December 31, 1998,
1997 and 1996 certain compensation earned by the Company's Chief Executive
Officer, its former Chief Executive Officer, the three other most highly paid
executive officers of the Company whose cash compensation exceeded $100,000 for
the year ended December 31, 1998 and an additional individual who served as an
executive officer during the last completed fiscal year but which was not
serving as such on December 31, 1998 (collectively, the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
Securities
Other Annual Underlying Restricted Stock
Name and Principal Position Year Salary Bonus Compensation Options Awards
- --------------------------- ---- ------ ----- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
David Van Riper Morris 1998 $ 166,667 -- -- 75,000 --
President and Chief 1997 $ 147,254 -- -- 100,000 --
Executive Officer 1996 $ 138,750 -- $ 65,000 111,200 --
Marvin I. Weinberger 1998 $ 40,833 -- $ 99,167(2) $ 617,188(3)
Chief Executive Officer (1) 1997 $ 136,454 -- $ 4,800 100,000 --
1996 $ 132,900 -- $ 15,260 150,000 --
Joshua M. Kopelman (4) 1998 $ 109,000 $ 15,000 -- 10,000 --
Executive Vice President 1997 $ 99,672 $ 40,010 -- 10,000 --
and Secretary 1996 $ 89,000 $ 10,000 -- 50,000 --
William R. Burger 1998 $ 127,500 -- -- 30,000 --
Vice President - Content 1997 $ 111,200 $ 5,000 -- 30,000 --
and Media Services (5)
Gerard J. Lewis, Jr 1998 $ 108,986 -- -- 25,000 --
Vice President & General 1997 $ 90,267 -- -- 30,000 --
Counsel and 1996 $ 55,331 -- -- 15,000 --
Secretary (6)
James T. Beattie 1998 $ 131,771 $ 8,305 $ 145,000(7) -- --
Vice President - IntelliBank 1997 $ 133,681 -- -- 10,000 --
Services (7) 1996 $ 126,667 $ 10,000 -- 50,000 --
</TABLE>
(1) Mr. Weinberger resigned as Chief Executive Officer of the Company
effective March 31, 1998 and as a director effective May 26, 1999.
(2) Consists of the remainder of Mr. Weinberger's annual salary due to him
as part of his severance agreement with the Company in February 1998,
(3) Represents the value on March 31, 1998 of 125,000 shares of Class A
Common Stock paid to Mr. Weinberger as part of his severance agreement
with the Company in February 1998. The value of these shares on
December 31, 1998 was $562,500.
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<PAGE>
(4) Mr. Kopelman resigned as Executive Vice President and Secretary of the
Company effective July 6, 1999. Mr. Kopelman is a consultant to the
Company through January 6, 2000, unless his consulting agreement is
terminated earlier or renewed by mutual agreement of the Company and
Mr. Kopelman.
(5) Mr. Burger began his employment with the Company on January 2, 1997.
(6) Mr. Lewis became an executive officer of the Company on February 17,
1997.
(7) Mr. Beattie ended his employment with the Company effective December 1,
1998. The amount reflected under "Other Annual Compensation" represents
a lump sum payment to Mr. Beattie under his employment agreement, as
amended.
The following table summarizes stock options granted during 1998 to the Named
Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants(l)
Grant Date
Value(2)
--------
Number of
Securities Percent of Total
Underlying Options Granted to Exercise Expiration Grant Date
Name Options Granted Employees in 1998 Price Date Present Value
<S> <C> <C> <C> <C> <C>
David Van Riper Morris 75,000 15.9% $3.50 5/28/08 $171,000
Joshua M. Kopelman 10,000 2.1% $3.50 5/28/08 $ 22,800
William R. Burger 30,000 6.4% $3.50 5/28/08 $ 68,400
Gerard J. Lewis, Jr. 25,000 5.3% $3.50 5/28/08 $ 57,000
James T. Beattie -- -- -- -- --
</TABLE>
(1) The options, which were granted under the Company's 1996 Equity
Compensation plan, have a term of ten years, subject to earlier
termination in certain events related to the termination of employment.
The options vest in four equal annual installments commencing on the
first anniversary of the date of grant. If a "change of control" (as
defined in the plan) were to occur, these options would become
immediately exercisable in full.
(2) Grant date present value has been calculated using the Black Scholes
pricing model.
The following table summarizes option exercises during 1998 and the
value of vested and unvested options for the current Named Executive Officers at
December 31, 1998. Year-end values are based upon a price of $4.50 per share,
which was the closing market price of a share of the Company's Class a Common
Stock on December 31, 1998.
61
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at Money Options at
December 31, 1998 December 31, 1998
----------------- --------
Shares
Acquired ON Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David Van Riper Morris -- -- 194,600 243,600 $151,125 $300,375
Joshua M. Kopelman -- -- 122,500 47,500 177,813 33.483
William R. Burger -- -- 12,500 47,500 12,813 55,938
Gerard J. Lewis, Jr. -- -- 15,000 55,000 21,250 85,625
James T. Beattie 28,500 $112,438 47,250 34,250 26,219 13,969
</TABLE>
The company does not currently grant any long-term incentives, other
than stock options, to its executives or other employees. similarly, the company
does not sponsor any defined benefit or actuarial plans at this time.
EMPLOYMENT AGREEMENTS
As of January 1, 1993, the Company entered into an employment agreement
with Joshua M. Kopelman, a former Executive Vice President and Secretary, which
was subsequently amended on June 17, 1999. Effective July 6, 1999, Mr. Kopelman
resigned from the Company. Pursuant to Mr. Kopelman's employment agreement, as
amended, Mr. Kopelman was entitled to receive either (i) a lump sum payment
equal to $160,000 (subject to taxes) or (ii) an equity investment in Mr.
Kopelman's newly formed company ("half.com"), subject to certain conditions, in
the amount of $280,000 in exchange for an equity interest in half.com. The
Company elected to make an equity investment in half.com and has, through
September 1, 1999, paid $160,000 of the $280,000.
On April 14, 1994, the Company entered into an employment agreement
with James T. Beattie, a former Vice President and executive officer of the
Company, which was subsequently amended on November 4, 1996. Effective
December 1, 1998, Mr. Beattie ended his employment with the Company. Pursuant
to Mr. Beattie's employment agreement as amended, in connection with
termination without cause by the Company Mr. Beattie was entitled to receive
a lump sum payment in an amount equal to his then-current annual salary
conditioned upon his execution of a general release of all claims against the
Company and continued compliance with certain ongoing provisions of his
employment agreement, as amended. On December 1, 1998, Mr. Beattie executed a
general release of all claims against the Company. The Company subsequently
paid Mr. Beattie a lump sum payment equal to his then-current annual salary
in the amount of $145,000 (net of certain taxes and other deductions).
As of September 5, 1995, Van Morris entered into an employment
agreement with the Company that provided for an annual base salary of $135,000,
which salary is subject to review at least annually and is currently $175,000.
His employment agreement was subsequently amended on November 4, 1996. In
connection with his employment agreement, the Company agreed to grant Mr.
Morris an aggregate of 152,000 options to purchase Class A Common Stock. Mr.
Morris' employment agreement is at-will, with limited non-compete provisions
applicable for up to one year after certain terminations, as long as the Company
continues certain salary payments during the period. However, if the Company
terminates Mr. Morris without cause, the Company is required to pay Mr. Morris
as severance a lump sum equal to his annual salary within 30 days of
termination. Such payment is conditioned on the Company's receiving a general
release from Mr. Morris. The Company's obligations to pay Mr. Morris will
terminate upon Mr. Morris' obtaining other employment or other full-time
consulting work.
Effective January 2, 1997 and November 24, 1997, respectively, the
Company entered into employment agreements with William R. Burger and Gerard J.
Lewis, Jr. that provided for base annual salaries of $120,000 and $95,000,
respectively, which salaries are subject to
62
<PAGE>
review at least annually and are each currently $140,000. Each employment
agreement is at-will. Mr. Burger's employment agreement contains a limited
non-compete provision applicable for up to one year after certain terminations.
However, if the Company terminates Messrs. Burger or Lewis without cause, the
Company is required to pay as severance a lump sum equal to such employee's
annual salary within 30 days of termination. All such payments are contingent on
the Company's receiving a general release from the employee.
FUTURE SHAREHOLDER PROPOSALS
Shareholders may submit proposals on matters appropriate for
shareholder action at annual meetings under regulations adopted by the SEC. To
be considered for inclusion in the proxy statement and form of proxy for the
Company's 2000 annual meeting, proposals must be received by the Company no
later than December 31, 1999. Proposals should be directed to the attention of
the Secretary of the Company.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0300 for further information on the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the Web site maintained by the SEC at
"http://www.sec.gov."
The Company's Annual Report on Form 10-K for the year ended December
31, 1998 and Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
are attached to this Proxy Statement as Exhibits B and C and are incorporated in
this Proxy Statement by reference. The Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 is also incorporated in this Proxy
Statement by reference. The Company may have sent you some of the documents
referenced above, but you can obtain any of them through the Company or the SEC.
You may obtain documents incorporated by reference without charge by writing or
calling the Company at the following address:
63
<PAGE>
Infonautics, Inc.
Investor Relations
900 W. Valley Road
Suite 1000
Wayne, PA 19087
Tel: (610) 971-8840
If you would like to request documents from the Company, please do so
by November 22, 1999 to receive them before the Special Meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT TO VOTE ON THE PROPOSALS. THE COMPANY HAS NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED NOVEMBER 3, 1999. YOU SHOULD
NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS
OF ANY DATE OTHER THAN SUCH DATE, AND THE MAILING OF THE PROXY STATEMENT TO
SHAREHOLDERS SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
By order of the board of directors
Gerard J. Lewis, Jr.
Secretary
November 3, 1999
64
<PAGE>
INDEX TO THE BELL & HOWELL INFORMATION AND LEARNING K-12 BUSINESS
Independent Auditors' Report ............................................ F-2
Balance Sheet -- Assets, as of Fiscal Year Ended January 2, 1999
and January 3, 1998 ................................................... F-3
Balance Sheet -- Liabilities and Business Equity, as of
Fiscal Year Ended January 2, 1999 and January 3, 1998 ................. F-4
Statement of Operations, for the Fiscal Years Ended January 2, 1999,
January 3, 1998 and December 28, 1996 ................................. F-5
Statements of Cash Flows, for Fiscal Years Ended January 2, 1999,
January 3, 1998 and December 28, 1996 ................................. F-6
Statements of Business Equity, for Fiscal Years Ended January 2, 1999,
January 3, 1998 and December 28, 1996 ................................. F-7
Notes to Audited Financial Statements ................................... F-8
Unaudited Balance Sheet -- Assets, as of June 30, 1999 and
December 31, 1998...................................................... F-11
Unaudited Balance Sheet -- Liabilities and Business Equity,
as of June 30, 1999 and December 31, 1998.............................. F-12
Unaudited Statements of Operations, for the six months ended
June 30, 1999 and June 30, 1998........................................ F-13
Unaudited Statements of Cash Flows, for the six months ended
June 30, 1999 and June 30, 1998........................................ F-14
Notes to Unaudited Financial Statements ................................. F-15
F-1
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bell and Howell Company:
We have audited the accompanying balance sheet of Bell & Howell Information
and Learning K-12 Business (a business within the Bell & Howell Information
and Learning Company subsidiary of Bell and Howell Company (Parent)) (the
Business) as of December 31, 1998 and 1997, and the related statements of
operations, business equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Parent's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Business as of December
31, 1998 and 1997, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
-----------------------------
Chicago, Illinois
September 10, 1999
F-2
<PAGE>
Bell & Howell Information and Learning K-12 Business
Balance Sheets
At the End of Fiscal Years 1998 and 1997
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current assets:
Accounts receivable $ 2,019 $ 1,988
Inventory 50 57
Prepaid expenses 611 195
------- -------
Total current assets 2,680 2,240
Fixed assets, at cost 546 328
Accumulated depreciation (241) (96)
------- -------
Net fixed assets 305 232
Total Assets $ 2,985 $ 2,472
------- -------
------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-3
<PAGE>
Bell & Howell Information and Learning K-12 Business
Balance Sheets
At the End of Fiscal Years 1998 and 1997
(Dollars in Thousands)
LIABILITIES AND BUSINESS EQUITY
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,690 $ 990
Accrued expenses 122 11
Deferred income 8,396 4,645
-------- --------
Total current liabilities 10,208 5,646
Total business equity (deficit) (7,223) (3,174)
Total liabilities and business equity $ 2,985 $ 2,472
-------- --------
-------- --------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-4
<PAGE>
Bell & Howell Information and Learning K-12 Business
Statements Of Operations
Fiscal Years 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 10,006 $ 6,722 $ 5,835
Operating costs and expenses:
Cost of sales 3,916 2,221 1,317
Research and development 875 1,856 --
Selling and administrative 6,617 4,236 1,995
-------- -------- --------
Total operating costs and expenses 11,408 8,313 3,312
Net earnings (loss) $ (1,402) $ (1,591) $ 2,523
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-5
<PAGE>
Bell & Howell Information and Learning K-12 Business
Statements of Cash Flows
Fiscal Years 1998, 1997, and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net earnings (loss) $(1,402) $(1,591) $ 2,523
Depreciation and amortization 145 75 21
Changes in operating assets and liabilities:
Accounts receivable (31) (925) (102)
Inventory 7 40 291
Prepaid expenses (416) (33) (7)
Accounts payable 700 133 34
Accrued expenses 111 (35) --
Deferred income 3,751 1,238 187
------- ------- -------
Net cash provided (used) by operations 2,865 (1,098) 2,947
Investing activities:
Capital expenditures (218) (199) (85)
------- ------- -------
Net cash used by investing activities (218) (199) (85)
Financing activities:
Contributions from (distributions to) Parent, net (2,647) 1,297 (2,862)
Increase (decrease) in cash and cash equivalents -- -- --
Cash and cash equivalents, beginning of period -- -- --
Cash and cash equivalents, end of period $ -- $ -- $ --
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-6
<PAGE>
Bell & Howell Information and Learning K-12 Business
Statements of Business Equity
Fiscal Years 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Business
Equity/(Deficit)
-------
<S> <C>
Balance at the end of fiscal 1995 $(2,541)
Net earnings (loss) for the period 2,523
Contributions from (distributions to) Parent, net (2,862)
-------
Balance at the end of fiscal 1996 (2,880)
Net earnings (loss) for the period (1,591)
Contributions from (distributions to) Parent, net 1,297
-------
Balance at the end of fiscal 1997 (3,174)
Net earnings (loss) for the period (1,402)
Contributions from (distributions to) Parent, net (2,647)
-------
Balance at the end of fiscal 1998 (7,223)
-------
-------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-7
<PAGE>
BELL & HOWELL INFORMATION AND LEARNING K-12 BUSINESS
NOTES TO THE FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Bell & Howell Information and Learning K-12 Business
(the "Company"),a business of Bell & Howell Information and Learning Company
(the "Parent", which is a wholly owned subsidiary of Bell and Howell Company),
is a leading Internet-based information service provider that is focused on the
needs of its customers in the domestic kindergarten to twelfth grade (K-12)
education marketplace. The Company operates in this one reportable segment.
BASIS OF PRESENTATION. For all periods presented, certain expenses
reflected in the financial statements include allocations from the Parent. These
allocations take into consideration related business volume, personnel, or other
appropriate bases, and generally include administrative expenses related to
general management, information management, and other services provided to the
Company by the Parent. Allocations of expenses are based on management's best
assessment of actual expenses incurred by the Company and in management's
opinion are reasonable.
The financial statements have been prepared as if the Company operated as a
stand-alone entity since inception. The financial information included herein
may not necessarily reflect the financial position, results of operations, or
cash flows of the Company in the future, or what the balance sheets, results of
operations, or cash flows of the Company would have been if it had been a
separate, stand-alone corporation during the periods presented.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Subsequent actual results may differ from those
estimates.
FISCAL YEAR. The Company's fiscal year ends on the Saturday nearest to
December 31. References to fiscal 1998 are for the 52 weeks ended January 2,
1999, references to fiscal 1997 are for the 53 weeks ended January 3, 1998, and
references to fiscal 1996 are for the 52 weeks ended December 28, 1996.
REVENUE/COMMISSION EXPENSE RECOGNITION. The Company principally derives its
revenue from subscriptions. Billings for subscriptions are deferred as a
liability and recognized as revenue in the periods the subscriptions are
fulfilled. Prepaid expense consists of commissions paid to sales representatives
which are recorded as an asset and recognized as expense in the periods the
subscriptions are fulfilled.
MARKETING AND PROMOTION COSTS. Marketing and promotion costs, which
principally consist of advertising, are charged to expense as incurred and were
$436, $479, and $116 in fiscal 1998, 1997, and 1996, respectively.
F-8
<PAGE>
LIQUIDITY/CONTRIBUTIONS FROM (DISTRIBUTIONS TO) PARENT. Since the Company's
inception, the Parent has provided funding for working capital. The Parent has
made a commitment to continue to provide financing to the Company until the
transaction described in note (4) is consummated. The Company participates in
the Parent's cash management system. All cash generated from and cash required
to support the Company's operations are deposited and received through the
Parent's cash accounts. Accordingly, the amounts represented by the caption
"Contributions from (distributions to) Parent, net" in the Company's statement
of cash flows represent the net effect of all cash transactions between the
Company and the Parent. No interest expense has been allocated to the Company.
The average shareholder's deficit is $5,199, $3,027, and $2,711 for fiscal years
1998, 1997, and 1996, respectively.
INCOME TAXES. The financial statements of the Company have been prepared
assuming the Company is a limited liability corporation (see note (4)) and as
such, the net earnings (loss) of the Company is reportable in the shareholders'
tax returns. Accordingly, these financial statements contain no provision or
benefit and no assets or liabilities for federal or state income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company believes that the carrying
amounts of its financial instruments, consisting of accounts receivable,
accounts payable, and accrued expenses, approximates the fair value of such
items.
INVENTORY. Inventory, consisting primarily of CD-ROMs, is carried at the
lower of cost or net realizable value, with cost determined by the first-in,
first-out method.
FIXED ASSETS. Fixed Assets primarily consist of computer
equipment/accessories for sales and marketing personnel which are recorded at
cost and depreciated on a straight-line basis over a three year life.
NOTE 2 - CONTINGENT LIABILITIES
The Company is involved in various legal proceedings incidental to its
business. Management believes that the outcome of such proceedings will not have
a material adverse effect upon the consolidated operations or financial
condition of the Company.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company is dependent upon the Parent to provide software programming
assistance, data feeds, communications lines and related facilities, network
operations and web site management services. The inability of the Parent to
continue to provide such services could in the near term negatively affect the
competitive position of the Company. Selling and administrative expenses include
expenses from Bell & Howell Company of $478, $336, and $223 for fiscal years
1998, 1997, and 1996, respectively. Accounts payable includes amounts due to
Bell & Howell Company of $219 and $155 at the end of fiscal years 1998 and 1997,
respectively.
The Company does not maintain separate physical facilities. It uses space
of the Parent and is charged occupancy costs based on proportionate square
footage.
F-9
<PAGE>
Employees of the Company are eligible for various benefits under programs
maintained by Bell & Howell Company. Any related assets or liabilities are not
included in the Company's financial statements.
NOTE 4 - SUBSEQUENT EVENTS
In July 1999, Bell & Howell Company announced that it has reached agreement
with Infonautics, Inc. to combine the Infonautics' K-12 business with the Bell &
Howell Information and Learning K-12 business, into a newly created limited
liability company, with Bell & Howell Company as the majority owner. The
transaction is expected to close during the fourth quarter of 1999, subject to
the approval of Infonautics' shareholders.
F-10
<PAGE>
Bell & Howell Information and Learning K-12 Business
Balance Sheets
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
June December
1999 1998
----------- ---------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Accounts receivable $ 1,242 $ 2,019
Inventory 82 50
Prepaid expenses 601 611
------- -------
Total current assets 1,925 2,680
Fixed assets, at cost 728 546
Accumulated depreciation (314) (241)
------- -------
Net fixed assets 414 305
Total Assets $ 2,339 $ 2,985
------- -------
------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-11
<PAGE>
Bell & Howell Information and Learning K-12 Business
Balance Sheets
(Dollars in Thousands)
LIABILITIES AND BUSINESS EQUITY
<TABLE>
<CAPTION>
June December
1999 1998
------- -----------
(unaudited) (audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,006 $ 934
Accrued expenses 351 878
Deferred income 6,892 8,396
------- -------
Total current liabilities 8,249 10,208
Total shareholder's equity (deficit) (5,910) (7,223)
Total liabilities and business equity $ 2,339 $ 2,985
------- -------
------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-12
<PAGE>
Bell & Howell Information and Learning K-12 Business
Statements Of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
June YTD June YTD
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 5,561 $ 3,004
Operating costs and expenses:
Cost of sales 2,867 1,602
Research and development 450 438
Selling and administrative 4,026 3,166
------- -------
Total operating costs and expenses 7,343 5,206
Net earnings (loss) $(1,782) $(2,202)
------- -------
------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-13
<PAGE>
Bell & Howell Information and Learning K-12 Business
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
June YTD June YTD
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net earnings (loss) $(1,782) $(2,202)
Depreciation and amortization 73 72
Changes in operating assets and liabilities:
Accounts receivable 777 410
Inventory (32) (143)
Prepaid expenses 10 56
Accounts payable 72 24
Accrued expenses (527) 77
Deferred income (1,504) 459
------- -------
Net cash provided (used) by operations (2,913) (1,247)
Investing activities:
Capital expenditures (182) (218)
------- -------
Net cash used by investing activities (182) (218)
Financing activities:
Contributions from (distributions to) Parent, net 3,095 1,465
Increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents, beginning of period -- --
Cash and cash equivalents, end of period $ -- $ --
------- -------
------- -------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-14
<PAGE>
Bell & Howell Information and Learning K-12 Business
Notes to the Financial Statements
(Dollars in thousands)
Note 1 - Significant Accounting Policies
NATURE OF OPERATIONS. Bell & Howell Information and Learning K-12
Business (the "Company"), a business of Bell & Howell Information and
Learning Company (the "Parent", which is a wholly owned subsidiary of Bell
and Howell Company), is a leading Internet-based information service provider
that is focused on the needs of its customers in the domestic kindergarten to
twelfth grade (K-12) education marketplace. The Company operates in this one
reportable segment.
BASIS OF PRESENTATION. For all periods presented, certain expenses
reflected in the financial statements include allocations from the Parent.
These allocations take into consideration related business volume, personnel,
or other appropriate bases, and generally include administrative expenses
related to general management, information management, and other services
provided to the Company by the Parent. Allocations of expenses are based on
management's best assessment of actual expenses incurred by the Company and
in management's opinion are reasonable.
The financial statements have been prepared as if the Company operated
as a stand-alone entity since inception. The financial information included
herein may not necessarily reflect the financial position, results of
operations, or cash flows of the Company in the future, or what the balance
sheets, results of operations, or cash flows of the Company would have been
if it had been a separate, stand-alone corporation during the periods
presented.
REVENUE/COMMISSION EXPENSE RECOGNITION. The Company principally derives
its revenue from subscriptions. Billings for subscriptions are deferred as a
liability and
F-15
<PAGE>
recognized as revenue in the periods the subscriptions are fulfilled. Prepaid
expense consists of commissions paid to sales representatives which are
recorded as an asset and recognized as expense in the periods the
subscriptions are fulfilled.
LIQUIDITY/CONTRIBUTIONS FROM (DISTRIBUTIONS TO) PARENT. Since the
Company's inception, the Parent has provided funding for working capital. The
Parent has made a commitment to continue to provide financing to the Company
until the transaction described in note (4) is consummated. The Company
participates in the Parent's cash management system. All cash generated from
and cash required to support the Company's operations are deposited and
received through the Parent's cash accounts. Accordingly, the amounts
represented by the caption "Contributions from (distributions to) Parent, net"
in the Company's statement of cash flows represent the net effect of all cash
transactions between the Company and the Parent. No interest expense has been
allocated to the Company.
INCOME TAXES. The financial statements of the Company have been prepared
assuming the Company is a limited liability corporation (see note (3)) and as
such, the net earnings (loss) of the Company is reportable in the
shareholder's tax returns. Accordingly, these financial statements contain no
provision or benefit and no assets or liabilities for federal or state income
taxes.
INVENTORY. Inventory, consisting primarily of CD-ROMs, is carried at the
lower of cost or net realizable value, with cost determined by the first-in,
first-out method.
FIXED ASSETS. Fixed Assets primarily consist of computer
equipment/accessories for sales and marketing personnel which are recorded at
cost and depreciated on a straight-line basis over a three year life.
Note 2 - Related Party Transactions
F-16
<PAGE>
The Company is dependent upon the Parent to provide software programming
assistance, data feeds, communications lines and related facilities, network
operations and web site management services. The inability of the Parent to
continue to provide such services could in the near term negatively affect
the competitive position of the Company.
The Company does not maintain separate physical facilities. It uses space
of the Parent and is charged occupancy costs based on proportionate square
footage.
Employees of the Company are eligible for various benefits under programs
maintained by Bell & Howell Company. Any related assets or liabilities are
not included in the Company's financial statements.
NOTE 3 - SUBSEQUENT EVENTS
In July 1999, Bell & Howell Company announced that is has reached
agreement with Infonautics, Inc. to combine the Infonautics' K-12 business
with the Bell & Howell Information and Learning K-12 business, into a newly
created limited liability corporation, with Bell & Howell Company as the
majority owner. The transaction is expected to close during the fourth
quarter of 1999, subject to the approval of Infonautics' shareholders.
F-17
<PAGE>
EXHIBIT A
MASTER TRANSACTION AGREEMENT
BY AND AMONG
INFONAUTICS, INC.
INFONAUTICS CORPORATION,
BELL & HOWELL COMPANY
AND
BELL & HOWELL INFORMATION AND LEARNING COMPANY
DATED JULY 8, 1999
AS AMENDED ON SEPTEMBER 28, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS............................................................2
ARTICLE II RELATED AGREEMENTS AND CLOSING.........................................2
2.1 Organizational Documents...................................................2
2.2 Capitalization Agreements..................................................2
2.3 BHIL Services Agreement....................................................3
2.4 EDCO Services Agreement....................................................4
2.5 INFO Transition Support Services...........................................4
2.6 BHIL License Agreements....................................................4
2.7 EDCO and INFO License Agreements...........................................4
2.8 Online Publishing Asset Purchase Agreement.................................4
2.9 Covenant Not to Compete....................................................5
2.10 Other Documents............................................................5
2.11 Definitive Agreements......................................................6
2.12 Closing....................................................................6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INFO.................................6
3.1 Authority..................................................................6
3.2 Validity...................................................................7
3.3 Due Organization...........................................................8
3.4 Financial Information......................................................8
3.5 Brokers and Finders........................................................8
3.6 Opinion of Financial Advisor...............................................8
3.7 Information for Proxy Statement............................................9
3.8 Board Approval.............................................................9
3.9 Representations and Warranties.............................................9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BHW AND BHIL.........................9
4.1 Authority.................................................................10
4.2 Validity..................................................................10
</TABLE>
ii
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<TABLE>
<S> <C> <C>
4.3 Due Organization..........................................................11
4.4 Financial Information.....................................................11
4.5 Brokers and Finders.......................................................11
4.6 Information Supplied for Proxy Statement..................................11
4.7 Representations and Warranties............................................12
ARTICLE V INTERIM AGREEMENTS....................................................12
5.1 Interim Conduct of the Contributed Business...............................12
5.2 Access....................................................................15
5.3 Corporate Approval........................................................17
5.4 Agreements To Cooperate...................................................17
5.5 Public Statements.........................................................17
5.6 Notifications.............................................................18
5.7 Proxy Statement; Shareholders Meeting.....................................18
5.8 Alternative Proposals.....................................................18
ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF INFO...........................20
6.1 Shareholder Approval......................................................20
6.2 Accuracy of Warranties and Performance of Covenants.......................20
6.3 No Pending Action.........................................................20
6.4 Consents..................................................................21
6.5 Regulatory Approvals......................................................21
6.6 Litigation................................................................21
6.7 Audited Financial Statements..............................................21
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS
OF BHW AND BHIL.......................................................21
7.1 Shareholder Approval......................................................22
7.2 Accuracy of Warranties and Performance of Covenants.......................22
7.3 No Pending Action.........................................................22
7.4 Consents..................................................................22
7.5 Regulatory Approvals......................................................22
</TABLE>
iii
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<TABLE>
<S> <C> <C>
7.6 Litigation................................................................23
7.7 Audited Financial Statements..............................................23
ARTICLE VIII TERMINATION BY PARTIES PRIOR TO CLOSING...............................23
8.1 Termination...............................................................23
8.2 Termination Fees..........................................................25
8.3 Effect of Termination.....................................................25
ARTICLE IX POST CLOSING AGREEMENTS...............................................26
9.1 Working Capital...........................................................26
9.2 Confidentiality...........................................................26
9.3 EDCO Board of Directors...................................................27
9.4 INFO End-User Business....................................................27
9.5 Employees.................................................................28
9.6 Records and Documents.....................................................29
ARTICLE X DISSOLUTION OF ALLIANCE...............................................29
10.1 BHW Call..................................................................29
10.2 INFO Put..................................................................29
10.3 Right of First Offer......................................................30
ARTICLE XI GENERAL PROVISIONS....................................................31
11.1 Amendments and Waiver.....................................................31
11.2 Notices...................................................................31
11.3 Expenses..................................................................33
11.4 Counterparts..............................................................33
11.5 Captions..................................................................33
11.6 Successors and Assigns....................................................34
11.7 Entire Transaction........................................................34
11.8 Applicable Law............................................................34
11.9 Other Rules of Construction...............................................34
11.10 Partial Invalidity........................................................34
11.11 Authorship................................................................35
</TABLE>
iv
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibits Name Section
- -------- ---- -------
<S> <C> <C>
A Certificate of Incorporation of EDCO Inc. 2.1.1
B Bylaws of EDCO Inc. 2.1.1
C Form of Bill of Sale, Assignment and 2.2.1
Assumption and Indemnity Agreement
D-1 BHIL Technical Services Agreement 2.3.1
D-2 BHIL Non-Technical Support Services 2.3.2
Agreement
D-3 Representation Agreement 2.3.3
E-1 EDCO Technical Services Agreement 2.6
E-2 EDCO Non-Technical Support Services
F BHIL Content License Agreement 2.5
G BHIL Software License 2.6
H EDCO Content License Agreement 2.7.2
I EDCO Software and Technology License 2.8
J-1 Online Publishing License Agreement 2.9.3
J-2 INFO Sleuth Software and Technology
License
L INFO Noncompetition Agreement 9.1.1
M EDCO Noncompetition Agreement 9.1.2
N BHIL Noncompetition Agreement 9.1.1
</TABLE>
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<TABLE>
<S> <C> <C>
O Online Noncompetition Agreement
P Form of Services Agreement
Q Form of License Agreement
</TABLE>
SCHEDULES
<TABLE>
<CAPTION>
Schedules Name Section
- --------- ---- -------
<S> <C> <C>
BHW1 BHIL Contributed Assets 2.2.1(a)(i)
BHW2 BHIL Transferred Contracts 2.2.1(b)(i)
BHW3 BHIL Transferred Liabilities and Other 2.2.1(c)(i)
Obligations
INFO1 INFO Contributed Assets 2.2.1(a)(i)
INFO2 INFO Transferred Contracts 2.2.1(b)(ii)
INFO3 INFO Transferred Liabilities and Other 2.2.19c)(iii)
Obligations
OPB1 OPB Assets 2.9
OPB2 OPB Contracts 2.9
OPB3 OPB Liabilities and Other Obligations 2.9
</TABLE>
ANNEX
<TABLE>
<CAPTION>
Annex Name Section
- ----- ---- -------
<S> <C> <C>
A Glossary 1
</TABLE>
vi
<PAGE>
MASTER TRANSACTION AGREEMENT*/
This Master Transaction Agreement is made and entered into this 8th day of July,
1999 by and among INFONAUTICS, INC., a Pennsylvania corporation ("INFO"),
INFONAUTICS CORPORATION, a Pennsylvania corporation ("INFO Corporation"), BELL &
HOWELL COMPANY, a Delaware corporation ("BHW") and BELL & HOWELL INFORMATION AND
LEARNING COMPANY, a Delaware corporation ("BHIL").
WHEREAS, upon the terms and subject to the conditions set forth herein, EDCO
will engage in the business, operations and activities incident to the
development and operation of the EDCO Business as contemplated by this Master
Transaction Agreement and the Exhibits hereto (the "Related Agreements");
WHEREAS, upon the terms and subject to the conditions set forth herein and in
the Related Agreements, EDCO will acquire:
(i) from BHIL, the BHIL Contributed Business pursuant to the
Bill of Sale, Assignment and Assumption and Indemnity
Agreement to be entered into by and between EDCO and
BHIL (the "BHIL Capitalization Agreement"); and
(ii) from INFO, the INFO Contributed Business pursuant to the
Bill of Sale, Assignment and Assumption and Indemnity
Agreement to be entered into by and between EDCO and
INFO Corporation (the "INFO Capitalization Agreement"),
WHEREAS, upon the terms and subject to the conditions set forth herein and in
the Related Agreements, BHIL will acquire from INFO the INFO Online Publishing
Business; and
WHEREAS, the parties desire to make certain representations and warranties to
one another and provide for the coordination of the closing of all the
transactions contemplated by this Master Transaction Agreement and the Related
Agreements;
NOW, THEREFORE, in consideration of the premises, representations and promises
herein contained, the parties mutually agree as set forth below:
- --------
*/Certain portions of this Exhibit 10.1 have been omitted based upon the
Company's request for confidential treatment. These omitted portions will be
separately filed with the Securities and Exchange Commission.
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ARTICLE I
DEFINITIONS
For purposes of this Master Transaction Agreement, unless the
language or context clearly indicates that a different meaning is intended, the
words, terms and phrases used with initial capital letters shall have the
meanings set forth in the Glossary attached as Annex A which definitions are
incorporated herein by reference.
ARTICLE II
RELATED AGREEMENTS AND CLOSING
2.1 ORGANIZATIONAL DOCUMENTS.
2.1.1 BHW will cause BHIL to organize a new entity called EDCO, Inc., the
Certificate of Incorporation and Bylaws of which are attached hereto as Exhibit
A and B, respectively. Notwithstanding the foregoing, the parties may determine
to form EDCO as a limited liability company or as another type of entity. The
parties agree that if they decide to use another type of entity for EDCO, the
parties will use their reasonable best efforts to create and execute
organizational documents that are substantially equivalent to the Certificate of
Incorporation and Bylaws attached hereto as Exhibits A and B. The parties
currently intend EDCO to be a limited liability company organized pursuant to
the Laws of the State of Delaware. Upon the organization of EDCO, BHW or BHIL
and INFO shall cause EDCO to ratify and accept this Master Transaction Agreement
and the Related Agreements and perform the duties and obligations set forth
therein.
2.1.2 In exchange for $16.5 million cash and contributing the BHIL Contributed
Business to EDCO, BHIL will receive seven thousand three hundred (7,300) shares
of the Stock of EDCO.
2.1.3 In exchange for contributing the INFO Contributed Business to EDCO, INFO
will receive from EDCO a cash payment of $20 million and two thousand seven
hundred (2,700) shares of the Stock of EDCO. The cash payment shall be by wire
transfer of immediately available funds to a bank account designated by INFO in
writing and shall be paid in two installments as follows:
(a) $5.0 million on the Closing Date; and
(b) $15.0 million on January 3, 2000.
2.2 CAPITALIZATION AGREEMENTS.
2.2.1 The INFO Capitalization Agreement and the BHIL Capitalization Agreement
shall be executed and delivered at Closing by, in the case of the INFO
Capitalization Agreement, INFO and EDCO and, in the case of the BHIL
Capitalization Agreement, by BHIL and EDCO. Each of the Capitalization
Agreements shall be substantially in the form of the Bill of Sale, Assignment
and
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Assumption and Indemnity Agreement, a form of which is attached hereto Exhibit
C, and which shall be referred to as the Capitalization Agreements when
completed as appropriate with the name of the proper parties and when the
appropriate Schedules, as contemplated by this Subsection 2.2.1, are attached
thereto. The Capitalization Agreements shall provide for:
(a) the transfer of assets to EDCO listed:
(i) in the case of assets to be contributed by BHIL, on
Schedule BHW1 hereto, and
(ii) in the case of assets to be contributed by INFO, on
Schedule INFO1 hereto; and
(b) the assignment to EDCO and assumption by EDCO of the contracts and
related obligations listed:
(i) in the case of contracts and related obligations to be
transferred to EDCO by BHIL, on Schedule BHW2 hereto,
and
(ii) in the case of contracts and related obligations to be
transferred to EDCO by INFO, on Schedule INFO2 hereto;
and
(c) the assignment to EDCO and assumption by EDCO of the liabilities
and other obligations listed:
(i) in the case of liabilities and other obligations to be
assumed by EDCO from BHIL, on Schedule BHW3 hereto, and
(ii) in the case of liabilities and other obligations to be
assumed by EDCO from INFO, on Schedule INFO3 hereto.
2.3 BHIL SERVICES AGREEMENT.
2.3.1 At Closing, BHW will cause BHIL to enter into a BHIL Technical Services
Agreement with EDCO containing the terms set forth in Exhibit D-1 and in
substantially the form set forth in Exhibit P.
2.3.2 At Closing, BHW will cause BHIL to enter into a BHIL Non-Technical Support
Services Agreement with EDCO containing the terms set forth on Exhibit D-2 and
in substantially the form set forth in Exhibit P.
2.3.3 At Closing, BHW will cause BHIL to enter into a Representation Agreement
with EDCO
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containing the terms set forth on Exhibit D-3 and in substantially the form set
forth in Exhibit P.
2.4 EDCO SERVICES AGREEMENT.
2.4.1 At Closing, EDCO will enter into the EDCO Technical Services Agreement
with INFO containing the terms set forth on Exhibit E-1 and in substantially the
form set forth in Exhibit P.
2.4.2 At Closing, EDCO will enter into an EDCO Non-Technical Support Services
Agreement containing the terms set forth in Exhibit E-2, in substantially the
form set forth in Exhibit P.
2.4.3 At Closing, EDCO will enter into a Service Agreement with BHIL pursuant to
which EDCO will perform all services required under the customer contracts
transferred to EDCO by BHIL and BHIL in exchange will pay EDCO $3.5 Million for
such services.
2.5 INFO TRANSITION SUPPORT SERVICES.
For a period of six months following Closing, EDCO and INFO will provide certain
support services at no charge for up to six (6) months on terms set forth in
Exhibit E-2 hereto. It is expected that INFO will establish its own support
functions that are separate and independent from EDCO, BHIL and BHW. In a
similar manner, it is expected EDCO will establish its own support functions
that are separate and independent from BHW and BHIL.
2.6 BHIL LICENSE AGREEMENTS.
At Closing, BHW will cause BHIL to license to EDCO, pursuant to the BHIL Content
License Agreement and the BHIL Software License Agreement containing the terms
set forth in Exhibits F and G and in substantially the form set forth in Exhibit
Q.
2.7 EDCO AND INFO LICENSE AGREEMENTS.
2.7.1 At Closing, EDCO will enter into the EDCO Content License Agreement and
the EDCO Software and Technology License Agreement with INFO containing the
terms of Exhibits H and I and in substantially the form set forth in Exhibit Q.
2.7.2 At Closing, INFO will enter into the INFO Sleuth Software and Technology
License with BHIL and EDCO, containing the terms of Exhibit J-2 and in
substantially the form set forth in Exhibit Q.
2.8 ONLINE PUBLISHING ASSET PURCHASE AGREEMENT.
2.8.1 At Closing, BHW will cause BHIL to purchase all of the assets owned or
used in the INFO
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Online Publishing Business and assume select liabilities and obligations of the
INFO Online Publishing Business, including but not limited to accounts
receivable, customer contracts, customer data bases, domain names, trade names
and trademarks or intellectual property and software, hardware, patents, process
and know-how, employee records, sales orders, supplies, inventories, fixed
assets, software development processes, training procedures, vendor records,
prepaid amounts, customer deposits, service contracts, and any other rights or
arrangements, and normal trade payables which relate exclusively to or arise
from INFO Online Publishing Business pursuant to a Bill of Sale, Assignment and
Assumption and Indemnity Agreement in the form of Exhibit C. The assets,
contracts and other obligations and liabilities to be transferred will include
those listed on Schedules OPB1, OPB2 and OPB3, respectively.
2.8.2 If required by BHIL, INFO will use reasonable best efforts to cause a
sufficient number of its employees join BHIL so that the INFO Online Publishing
Business can continue to operate in the ordinary course. BHIL will provide
appropriate compensation, benefit, and incentive package offers to the INFO
employees subject to this paragraph.
2.8.3 BHIL will license to INFO and EDCO the Online Publishing software and
related technology pursuant to the Online Publishing License Agreement
containing the terms set forth in Exhibit J-1 and in substantially the form
attached hereto as Exhibit Q.
2.8.4 In addition to the consideration set forth in Section 2.1.2 BHW will
cause BHIL to pay INFO $2 million on January 3, 2000 for the INFO Online
Publishing Business. The cash payment shall be by wire transfer of
immediately available funds to a bank account designated by INFO in writing.
2.9 COVENANT NOT TO COMPETE.
2.9.1 At Closing, each of BHIL and INFO will enter into Noncompetition
Agreements in the form of Exhibits N and L.
2.9.2 At Closing, EDCO will enter into a Noncompetition Agreement with each of
BHIL and INFO in the form of Exhibit M and EDCO and INFO will enter into a
Noncompetition Agreement with BHIL in the form of Exhibit O hereto.
2.10 OTHER DOCUMENTS.
At Closing, the parties will execute and deliver all of the other
documents and agreements required to be delivered on or prior to Closing
pursuant to this Master Transaction Agreement and the Related Agreements.
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2.11 DEFINITIVE AGREEMENTS.
Immediately following the execution of this Master Transaction
Agreement and continuing until the earlier of the agreement by the Parties of
the form of all Related Agreements or the Closing, the Parties agree to
negotiate in good faith the final definitive form of all Related Agreements. In
the event, however, that the Parties have been unable to agree on the definitive
form of one or more of the Related Agreements prior to Closing, the Closing will
occur notwithstanding such fact and the terms set forth on the respective
Exhibits hereto shall be deemed to be the definitive form of such agreement and
any court or arbitrators construing the terms of the contractual commitments set
forth on such Exhibits are deemed to contain commercially reasonable terms for
any provision not set forth specifically on the respective Exhibits which is
necessary for a complete understanding of the contractual commitments
represented thereby.
2.12 CLOSING.
The contribution of assets to, and the assumption of liabilities
by, EDCO and the issuance of the Stock to INFO and BHW contemplated by this
Master Transaction Agreement (the "Closing") shall take place at the offices of
McDermott, Will & Emery on the later of September 1, 1999 or the fifth Business
Day following the satisfaction or waiver of all conditions to the obligations of
the Parties contemplated hereby commencing at 10:00 a.m., local time on such
date, or at such other date or time or other place as the parties may mutually
agree upon in writing, such date being hereinafter referred to as the "Closing
Date." Notwithstanding the foregoing, if all of the conditions to Closing as set
forth in Articles VI and VII have been satisfied or waived, the Closing shall
occur no later than December 31, 1999. Upon consummation, the Closing shall be
deemed to take place as of the opening of business on the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INFO
INFO and INFO Corporation, jointly and severally, hereby represent
and warrant to BHW as of the date hereof as set forth below. The representations
and warranties set forth below shall survive the Closing.
3.1 AUTHORITY.
INFO has full capacity, right, corporate power and authority
without the consent of any other Person, to execute and deliver this Master
Transaction Agreement and the Related
6
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Agreements and to carry out the transactions contemplated hereby and thereby,
including the right to sell the INFO Online Publishing Business to BHIL. INFO
Corporation has full capacity, right, corporate power and authority, without the
consent of any other Person other than INFO (which consent has been given), to
execute and deliver:
(a) this Master Transaction Agreement,
(b) the INFO Capitalization Agreement, and
(c) any other agreement to which it is a party as contemplated by this
Master Transaction Agreement.
(collectively, the "INFO Related Agreements"), and to carry out
the transactions contemplated hereby and thereby and to acquire, own and hold of
record and beneficially 27% of the Stock. Except with respect to the approval of
the shareholders of INFO, all corporate and other acts or proceedings required
to be taken by INFO and INFO Corporation to authorize the execution, delivery
and performance of this Master Transaction Agreement, the INFO Related
Agreements and the documents to be delivered at Closing and all transactions
contemplated hereby and thereby have been duly and properly taken.
3.2 VALIDITY.
3.2.1 Subject to Section 2.11, this Master Transaction Agreement and the INFO
Related Agreements have been, and the documents to be delivered at Closing will
be, duly executed and delivered by each of INFO and INFO Corporation, as
appropriate, and constitute lawful, valid and legally binding obligations of
each of them, enforceable in accordance with their respective terms.
3.2.2 The execution and delivery of this Master Transaction Agreement and the
INFO Related Agreements and the consummation of the transactions contemplated
hereby and thereby will not result in the creation of any lien, charge or
encumbrance of any kind or the termination or acceleration of any indebtedness
or other obligation of INFO or INFO Corporation and are not prohibited by, do
not violate or conflict with any provision of, do not constitute a default under
or a breach of and do not impair the rights under:
(a) the Certificate of Incorporation or By-laws of INFO or INFO
Corporation,
(b) any Contract,
(c) any order, writ, injunction, decree or judgment of any court or
governmental agency, or
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(d) any Law applicable to INFO or INFO Corporation.
3.2.3 Except for filings required by the Hart-Scott-Rodino Act and the
Securities Act, no approval, authorization, consent or other order or action of
or filing with any court, administrative agency or other governmental authority
is required for the execution and delivery by INFO or INFO Corporation, as
appropriate, of this Master Transaction Agreement and the INFO Related
Agreements or the consummation by INFO or INFO Corporation of the transactions
contemplated hereby and thereby.
3.3 DUE ORGANIZATION.
INFO and INFO Corporation are each corporations duly organized,
validly existing and in good standing under the Laws of the Commonwealth of
Pennsylvania, and has full corporate power and authority and all requisite
licenses, permits and franchises to own, lease and operate its assets and to
carry on its business.
3.4 FINANCIAL INFORMATION.
The financial information provided to BHW is accurate and complete
in all material respects, in accordance with the books of accounts and records
of INFO and prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby.
3.5 BROKERS AND FINDERS.
Except for the fees and expenses payable to Allen & Company, which
fees are reflected in its agreement with INFO, neither INFO nor INFO Corporation
has entered into any contract, arrangement or understanding with any person or
firm which may result in the obligation of INFO or INFO Corporation to pay any
finder's fees, brokerage or agent commissions or other like payments in
connection with the transactions contemplated hereby. Except for the fees and
expenses paid or payable to Allen & Company, there is no claim for payment by
INFO or INFO Corporation of any investment banking fees, finder's fees,
brokerage or agent commissions or other like payments in connection with the
negotiations related to this Master Transaction Agreement or the consummation of
the transactions contemplated hereby.
3.6 OPINION OF FINANCIAL ADVISOR.
The financial advisor of INFO, Allen & Company, has rendered an
opinion to the Board of Directors of INFO to the effect that, as of the date
thereof, the consideration to be received by INFO in connection with the
transactions contemplated hereby is fair from a financial point of view to INFO.
8
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3.7 INFORMATION FOR PROXY STATEMENT.
None of the information concerning INFO included in or
incorporated by reference into the Proxy Statement to be filed with the SEC by
INFO in connection with the shareholder meeting of INFO to be held in connection
with this Master Transaction Agreement and the transactions contemplated hereby
will, at the date mailed to shareholders, or at the time of such meetings,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Proxy Statement will, as of its mailing date, comply as to form
in all material respects with all Laws, including the Exchange Act and the rules
and regulations promulgated thereunder, except that no representation is made by
INFO with respect to information supplied by BHW for inclusion therein.
3.8 BOARD APPROVAL.
3.8.1 The Board of Directors of INFO has taken affirmative action to consider
and analyze a long-term strategy for INFO, taking into account the fairness
opinion of their investment banker made pursuant to Section 3.6, and has
concluded that the best interest of INFO's shareholders are best served by
pursuing a long-term strategic alliance with BHW as set forth in Article 2 of
this Master Transaction Agreement; provided, however, that INFO shall remain
free to pursue the sale of any portion of its remaining assets as long as such
sale does not negatively impact INFO's ability to perform the agreements
contemplated herein.
3.9 REPRESENTATIONS AND WARRANTIES
The representations and warranties of INFO Corporation which will
be set forth in the INFO Capitalization Agreement shall be true and correct;
provided, however, that following the Closing Date, the remedies for breach of
such representations and warranties shall be governed by the INFO Capitalization
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BHW AND BHIL
BHW and BHIL, jointly and severally, hereby represent and warrant to INFO as of
the date hereof as set forth below. The representations and warranties set forth
below shall survive the Closing.
9
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4.1 AUTHORITY.
BHW and BHIL have full capacity, right, corporate power and
authority, without the consent of any other Person, to execute and deliver this
Master Transaction Agreement. BHIL has full capacity, right, corporate power and
authority, without the consent of any Person other than BHW (which consent has
been given) to execute and deliver:
(a) the BHIL Capitalization Agreement,
(b) the BHIL Services Agreement, and
(c) any other agreement to which BHIL is a party contemplated by this
Master Transaction Agreement
(collectively, the "BHW Related Agreements"), and to carry out the transactions
contemplated hereby and thereby and to acquire, own and hold of record and
beneficially 73% of the Stock. All corporate and other acts or proceedings
required to be taken by BHW or BHIL to authorize the execution, delivery and
performance of this Master Transaction Agreement, the BHW Related Agreements and
the documents to be delivered at Closing and all transactions contemplated
hereby and thereby have been duly and properly taken.
4.2 VALIDITY.
4.2.1 Subject to Section 2.11, this Master Transaction Agreement and the BHW
Related Agreements have been, and the documents to be delivered at Closing will
be, duly executed and delivered by BHW or BHIL, as appropriate, and constitute
lawful, valid and legally binding obligations of BHW or BHIL, as appropriate,
enforceable in accordance with their respective terms.
4.2.2 The execution and delivery of this Master Transaction Agreement and the
BHW Related Agreements and the consummation of the transactions contemplated
hereby and thereby will not result in the creation of any lien, charge or
encumbrance of any kind or the termination or acceleration of any indebtedness
or other obligation of BHW or BHIL and are not prohibited by, do not violate or
conflict with any provision of, do not constitute a default under or a breach of
and do not impair the rights under:
(a) the Certificate of Incorporation or By-laws of BHW or BHIL,
(b) any Contract,
(c) any order, writ, injunction, decree or judgment of any court or
governmental agency, or
10
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(d) any Law applicable to BHW or BHIL.
4.2.3 Except for filings required by the Hart-Scott-Rodino Act and the
Securities Act, no approval, authorization, consent or other order or action of
or filing with any court, administrative agency or other governmental authority
is required for the execution and delivery by BHW or BHIL, as appropriate, of
this Master Transaction Agreement and the BHW Related Agreements or the
consummation by BHW or BHIL of the transactions contemplated hereby and thereby.
4.3 DUE ORGANIZATION.
BHW and BHIL are each corporations duly organized, validly
existing and in good standing under the Laws of the State of Delaware, and each
has full corporate power and authority and all requisite licenses, permits and
franchises to own, lease and operate its respective assets and to carry on its
respective business.
4.4 FINANCIAL INFORMATION.
The financial information provided to INFO is accurate and
complete in all material respects, in accordance with the books of account and
records of BHIL and prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby.
4.5 BROKERS AND FINDERS.
Except for the fees and expenses payable to BT Wolfenson which
fees are reflected in its agreement with BHW, neither BHW nor BHIL has entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of BHW or BHIL to pay any finder's fees, brokerage
or agent commissions or other like payments in connection with the transactions
contemplated hereby. Except for the fees and expenses paid or payable to BT
Wolfenson there is no claim for payment by BHW or BHIL of any investment banking
fees, finder's fees, brokerage or agent commissions or other like payments in
connection with the negotiations related to this Master Transaction Agreement or
the consummation of the transactions contemplated hereby.
4.6 INFORMATION SUPPLIED FOR PROXY STATEMENT.
None of the information supplied or to be supplied by BHW for
inclusion or incorporation by reference in the Proxy Statement to be filed with
the SEC by INFO in connection with the shareholder meeting of INFO to be held in
connection with this Master Transaction Agreement and the transactions
contemplated hereby will, at the date mailed to shareholders, or at the time of
such meetings, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the
11
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statements therein, in the light of the circumstances under which they are made,
not misleading.
4.7 REPRESENTATIONS AND WARRANTIES
The representations and warranties of BHIL which will be set forth
in the BHIL Capitalization Agreement shall be true and correct; provided,
however, that following the Closing Date, the remedies for breach of such
representations and warranties shall be governed by the BHIL Capitalization
Agreement.
ARTICLE V
INTERIM AGREEMENTS
5.1 INTERIM CONDUCT OF THE CONTRIBUTED BUSINESS.
5.1.1 From the date hereof until the Closing, each of INFO, BHIL and BHW shall
preserve, protect and maintain their respective Contributed Business consistent
with current practice and in the ordinary course of business. Without limiting
the generality of the foregoing, from the date hereof until the Closing, except
for transactions specifically contemplated hereby or expressly approved in
writing by the other party, INFO, BHIL and BHW shall, with respect to their
respective Contributed Business:
(a) maintain the properties of their respective Contributed Business
and Contributed Assets in good repair, order and condition,
reasonable wear and tear excepted;
(b) maintain and keep in full force and effect all insurance on assets
and property or for the benefit of employees of their respective
Contributed Business, all liability and other casualty insurance,
and all bonds on personnel of the Contributed Business, presently
carried;
(c) not sell, lease or otherwise dispose of or agree to sell, lease,
license or otherwise dispose of, or restrict, or grant an option
with respect to, any of their respective Contributed Business'
assets, properties, rights or claims, except for inventory and
other assets sold in the ordinary course of business;
(d) preserve intact the organization and reputation of their
respective Contributed Business and use its reasonable commercial
efforts to keep available the services of the present executives,
employees and agents of their respective Contributed Business and
preserve the good will of suppliers, customers and others having
business relationships with such Contributed Business;
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(e) pay accounts payable and other obligations of their respective
Contributed Business when they become due and payable in the
ordinary course of business consistent with prior practice;
(f) not grant any security interest, lien, charge, encumbrance or
claim on any assets of the Contributed Business, except in the
ordinary course of business and consistent with prior practice;
(g) maintain the Contributed Business' books, accounts and records in
the usual, regular and ordinary manner on a basis consistent with
prior years;
(h) not enter into, amend or terminate, or agree to enter into, amend
or terminate any Contract; provided, however, that the foregoing
shall not prohibit the termination, extension or any amendment
(which is not material) of any Contract necessary to the
Contributed Business arising in the ordinary course of business
and consistent with past practice;
(i) perform in all material respects all of its obligations under all
Contracts and other agreements and instruments relating to or
affecting the Contributed Business or its assets, and comply in
all material respects with all Laws applicable to the Contributed
Assets, except where non-performance or non-compliance would not
have a Material Adverse Effect;
(j) not enter into, amend or terminate any employment, bonus,
severance or retirement contract or arrangement, nor increase any
salary or other form of compensation payable or to become payable
to any executives or employees of the Contributed Business other
than in the ordinary course of business or any material change in
the employee benefits of the Contributed Business;
(k) not take any action or intentionally omit to take any action,
which action or omission would result in a breach of any of the
representations and warranties set forth under the BHIL
Capitalization Agreement or the INFO Capitalization Agreement, as
the case may be, or in the failure or inability of the parties to
consummate the transactions contemplated hereby; or
(l) not incur or become subject to, nor agree to incur or become
subject to, any debt, obligation or liability, contingent or
otherwise, except for borrowings under or refinancing of, the
existing credit facilities of INFO, BHW or BHIL, as the case may
be, or current liabilities and contractual obligations in the
ordinary course.
5.1.2 From the date hereof until the Closing, INFO shall preserve, protect and
maintain the INFO
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Online Publishing Business, consistent with current practice and in the ordinary
course of business. Without limiting the generality of the foregoing, from the
date hereof until the Closing, except for transactions specifically contemplated
hereby or expressly approved in writing by BHW, INFO shall, with respect to the
INFO Online Publishing Business:
(a) maintain the properties of INFO Online Publishing Business and
assets related thereto in good repair, order and condition,
reasonable wear and tear excepted;
(b) maintain and keep in full force and effect all insurance on assets
and property or for the benefit of employees of INFO Online
Publishing Business, all liability and other casualty insurance,
and all bonds on personnel of the INFO Online Publishing Business,
presently carried;
(c) not sell, lease or otherwise dispose of or agree to sell, lease,
license or otherwise dispose of, or restrict, or grant an option
with respect to, any of the INFO Online Publishing Business'
assets, properties, rights or claims, except for inventory and
other assets sold in the ordinary course of business;
(d) preserve intact the organization and reputation of the INFO Online
Publishing Business and use its reasonable commercial efforts to
keep available the services of the present executives, employees
and agents of the INFO Online Publishing Business and preserve the
good will of suppliers, customers and others having business
relationships with the INFO Online Publishing Business;
(e) pay accounts payable and other obligations of the INFO Online
Publishing Business when they become due and payable in the
ordinary course of business consistent with prior practice;
(f) not grant any security interest, lien, charge, encumbrance or
claim on any assets of the INFO Online Publishing Business, except
in the ordinary course of business and consistent with prior
practice;
(g) maintain the INFO Online Publishing Business' books, accounts and
records in the usual, regular and ordinary manner on a basis
consistent with prior years;
(h) not enter into, amend or terminate, or agree to enter into, amend
or terminate any Contract; provided, however, that the foregoing
shall not prohibit the termination, extension or any amendment
(which is not material) of any Contract necessary to the INFO
Online Publishing Business arising in the ordinary course of
business and consistent with past practice;
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(i) perform in all material respects all of its obligations under all
Contracts and other agreements and instruments relating to or
affecting the INFO Online Publishing Business or its assets, and
comply in all material respects with all Laws applicable to the
assets of the INFO Online Publishing Business, except where
non-performance or non-compliance would not have a Material
Adverse Effect;
(j) not enter into, amend or terminate any employment, bonus,
severance or retirement contract or arrangement, nor increase any
salary or other form of compensation payable or to become payable
to any executives or employees of the INFO Online Publishing
Business other than in the ordinary course of business or any
material change in the employee benefits of the INFO Online
Publishing Business;
(k) not take any action or intentionally omit to take any action,
which action or omission would result in a breach of any of the
representations and warranties set forth under the INFO Online
Publishing Bill of Sale, Assignment and Assumption and Indemnity
Agreement or in the failure or inability of the parties to
consummate the transactions contemplated hereby; or
(l) not incur or become subject to, nor agree to incur or become
subject to, any debt, obligation or liability, contingent or
otherwise, except for borrowings under or refinancing of, the
existing credit facilities of INFO or current liabilities and
contractual obligations in the ordinary course.
5.1.3 Nothing contained in this Master Transaction Agreement shall give INFO,
directly or indirectly, rights to control or direct the BHIL Contributed
Business. Prior to the Closing Date, BHIL shall exercise, consistent with the
terms and conditions of this Master Transaction Agreement, complete control and
supervision of its Contributed Business and EDCO.
5.1.4 Nothing contained in this Master Transaction Agreement shall give BHIL,
directly or indirectly, rights to control or direct INFO's Contributed Business
or the INFO Online Publishing Business. Prior to the Closing Date, INFO shall
exercise, consistent with the terms and conditions of this Master Transaction
Agreement, complete control and supervision of its Contributed Business and the
INFO Online Publishing Business.
5.2 ACCESS.
5.2.1 Subject to applicable Law, BHW and BHIL shall afford to INFO and its
accountants, counsel, financial advisors and other representatives (the "INFO
Representatives") and INFO shall afford to BHW and BHIL and its accountants,
counsel, financial advisors and other representatives (the "BHW
Representatives") full access during normal business hours with reasonable
notice throughout the period prior to the Closing Date to all of their
respective properties, books, contracts,
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commitments and records and, during such period, shall furnish promptly to one
another:
(a) a copy of each report, schedule and other document filed with or
received by any of them from the SEC in connection with the
transactions contemplated by this Master Transaction Agreement,
and
(b) such other information concerning their respective businesses,
properties and personnel as INFO, BHIL or BHW, as the case may be,
shall reasonably request, including all information necessary for
either party to make any required filings with the SEC; provided,
however, that no investigation pursuant to this Section 5.2 shall
amend or modify any representations or warranties made herein or
in the Related Agreements or the conditions to the obligations of
the respective parties to consummate the transactions contemplated
hereby and thereby.
5.2.2 INFO shall hold and shall use its reasonable commercial efforts to cause
the INFO Representatives to hold, and BHW and BHIL shall hold and shall use its
reasonable commercial efforts to cause BHW Representatives to hold, in strict
confidence all non-public documents and information furnished to INFO or to BHW
or BHIL, as the case may be, in connection with the transactions contemplated by
this Master Transaction Agreement, except that:
(a) INFO, BHIL and BHW may disclose such information as may be
necessary in connection with seeking any required approvals or
consents, and
(b) each of INFO, BHIL and BHW may disclose any information that it is
required by Law or judicial or administrative order to disclose.
5.2.3 Neither INFO nor BHW nor BHIL shall use or knowingly permit the use of
such non-public information or other confidential or proprietary knowledge of
the other party for any purpose other than in connection with the transactions
contemplated hereby without the prior consent of the other parties hereto;
provided, that any information that is otherwise publicly available, without
breach of this provision, or has been obtained from a third party without a
breach of such third party's duties, shall not be subject to this Section 5.2.
5.2.4 In the event that this Master Transaction Agreement is terminated in
accordance with its terms, each party shall promptly redeliver to the other all
non-public written material provided pursuant to this Section 5.2 and shall not
retain any copies, extracts or other reproductions in whole or in part of such
written material. In such event, all documents, memoranda, notes and other
writings prepared by INFO, BHIL or BHW based on the information in such material
shall be destroyed (and INFO, BHIL and BHW shall use their respective reasonable
commercial efforts to cause their advisors and representatives to similarly
destroy their documents, memoranda and notes), and such destruction (and
reasonable commercial efforts) shall be certified in writing by an authorized
officer
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supervising such destruction. The provisions of Subsections 5.2.2, 5.2.3 and
5.2.4 shall survive any termination of this Master Transaction Agreement.
5.3 CORPORATE APPROVAL.
5.3.1 Subject to Section 5.8, the Board of Directors of INFO shall not take any
action to amend or modify the resolutions of the INFO Board of Directors related
to the subject matter set forth in Section 3.8.
5.3.2 If INFO determines to seek shareholder approval for the transactions
contemplated by the Master Transaction Agreement, INFO shall, as promptly as
practicable, submit the transactions contemplated by this Master Transaction
Agreement and the INFO Related Agreements for the approval of its shareholders
at a meeting of shareholders and shall use its reasonable best efforts to obtain
shareholder approval and adoption of the transactions contemplated by this
Master Transaction Agreement and the INFO Agreements. Such meeting of
shareholders shall be held as soon as practicable. INFO shall use its best
efforts to cause the Proxy Statement to be mailed to its shareholders at the
earliest practicable date. INFO shall, through its Board of Directors, recommend
to its shareholders approval of the transactions contemplated by this Master
Transaction Agreement.
5.4 AGREEMENTS TO COOPERATE.
Subject to the terms and conditions herein provided, each of the parties hereto
shall use best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
Laws to consummate and make effective the transactions contemplated by this
Master Transaction Agreement, including using its best efforts to obtain all
necessary or appropriate waivers, consents or approvals of third parties
required in order to preserve material contractual relationships of INFO and BHW
and their respective Affiliates, all necessary or appropriate waivers, consents
and approvals to effect all necessary filings and submissions and to lift any
injunction or other legal bar to the transactions contemplated hereby and
contemplated by the Related Agreements. Each party agrees to use all reasonable
efforts to comply with each of their respective covenants and agreements
contained in the Related Agreements.
5.5 PUBLIC STATEMENTS.
The parties shall consult with each other prior to issuing any
press release or any written public statement with respect to this Master
Transaction Agreement or the transactions contemplated hereby and shall not
issue any such press release or written public statement without the prior
written approval of the other party, which approval shall not be unreasonably
withheld.
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5.6 NOTIFICATIONS.
5.6.1 Each party shall notify the other party and keep it advised as to:
(a) any litigation or administrative proceeding that is either pending
or, to its knowledge, threatened against such party which
challenges the transactions contemplated hereby;
(b) any material damage to or destruction of its Contributed Business;
(c) any breach of its own representations and warranties set forth
herein or in any of the Related Agreements; and
(d) any fact of which such party has knowledge that indicates that any
condition to Closing is reasonably likely not to be satisfied in a
timely fashion.
5.6.2 No disclosure by any party pursuant to this Section 5.6, however shall be
deemed to amend or supplement any schedules or to prevent or cure any
misrepresentations, breach of warranty or breach of covenant contained herein or
in the Related Agreements.
5.7 PROXY STATEMENT; SHAREHOLDERS MEETING.
INFO shall promptly prepare and file with the SEC the Proxy
Statement in preliminary form. INFO shall use its best efforts to respond to any
comments of the SEC staff with respect thereto, in order to permit mailing to
shareholders of the definitive Proxy Statement as promptly as practicable. More
specifically, INFO shall (a) file with the SEC the Proxy Statement in
preliminary form within three (3) business days or as soon as reasonably
practical, but in no event within seven (7) business days of all required
financial statements being finalized, and (b) respond to the SEC in writing
regarding any comments from the SEC with respect to the Proxy Statement within
three (3) business days or as soon as reasonably practical, but in no event
within seven (7) business days of the receipt of such comments. Prior to the
date of approval of the transactions contemplated hereby by the INFO
shareholders, each of INFO and BHW shall correct promptly any information
provided by it used in the Proxy Statement that shall have become false or
misleading in any material respect and INFO shall take all steps necessary to
file with the SEC and have cleared by the SEC any amendment or supplement to the
Proxy Statement so as to correct the same and to cause the Proxy Statement as so
corrected to be disseminated to the shareholders of INFO to the extent required
by applicable Law.
5.8 ALTERNATIVE PROPOSALS.
5.8.1 INFO hereby agrees that after the date hereof and prior to the Closing
Date or earlier
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termination of this Master Transaction Agreement, INFO shall not, and shall not
permit any of its Affiliates to, and such party shall, and shall cause each of
its Affiliates to, cause each officer, director and employee of such party and
its Affiliates, and each attorney, accountant, investment banker, financial
advisor and other agent retained by them, not to, directly or indirectly:
(a) initiate or solicit any discussion in relation to or any inquiries
or the submission of any proposal or offer relating to a Change of
Control of INFO, whether by merger, share exchange, purchase of
stock, purchase of assets, tender offer, joint venture or
otherwise, and whether for cash, securities or any other
consideration or combination thereof that is inconsistent with or
provides a competitive impediment to the transactions contemplated
hereby and the ongoing operations and prospects of EDCO as
determined by BHW (any such inconsistent or competitive
transaction being referred to herein as an "Alternative
Transaction"), or
(b) participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, the making
of any proposal that constitutes, or may reasonably be expected to
or lead to, any Alternative Transaction;
provided, HOWEVER, that prior to the vote of shareholders of INFO for approval
and adoption of the transactions contemplated by this Master
Transaction Agreement, INFO may take any actions described in the
foregoing clause (b) to the extent that the Board of Directors of INFO
determines, in good faith after consultation with INFO's investment
bankers and outside counsel, that the Alternative Transaction, taken
as a whole, is superior to the transactions contemplated by this
Master Transaction Agreement.
5.8.2 INFO will immediately cease and cause to be terminated any existing
initiation, solicitation, encouragement, discussions or negotiations with
parties other than BHW with respect to Alternative Transactions.
5.8.3 If the Board of Directors of INFO receives an Alternative Transaction
that, taken as a whole, it determines to be superior to the transactions
contemplated by this Master Transaction Agreement, as determined in good faith
after consultation with INFO's investment bankers and outside counsel, the Board
of Directors may withdraw or modify its approval or recommendation of this
Master Transaction Agreement and may (subject to the following sentence)
terminate this Master Transaction Agreement, in each case at any time after the
fifth business day following BHW's receipt of written notice advising BHW that
the Board of Directors of INFO has received an Alternative Transaction that it
has determined to be a superior proposal, specifying the principal terms and
conditions of such superior proposal and identifying the person making such
superior proposal. INFO may terminate this Master Transaction Agreement pursuant
to the preceding sentence only if the shareholders of INFO shall not yet have
voted upon the Master Transaction Agreement and INFO shall have paid to BHW a
termination fee pursuant to Section 8.2.1. In
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addition to the obligations of INFO set forth in this Section 5.8.3, INFO shall
promptly advise BHW orally and in writing of any negotiations or discussions
entered into in reliance on the proviso to the first sentence of Section 5.8.1.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF INFO
Each and all of the obligations of INFO to consummate the transactions
contemplated by this Master Transaction Agreement and the Related Agreements are
subject to fulfillment prior to or at the Closing of the following conditions
(which conditions may be waived by INFO in its sole and arbitrary discretion):
6.1 SHAREHOLDER APPROVAL.
The transactions contemplated by this Master Transaction Agreement
and the Related Agreements shall have been approved and adopted by the requisite
vote of the shareholders of INFO under applicable Law.
6.2 ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS.
The representations and warranties of BHW or BHIL, as applicable
contained herein and in the Related Agreements shall be true, correct and
accurate in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in the
case of any representation or warranty without any materiality qualification) as
if made on and as of the Closing Date. EDCO, BHIL and BHW shall have performed
all of the obligations and complied in all material respects with each and all
of the covenants, agreements and conditions required to be performed or complied
with on or prior to the Closing pursuant to this Master Transaction Agreement
and the BHW Related Agreements.
6.3 NO PENDING ACTION.
No court of competent jurisdiction or governmental, regulatory
or administrative agency or commission shall have issued an order, decree or
ruling or taken any other action (which order, decree or ruling BHW, BHIL and
INFO shall use their commercially reasonable efforts to lift), in each case
temporarily or permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Master Transaction Agreement and the Related
Agreements.
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6.4 CONSENTS.
All consents by third parties that are required for the
consummation of the transactions contemplated hereby, or that are required in
order to prevent a breach of or a default under or a termination of any
Contract, shall have been obtained or provided for, except where the failure to
obtain the same would not be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on EDCO following the Closing Date.
6.5 REGULATORY APPROVALS.
All regulatory agencies shall have taken such action as may be
required to permit the consummation of the transactions contemplated hereby and
such actions shall remain in full force and effect and shall be reasonably
satisfactory in form and substance to INFO and its counsel.
6.6 LITIGATION.
None of BHW, BHIL, INFO, EDCO and any of the Contributed Assets
shall have been made a party or subject to any litigation related to the Master
Transaction Agreement or the transactions contemplated hereby, which is
reasonably expected to have a Material Adverse Effect.
6.7 AUDITED FINANCIAL STATEMENTS.
The audited financial statements of the BHIL Contributed Business for the three
years ended December 31, 1998 shall have been completed and shall not be
materially different using the same accounting methodologies with respect to
revenues from the unaudited financial statements of the BHIL Contributed
Business for the three-year period ended December 31, 1998, which unaudited
financial statements have been provided to INFO.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF BHW AND BHIL
Each and all of the obligations of BHW or BHIL, as applicable, to
consummate the transactions contemplated by this Master Transaction Agreement
and the Related Agreements are subject to fulfillment prior to or at the Closing
of the following conditions (which conditions may be waived by BHW in its sole
and arbitrary discretion):
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7.1 SHAREHOLDER APPROVAL.
The transactions contemplated by this Master Transaction Agreement
and the Related Agreements shall have been approved and adopted by the requisite
vote of the shareholders of INFO under applicable Law.
7.2 ACCURACY OF WARRANTIES AND PERFORMANCE OF COVENANTS.
The representations and warranties of INFO contained herein and in
the Related Agreements shall be true, correct and accurate in all respects (in
the case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any representation or
warranty without any materiality qualification) as if made on and as of the
Closing Date. EDCO and INFO shall have performed all of the obligations and
complied in all material respects with each and all of the covenants, agreements
and conditions required to be performed or complied with on or prior to the
Closing pursuant to this Master Transaction Agreement and the INFO Related
Agreements.
7.3 NO PENDING ACTION.
No court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action (which order, decree or ruling BHW, BHIL and INFO
shall use their commercially reasonable efforts to lift), in each case
temporarily or permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Master Transaction Agreement and the Related
Agreements.
7.4 CONSENTS.
All consents by third parties that are required for the
consummation of the transactions contemplated hereby, or that are required in
order to prevent a breach of or a default under or a termination of any
Contract, shall have been obtained or provided for, except where the failure to
obtain the same would not be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on EDCO or the INFO Online
Publishing Business following the Closing Date.
7.5 REGULATORY APPROVALS.
All regulatory agencies shall have taken such action as may be
required to permit the consummation of the transactions contemplated hereby and
such actions shall remain in full force and effect and shall be reasonably
satisfactory in form and substance to BHW and its counsel.
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7.6 LITIGATION.
None of INFO, BHIL, BHW, EDCO and any of the Contributed Assets
shall have been made a party or subject to any litigation related to this Master
Transaction Agreement or the transactions contemplated hereby, which is
reasonably expected to have a Material Adverse Effect.
7.7 AUDITED FINANCIAL STATEMENTS.
The audited financial statements of the INFO Contributed Business
for the three years ended December 31, 1998 shall have been completed and shall
not be materially different with respect to revenues from the unaudited
financial statements of the INFO Contributed Business for the three-year period
ended December 31, 1998, which unaudited financial statements have been provided
to BHW.
ARTICLE VIII
TERMINATION BY PARTIES PRIOR TO CLOSING
8.1 TERMINATION.
This Master Transaction Agreement and the Related Agreements may
be terminated and the transactions contemplated herein and therein may be
abandoned at any time prior to the Closing:
(a) by mutual written consent of the parties hereto;
(b) by either INFO or BHW in the event that the Closing does not occur
for any reason on or before December 31, 1999; provided, however,
that if the Closing does not occur due to the act or omission of
one of the parties or, in the case of INFO, the failure of the
conditions set forth in Article VII to be satisfied and in the
case of BHW, the failure of the conditions set forth in Article VI
to be satisfied, that party may not terminate this Master
Transaction Agreement pursuant to the provisions of this
paragraph (b);
(c) by INFO, upon material breach by BHW of this Master Transaction
Agreement which breach is not cured within 30 days of notice
thereof;
(d) by BHW, upon material breach by INFO of this Master Transaction
Agreement which breach is not cured within 30 days of notice
thereof;
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(e) by BHW, if the INFO Board of Directors or committee thereof shall:
(i) have resolved to accept or recommend to the INFO
shareholders an Alternative Proposal, or
(ii) have withdrawn or adversely modified or taken a public
position materially inconsistent with its approval or
recommendation to the shareholders of INFO of the
transactions contemplated hereby, or
(iii) not have submitted this Master Transaction Agreement and
the transactions contemplated hereby for the approval of
its shareholders at a meeting of shareholders to be held
on or prior to November 30, 1999 (or such other later
date as mutually agreed to in writing by the parties as
a result of action or inaction by the SEC solely and
exclusively with respect to the transactions
contemplated hereby) and used its reasonable best
efforts to obtain such shareholder approval;
(f) by BHW, if:
(i) a Change of Control of INFO shall have occurred, or
(ii) a tender offer or exchange offer shall have been
commenced or publicly announced that, if consummated,
would have the effect of a Change of Control of INFO; or
(g) by INFO, if:
(i) a Change of Control of BHW shall have occurred, or
(ii) a tender offer or exchange offer shall have been
commenced or publicly announced that, if consummated,
would have the effect of a Change of Control of BHW; and
(h) by INFO or BHW, if the approval of the shareholders of INFO
contemplated by Section 5.3 is not obtained at the applicable
shareholders meeting, including adjournments thereof, prior to
December 1, 1999.
Any right of termination set forth above shall be exercised by written notice
from the terminating party to the other party.
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8.2 TERMINATION FEES.
8.2.1 If this Master Transaction Agreement is terminated by BHW pursuant to
Section 8.1(e), then INFO shall pay BHW a fee of $4.0 million. If the Master
Transaction Agreement is terminated (i) by BHW pursuant to Section 8.1(b), (d)
or (h) or (ii) by INFO pursuant to Section 8.1(h), and within 120 days of any
such termination by either party, as applicable, INFO enters into or announces
an agreement or an intent to enter into an agreement for the sale, assignment or
transfer of all or substantially all of the INFO Contributed Business with a
third Person, then INFO shall pay to BHW a fee of $4.0 Million. Any such amount
shall be paid in cash by wire transfer in immediately available funds not later
than five (5) Business Days after the obligation to make such payment arises. In
the event that INFO is not in a position to make the $4.0 million payment in
full because of a lack of available funds as evidenced by the appropriate
corporate records of INFO, the parties will agree to a payment schedule
including interest on the amount of any unpaid fee at the publicly announced
prime rate of Citibank, N.A. plus five (5) percentage points (500 basis points)
from the date such fee was required to be paid. Any remaining unpaid amount
shall become immediately due and payable in full upon the closing of any sale,
assignment or transfer of all or substantially all of the INFO Contributed
Business. If INFO fails to promptly pay to BHW any fee when due under this
Section 8.2, then INFO shall pay the costs and expenses (including reasonable
legal fees and expenses) in connection with any action, including the filing of
any lawsuit or other legal action, taken to collect payment, together with
interest on the amount of any unpaid fee at the publicly announced prime rate of
Citibank, N.A. plus five (5) percentage points (500 basis points) from the date
such fee was required to be paid.
8.2.2 This Section 8.2 is the sole and exclusive remedy with respect to a
termination of this Master Transaction Agreement and the transactions
contemplated hereby pursuant to Section 8.1. In the event this Master
Transaction Agreement is terminated and the termination fee is paid pursuant to
Section 8.2, no claim for breach of contract and representation and warranty and
failure to perform or satisfy any covenant, agreement or other obligation
contained in this Master Transaction Agreement or the Related Agreements shall
survive.
8.3 EFFECT OF TERMINATION.
In the event of any termination of this Master Transaction Agreement as provided
above, this Master Transaction Agreement shall forthwith become wholly void and
of no further force and effect and there shall be no liability on the part of
any party, its Affiliates or their respective officers or directors; provided,
however, that upon any such termination the obligations of the parties with
respect to this Article VIII (including Section 8.2), Subsections 5.2.2, 5.2.3,
5.2.4, Sections 3.5, 3.7, 4.5, 4.6, 9.2 and 11.3 and the Mutual Confidentiality
and Nondisclosure Agreement previously entered into by and between INFO and BHIL
shall remain in full force and effect and provided, further, that subject to the
provisions of Subsection 8.2.2, nothing herein will relieve any party from
liability for damages for any breach of covenants or representations and
warranties of this Master
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Transaction Agreement prior to Closing.
ARTICLE IX
POST CLOSING AGREEMENTS
9.1 WORKING CAPITAL.
9.1.1 Working Capital is expected to be funded by EDCO on a stand-alone basis if
possible. If not possible, the respective shareholders of EDCO will have the
option and right to lend cash to EDCO on a pro rata basis to support EDCO in the
short term (less than one year) at market rates.
9.1.2 If one of the respective shareholders of EDCO elects not to lend cash
(short or long-term) on a pro rata basis, then the other shareholders may at
their option provide the financing, which may be convertible into equity
ownership (based on the then current capital structure of EDCO, utilizing a
similar valuation methodology as the one driving the transactions contemplated
hereby) thereby increasing the ownership position of that shareholder in EDCO.
The amount and duration (i.e., short or long-term) will be approved by the EDCO
Board of Directors. For purposes of this paragraph, pro rata means the then
current equity ownership positions of the respective shareholders.
9.2 CONFIDENTIALITY.
9.2.1 INFO shall hold and shall use its reasonable commercial efforts to cause
the INFO Representatives to hold, and BHW and BHIL shall hold and shall use
their reasonable commercial efforts to cause BHW Representatives to hold, in
strict confidence all non-public documents and information furnished to INFO or
to BHW or BHIL, as the case may be, in connection with the ownership, governance
or operation of EDCO except that each of INFO, BHIL and BHW may disclose any
information that it is required by Law or judicial or administrative order to
disclose.
9.2.2 Neither INFO, BHIL nor BHW shall use or knowingly permit the use of such
non-public information or other confidential or proprietary knowledge of EDCO
for any purpose other than in connection with the strategic alliance
contemplated hereby without the prior consent of the other parties hereto;
provided, that any information that is otherwise publicly available, without
breach of this provision, or has been obtained from a third party without a
breach of such third party's duties, shall not be subject to this Section 9.2.
9.2.3 In the event that either party ceases to be a shareholder of EDCO, such
party shall promptly deliver to EDCO all non-public written material provided
and shall not retain any copies, extracts or other reproductions in whole or in
part of such written material. In such event, all documents, memoranda, notes
and other writings prepared by INFO, BHIL or BHW based on the information in
such material shall be destroyed (and INFO, BHIL and BHW shall use their
respective reasonable
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commercial efforts to cause their advisors and representatives to similarly
destroy their documents, memoranda and notes), and such destruction (and
reasonable commercial efforts) shall be certified in writing by an authorized
officer supervising such destruction. The provisions of Subsections 9.2.1, 9.2.2
and 9.2.3 shall survive any termination of this Master Transaction Agreement.
9.3 EDCO BOARD OF DIRECTORS.
BHIL anticipates the EDCO Board of Directors will consist of eight
(8) members, six (6) to be named by BHW and two (2) to be named by INFO. The
Chairman of the Board will be James P. Roemer, BHW's Chairman, CEO & President.
Other members will likely be Joseph Reynolds, BHIL CEO, and Nils Johansson, BHW
Executive Vice President & CFO. It is also expected that Van Morris, INFO CEO &
President will serve as EDCO CEO & President, at least on an interim basis. In
order to facilitate a smooth transition of the INFO Contributed Business and
BHIL Contributed Business into EDCO, BHW and BHIL agree that Mr. Morris will not
be terminated from his position as CEO & President of EDCO or a position
responsible for a smooth transition of the INFO Contributed Business and BHIL
Contributed Business into EDCO for six (6) months from the date he assumes such
position, termination for cause excepted. The headquarters of EDCO shall be
initially located in Wayne, Pennsylvania.
9.4 INFO END-USER BUSINESS.
9.4.1 As of the Closing Date, INFO grants to EDCO a right of first refusal to
acquire the INFO End-user Business but only for the acquisition of such business
by itself as a stand alone business or asset and not as part of a Change of
Control of INFO. For a period of two (2) years from the Closing Date, INFO may
not effect, cause to be effected or permit any Transfer of the INFO End-User
Business, except in accordance with the provisions set forth in this Agreement.
Any Transfer not complying with the provisions of this Agreement shall not be
effective for any purpose and any purported transferee of such a Transfer shall
not acquire any right or interest in the INFO End-User Business.
(a) INFO may Transfer the INFO End-User Business pursuant to a
third-party offer which INFO reasonably establishes is bona fide
(the "OFFER"), provided that (x) INFO gives EDCO prior written
notice (the "ORIGINAL NOTICE"), (y) the rights of first refusal
granted hereunder are not exercised and (z) all other conditions
of this Section 9.4.1 are met.
(b) The Original Notice shall state the terms and conditions of the
proposed sale (including the purchase price for the INFO End-User
Business to be Transferred, and the name, business and residential
address of the proposed Transferee) and shall have attached any
documentation related to the Offer and the proposed sale. The
Original Notice shall include the names and addresses of the
following: if the proposed
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Transferee is (A) a corporation, the officers and directors of the
corporation; (B) a partnership, any limited partners and general
partners of the partnership; (C) a limited liability company, all
members of the limited liability company and (D) a trust, the
trustee and beneficiaries.
(c) Within thirty (30) days after the date of the Original Notice,
EDCO may elect to purchase the INFO End-User Business at the price
specified in the Original Notice. Neither INFO nor any of the
directors elected by INFO may be involved in any capacity in
EDCO's election. EDCO shall evidence its election to purchase by
written notice to INFO. Unless otherwise agreed upon, the closing
of the sale for the INFO End-User Business shall be within sixty
(60) days from the date the written notice is delivered to INFO.
(d) If EDCO does not elect to purchase the INFO End-User Business
within thirty (30) days after the date of Original Notice, then
the INFO may Transfer the INFO End- User Business in accordance
with the Offer. If the INFO End-User Business is not then
Transferred within ninety (90) days from the date of the Original
Notice on the same terms set forth in the Original Notice, all
restrictions contained in this Agreement again shall apply to the
INFO End-User Business, and any subsequent Transfer of the INFO
End-User Business shall be made only in compliance with this
Agreement.
9.4.2 For a period of two (2) years after Closing, if the right of first refusal
described above in 9.4.1 has not been exercised, EDCO shall have an exclusive
call option to acquire the INFO End-user Business from INFO. The purchase price
shall be equal to the preceding 12 months net revenue for the INFO End-user
Business multiplied by 2.0 and shall be paid in immediately available funds to
INFO at the closing of the Transfer of the INFO End-User Business to EDCO.
9.5 EMPLOYEES.
9.5.1 INFO will use its reasonable best efforts to ensure that a sufficient
number of its employees join EDCO so that the INFO Contributed Business can
continue to operate in the ordinary course consistent with past practice. EDCO
will provide appropriate compensation, benefit, and incentive package offers to
the INFO employees subject to this paragraph.
9.5.2 BHW will use its reasonable best efforts to ensure that a sufficient
number of BHIL's employees in the areas of sales, marketing, publishing and
product development join EDCO so that these functions can continue to operate in
the ordinary course. EDCO will provide appropriate compensation, benefit, and
incentive package offers to the BHIL employees subject to this paragraph.
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9.5.3 Between the date hereof and the Closing Date, INFO will not solicit for
employment or employ any employee of BHIL or any of its Affiliates, or request,
induce or advise any employee to leave the employ of BHIL or any of its
Affiliates.
9.5.4 Between the date hereof and the Closing Date, neither BHW nor BHIL will
solicit for employment or employ any employee of INFO or any of its Affiliates,
or request, induce or advise any employee to leave the employ of INFO or any of
its Affiliates.
9.6 RECORDS AND DOCUMENTS.
Subject to the confidentiality provisions contained in this
Article IX, following the Closing Date, EDCO shall grant to each party and its
representatives, at such party's reasonable request, reasonable access to and
the right to make copies at its expense of those records and documents of EDCO's
Business as may be reasonably necessary for litigation, preparation of financial
statements, and tax returns and audits.
ARTICLE X
DISSOLUTION OF ALLIANCE
10.1 BHW CALL.
Commencing on the third anniversary after the Closing Date and
continuing until the earlier to occur of:
(a) the closing of an underwritten public equity offering of EDCO, or
(b) any event which results in either a Change of Control of either
party or a change of more than twenty percent (20%) in the
percentage ownership of either party in EDCO,
BHW will have a Call Option to buy INFO's equity position in EDCO at a valuation
determined by a fair value appraisal (with no discount applied for illiquidity
or minority interest).
10.2 INFO PUT.
Commencing on the third anniversary after the Closing Date and
continuing until the earlier to occur of:
(a) the closing of an underwritten public equity offering of EDCO, or
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(b) any event which results in either a Change of Control of either
party or a change of more than twenty percent (20%) in the
percentage ownership of either party in EDCO,
INFO will have a Put Option to sell its equity position in EDCO to BHW at a
valuation determined by a fair value appraisal (with no discount applied for
illiquidity or minority interest).
10.3 RIGHT OF FIRST OFFER.
As of the Closing Date and up to the date EDCO becomes a publicly
traded company on the New York Stock Exchange or the Nasdaq Stock Market, INFO
grants BHW a right of first offer to acquire INFO's equity interest in EDCO but
only for the acquisition of such equity interest in EDCO by itself on a stand
alone basis and not as part of a Change of Control of INFO. INFO may not affect,
or cause to be affected any Transfer of its equity interest in EDCO, except in
accordance with the provisions set forth in this Agreement. Any Transfer not
complying with the provisions of this Agreement shall not be effective for any
purpose and any purported transferee of such a Transfer shall not acquire any
right or interest in INFO's equity interest in EDCO:
(a) If INFO desires to Transfer all or any portion of its equity
interest in EDCO, INFO must give BHW written notice of its desire,
setting forth the terms and conditions, including the purchase
price, that INFO is willing to sell its equity interest in EDCO;
(b) Within thirty (30) days after the written notice is received, BHW
may elect to purchase INFO's equity interest in EDCO on the terms
and conditions set forth in the written notice or on such other
terms and conditions as the parties may mutually agree upon. BHW
shall evidence its election to purchase by written notice to INFO.
Unless otherwise agreed upon, the closing of the sale of INFO's
equity interest in EDCO shall be within sixty (60) days from the
date the written notice is delivered to INFO.
(c) If BHW does not elect to purchase INFO's equity interest in EDCO
within thirty (30) days after the receipt of written notice as
provided in subparagraph (a), then INFO may Transfer its equity
interest in EDCO; provided, however, that if the equity interest
in EDCO is not Transferred within ninety (90) days from the date
of the written notice provided in subparagraph (a), all
restrictions contained in this Agreement shall apply to INFO's
equity interest in EDCO, and any subsequent Transfer of INFO's
equity interest in EDCO shall be made only in compliance with this
Agreement.
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ARTICLE XI
GENERAL PROVISIONS
11.1 AMENDMENTS AND WAIVER.
(a) No amendment, waiver or consent with respect to any provision of
this Master Transaction Agreement shall in any event be effective,
unless the same shall be in writing and signed by the parties
hereto, and then such amendment, waiver or consent shall be
effective only in the specific instance and for the specific
purpose for which given.
(b) The failure of any party at any time or times to require
performance of any provisions hereof shall in no manner affect
that party's right at a later time to enforce the same. No waiver
by any party of the breach of any term or covenant contained in
this Master Transaction Agreement in any one or more instances
shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other
term or covenant contained in this Master Transaction Agreement.
11.2 NOTICES.
All notices, requests, demands and other communications hereunder
shall be in writing and shall be, personally delivered or sent by facsimile
transmission with confirming copy sent by overnight courier (such as Express
Mail, Federal Express, etc.) and a delivery receipt obtained and addressed to
the intended recipient as follows:
(a) If to BHW or BHIL:
Bell & Howell Company
5215 Old Orchard Road
Skokie, Illinois 60077
Attention: CEO & President
Telecopy No.: 847-470-7650
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With a copy to:
Bell & Howell Company
5215 Old Orchard Road
Skokie, Illinois 60077
Attention: General Counsel
Telecopy No.: 847-470-7881
and
McDermott, Will & Emery
227 West Monroe Street
Suite 4400
Chicago, Illinois 60606-5096
Attention: William J. McGrath, P.C.
Telecopy No.: (312) 984-3669
(b) If to INFO or INFO Corporation:
Infonautics, Inc.
900 West Valley Road
Suite 1000
Wayne, Pennsylvania 19087-1830
Attention: Van Morris, CEO & President
Telecopy No.: (610) 971-8850
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With a copy to:
Infonautics, Inc.
900 West Valley Road
Suite 1000
Wayne, Pennsylvania 19087-1830
Attention: Vice President & General Counsel
Telecopy No.: (610) 971-8850
and
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Attention: David R. King
Telecopy No.: (215) 963-5299
Any party may change its address for receiving notice by written notice given to
the others named above. Notices shall be deemed given as of the date of receipt.
11.3 EXPENSES.
Except as otherwise expressly provided herein, each party to
this Master Transaction Agreement shall pay its own costs and expenses in
connection with the transactions contemplated herein, including fees of
counsel, investment bankers and accountants. The provisions of this Section
shall survive any termination of this Master Transaction Agreement.
11.4 COUNTERPARTS.
This Master Transaction Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
11.5 CAPTIONS.
The captions contained in this Master Transaction Agreement are
for convenience of reference only, shall not be given meaning and do not form a
part of this Master Transaction Agreement.
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11.6 SUCCESSORS AND ASSIGNS.
This Master Transaction Agreement shall bind and inure to the
benefit of the parties named herein and their respective successors and
permitted assigns. This Master Transaction Agreement shall not be assigned by
either party hereto without the express prior written consent of the other party
and any attempted assignment, without such consents, shall be null and void.
This Master Transaction Agreement does not create any rights, claims or benefits
inuring to any person that is not a party hereto nor create or establish any
third-party beneficiary hereto.
11.7 ENTIRE TRANSACTION.
This Master Transaction Agreement and the agreements and documents
referred to herein contain the entire agreement and understanding among the
parties with respect to the transactions contemplated hereby and supersede all
other agreements, understandings and undertakings among the parties on the
subject matter hereof. All exhibits and schedules hereto are hereby incorporated
by reference and made a part of this Master Transaction Agreement.
11.8 APPLICABLE LAW.
This Master Transaction Agreement shall be governed by and
construed in accordance with the internal substantive Laws of the state of
Delaware, without giving effect to conflict of Laws rules.
11.9 OTHER RULES OF CONSTRUCTION.
References in this Master Transaction Agreement to Sections,
Schedules, Annexes and Exhibits are to Sections of, and Schedules, Annexes and
Exhibits to, this Master Transaction Agreement unless otherwise indicated. Words
in the singular include the plural and in the plural include the singular. The
word "or" is not exclusive. The word "including" shall mean including, without
limitation. The term "ordinary course" means the ordinary course of the business
consistent with the past practice of the respective Contributed Business. The
section and other headings contained in this Master Transaction Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Master Transaction Agreement.
11.10 PARTIAL INVALIDITY.
In the event that any provision of this Master Transaction
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
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11.11 AUTHORSHIP.
The parties hereto agree that the terms and language of this
Master Transaction Agreement were the result of negotiations between the parties
and, as a result, there shall be no presumption that any ambiguities in this
Master Transaction Agreement shall be resolved against any party. Any
controversy over construction of this Master Transaction Agreement shall be
decided without regard to events of authorship or negotiation.
IN WITNESS WHEREOF, the parties hereto have caused this Master Transaction
Agreement to be duly executed as of the date first written above.
INFONAUTICS, INC.
By:/s/Van Morris
----------------------------
Van Morris, President
INFONAUTICS CORPORATION
By:/s/Van Morris
----------------------------
Van Morris, President
BELL & HOWELL COMPANY
By:/s/Nils A. Johansson
----------------------------
Nils A. Johansson
Executive Vice President and
Chief Financial Officer
BELL & HOWELL INFORMATION AND
LEARNING COMPANY
By:/s/Nils A. Johansson
----------------------------
Nils A. Johansson
Executive Vice President and
Chief Financial Officer
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Exhibit A
CERTIFICATE OF INCORPORATION
OF
EDCO, INC.
FIRST: The name of the corporation is EDCO, Inc.
SECOND: The registered office of the corporation in the State of
Delaware shall be located at ______________________________. The name of its
registered agent shall be Corporation Service Company.
THIRD: The purposes of the corporation are to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is [25,000] shares of Common Stock,
par value $.01 per share.
FIFTH: The name and mailing address of the sole incorporator is as
follows:
John P. Tamisiea 227 West Monroe Street
Suite 3100
Chicago, IL 60606
SIXTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized and empowered, in the manner provided in the By-Laws of the
corporation, to make, alter, amend and repeal the By-Laws of the corporation in
any respect not inconsistent with the laws of the State of Delaware or with this
Certificate of Incorporation.
In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon it, the Board of Directors may exercise all such powers
and do all such acts as may be exercised or done by the corporation, subject,
nevertheless, to the provisions of the laws of the State of Delaware, this
Certificate of Incorporation and the By-Laws of the corporation.
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Any contract, transaction or act of the corporation or of the directors
or of any committee which shall be ratified by the holders of a majority of the
shares of stock of the corporation present in person or by proxy and voting at
any annual meeting, or at any special meeting called for such purpose, shall,
insofar as permitted by law or by this Certificate of Incorporation, be as valid
and as binding as though ratified by every stockholder of the corporation.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code, or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation as the case may be,
and also on this corporation.
EIGHTH: A director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as the same exists or hereafter may be amended, or (iv) for any transaction
from which the director derived an improper personal benefit.
If the Delaware General Corporation Law hereafter is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of directors shall be eliminated or limited to the full
extent authorized by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of this Article shall not adversely affect
any right or protection of a director of the corporation existing at the time of
such repeal or modification.
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NINTH: The books of the corporation may be kept (subject to any
provision contained in the statutes) outside the State of Delaware at such place
or places as may be designated from time to time by the Board of Directors or in
the By-Laws of the corporation. Election of directors need not be by ballot
unless the By-Laws of the corporation shall so provide.
TENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this certificate, hereby declaring and certifying
that the facts stated are true, and accordingly, have hereunto set my hand this
____ day of ____________, 1999.
John P. Tamisiea
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Exhibit B
BY-LAWS
OF
EDCO, INC.
ARTICLE I
OFFICES
Section 1.1. REGISTERED OFFICE. The registered office of the
corporation shall be maintained in the City of Wilmington, State of Delaware,
and the registered agent in charge thereof is Corporation Service Company.
Section 1.2. OTHER OFFICES. The corporation may also have an office in
Chicago, Illinois, and also offices at such other places as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
STOCKHOLDERS' MEETINGS
Section 2.1. PLACE OF MEETINGS. All meetings of the stockholders,
whether annual or special, shall be held at the offices of the corporation or at
such other place as may be fixed from time to time by the Board of Directors.
Section 2.2. ANNUAL MEETINGS. An annual meeting of the stockholders,
commencing with the year 1998, shall be held on the second Tuesday in May in
each year, but if a legal holiday then on the next secular day following, at
11:00 A.M., at which they shall elect a Board of Directors, and transact such
other business as may properly be brought before the meeting.
Section 2.3. NOTICE OF MEETING. Written notice of the annual meeting
stating the place, date and hour of the meeting, shall be given not less than
ten nor more than sixty days before the date of the meeting to each stockholder
entitled to vote at such meeting. If mailed, notice is given when deposited in
the United States mail, postage prepaid, directed to the stockholder at his
address as it appears on the records of the corporation.
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Section 2.4. STOCKHOLDERS' LIST. At least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder,
shall be prepared by the Secretary. Such list shall be open to the examination
of any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 2.5. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board or by
the President and shall be called by the Secretary at the request of a majority
of the Board of Directors, or at the request in writing of stockholders owning
at least 50% of the number of shares of the corporation issued and outstanding
and entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 2.6. NOTICE OF SPECIAL MEETINGS. Written notice of a special
meeting, stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the corporation.
Section 2.7. QUORUM. The holders of a majority of the shares issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall be requisite and shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute, by the Certificate of Incorporation or by these By-Laws. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, of the place, date
and hour of the adjourned meeting, until a quorum shall again be present or
represented by proxy. At the adjourned meeting at which a quorum shall be
present or represented by proxy, the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment, a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
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Section 2.8. VOTING. When a quorum is present at any meeting, and
subject to the provisions of the General Corporation Law of the State of
Delaware, the Certificate of Incorporation or by these By-Laws in respect of the
vote that shall be required for a specified action, the vote of the holders of a
majority of the shares having voting power, present in person or represented by
proxy, shall decide any question brought before such meeting, unless the
question is one upon which, by express provision of the statutes or of the
Certificate of Incorporation or of these By-Laws, a different vote is required
in which case such express provision shall govern and control the decision of
such question. Each stockholder shall have one vote for each share of stock
having voting power registered in his name on the books of the corporation,
except as otherwise provided in the Certificate of Incorporation.
Section 2.9. PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
A stockholder may execute a writing authorizing another person or
persons to act for him as proxy by transmitting or authorizing the transmission
of a telegram, cablegram, or other means of electronic transmission, provided
that the telegram, cablegram or other means of electronic transmission either
sets forth or is submitted with information from which it can be determined that
the telegram, cablegram or other electronic transmission was authorized by the
stockholder.
Section 2.10. MAJORITY CONSENT. Whenever the vote of stockholders at a
meeting thereof is required or permitted to be taken for or in connection with
any corporate action by any provisions of the statutes or of the Certificate of
Incorporation or these By-Laws, the meeting, notice of the meeting, and vote of
stockholders may be dispensed with if stockholders owning stock having not less
than the minimum number of votes which, by statute, the Certificate of
Incorporation or these By-Laws, is required to authorize such action at a
meeting at which all shares entitled to vote thereon were present and voted
shall consent in writing to such corporate action being taken; provided that
prompt notice of the taking of such action must be given to those stockholders
who have not consented in writing.
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ARTICLE III
DIRECTORS
Section 3.1. GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors
which may exercise all such powers of the corporation and do all such acts and
things as are not by the General Corporation Law of the State of Delaware nor by
the Certificate of Incorporation nor by these By-Laws directed or required to be
exercised or done by the stockholders.
Section 3.2. NUMBER OF DIRECTORS. The number of directors which shall
constitute the whole Board shall be eight. The directors shall be elected at the
annual meeting of the stockholders, and each director shall hold office until
his successor is elected and qualified or until his earlier resignation or
removal.
Section 3.3. VACANCIES. If the office of any director or directors
becomes vacant by reason of death, resignation, retirement, disqualification,
removal from office, or otherwise, or a new directorship is created, the holders
of a plurality of shares issued and outstanding and entitled to vote in
elections of directors, shall choose a successor or successors, or a director to
fill the newly created directorship, who shall hold office for the unexpired
term or until the next election of directors.
Section 3.4. PLACE OF MEETINGS. The Board of Directors may hold its
meetings outside of the State of Delaware, at the office of the corporation or
at such other places as they may from time to time determine, or as shall be
fixed in the respective notices or waivers of notice of such meetings.
Section 3.5. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, designate one
or more committees, each committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power of authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amendment to
the By-Laws, of the corporation; and, unless the resolution, By-Laws, or
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to
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declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors. The committees shall keep
regular minutes of their proceedings and report the same to the Board of
Directors when required.
Section 3.6. COMPENSATION OF DIRECTORS. Directors, as such, may receive
such stated salary for their services and/or such fixed sums and expenses of
attendance for attendance at each regular or special meeting of the Board of
Directors as may be established by resolution of the Board; provided that
nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 3.7. ANNUAL MEETING. The annual meeting of the Board of
Directors shall be held within ten days after the annual meeting of the
stockholders in each year. Notice of such meeting, unless waived, shall be given
by mail or telegram to each director elected at such annual meeting, at his
address as the same may appear on the records of the corporation, or in the
absence of such address, at his residence or usual place of business, at least
three days before the day on which such meeting is to be held. Said meeting may
be held at such place as the Board may fix from time to time or as may be
specified or fixed in such notice or waiver thereof.
Section 3.8. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held at any time on the call of the Chairman of the Board or
President or at the request in writing of any one director. Notice of any such
meeting, unless waived, shall be given by mail or telegram to each director at
his address as the same appears on the records of the corporation not less than
one day prior to the day on which such meeting is to be held if such notice is
by telegram, and not less than two days prior to the day on which the meeting is
to be held if such notice is by mail. If the Secretary shall fail or refuse to
give such notice, then the notice may be given by the officer or any one of the
directors making the call. Any such meeting may be held at such place as the
Board may fix from time to time or as may be specified or fixed in such notice
or waiver thereof. Any meeting of the Board of Directors shall be a legal
meeting without any notice thereof having been given, if all the directors shall
be present thereat, and no notice of a meeting shall be required to be given to
any director who shall attend such meeting.
Section 3.9. ACTION WITHOUT MEETING. Any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting, if a
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written consent to such action is signed by all members of the Board or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors.
Members of the Board of Directors, or any committee designated by the
Board, may participate in a meeting of the Board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
Section 3.10. QUORUM AND MANNER OF ACTING. Except as otherwise provided
in these By-Laws, a majority of the total number of directors as at the time
specified by the By-Laws shall constitute a quorum at any regular or special
meeting of the Board of Directors. Except as otherwise provided by statute, by
the Certificate of Incorporation or by these By-Laws, the vote of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board of Directors. In the absence of a quorum, a majority of the
directors present may adjourn the meeting from time to time until a quorum shall
be present. Notice of any adjourned meeting need not be given, except that
notice shall be given to all directors if the adjournment is for more than
thirty days or if after the adjournment a new record date is fixed for the
adjourned meeting.
ARTICLE IV
OFFICERS
Section 4.1. EXECUTIVE OFFICERS. The executive officers of the
corporation shall be a Chairman of the Board, a Chief Executive Officer, a
President, such number of Vice Presidents, if any, as the Board of Directors may
determine, a Secretary and a Treasurer. One person may hold any number of said
offices.
Section 4.2. ELECTION, TERM OF OFFICE AND ELIGIBILITY. The executive
officers of the corporation shall be elected annually by the Board of Directors
at its annual meeting; provided that new or additional officers may be elected
at any meeting of the Board. Each officer, except such officers as may be
appointed in accordance with the provisions of Section 4.3, shall hold office
until the next annual election of officers or until his death, resignation or
removal. The Chairman of the Board shall be and remain a member of the Board of
Directors. None of the other officers need be members of the Board.
Section 4.3. SUBORDINATE OFFICERS. The Board of Directors may appoint
such Assistant Secretaries, Assistant Treasurers, Controller and other officers,
and such agents as the Board may
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determine, to hold office for such period and with such authority and to perform
such duties as the Board may from time to time determine. The Board may, by
specific resolution, empower the chief executive officer of the corporation or
the Executive Committee to appoint any such subordinate officers or agents.
Section 4.4. REMOVAL. The Chairman of the Board, the President, any
Vice President, the Secretary and/or the Treasurer may be removed at any time,
either with or without cause, but only by the affirmative vote of the majority
of the total number of directors as at the time specified by the By-Laws. Any
subordinate officer appointed pursuant to Section 4.3 may be removed at any
time, either with or without cause, by the majority vote of the directors
present at any meeting of the Board or by any committee or officer empowered to
appoint such subordinate officers.
Section 4.5. THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the stockholders and of the Board of Directors; and
in general shall perform all duties incident to the office of the Chairman of
the Board and such other duties as from time to time may be assigned to him by
the Board of Directors.
Section 4.6. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
be the chief executive officer of the corporation and shall perform such duties
as may from time to time be assigned by the Board of Directors, and in the
absence or disability of the Chairman of the Board, shall perform the duties of
the Chairman of the Board. He shall have executive authority to see that all
orders and resolutions of the Board of Directors are carried into effect, and,
subject to the control vested in the Board of Directors by statute, by the
Certificate of Incorporation, or by these By-Laws, shall administer and be
responsible for the overall management of the business and affairs of the
corporation.
Section 4.7. THE PRESIDENT. The President shall perform such duties as
may from time to time be assigned by the Chief Executive Officer and the Board
of Directors.
Section 4.8. THE VICE PRESIDENTS. In the event of the absence or
disability of the President, each Vice President, in the order designated, or in
the absence of any designation, then in the order of their election, shall
perform the duties of the President. The Vice Presidents shall also perform such
other duties as from time to time may be assigned to them by the Board of
Directors or by the chief executive officer of the corporation.
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Section 4.9. THE SECRETARY. The Secretary shall:
(a) Keep the minutes of the meetings of the stockholders and of
the Board of Directors;
(b) See that all notices are duly given in accordance with the
provisions of these By-Laws or as required by law;
(c) Be custodian of the records and of the seal of the corporation
and see that the seal or a facsimile or equivalent thereof is affixed
to or reproduced on all documents, the execution of which on behalf of
the corporation under its seal is duly authorized;
(d) Have charge of the stock record books of the corporation; and
(e) In general, perform all duties incident to the office of
Secretary, and such other duties as are provided by these By-Laws and
as from time to time are assigned to him by the Board of Directors or
by the chief executive officer of the corporation.
Section 4.10. THE ASSISTANT SECRETARIES. If one or more Assistant
Secretaries shall be appointed pursuant to the provisions of Section 4.3
respecting subordinate officers, then, at the request of the Secretary, or in
his absence or disability, the Assistant Secretary designated by the Secretary
(or in the absence of such designations, then any one of such Assistant
Secretaries) shall perform the duties of the Secretary and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
Secretary.
Section 4.11. THE TREASURER. The Treasurer shall:
(a) Receive and be responsible for all funds of and securities
owned or held by the corporation and, in connection therewith, among
other things: keep or cause to be kept full and accurate records and
accounts for the corporation; deposit or cause to be deposited to the
credit of the corporation all moneys, funds and securities so received
in such bank or other depositary as the Board of Directors or an
officer designated by the Board may from time to time establish; and
disburse or supervise the disbursement of the funds of the corporation
as may be properly authorized.
(b) Render to the Board of Directors at any meeting thereof, or
from time to time whenever the Board of Directors or the chief
executive officer of the corporation
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may require, financial and other appropriate reports on the condition
of the corporation; and
(c) In general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to
him by the Board of Directors or by the chief executive officer of the
corporation.
Section 4.12. THE ASSISTANT TREASURERS. If one or more Assistant
Treasurers shall be appointed pursuant to the provisions of Section 4.3
respecting subordinate officers, then, at the request of the Treasurer, or in
his absence or disability, the Assistant Treasurer designated by the Treasurer
(or in the absence of such designation, then any one of such Assistant
Treasurers) shall perform all the duties of the Treasurer and when so acting
shall have all the powers of and be subject to all the restrictions upon, the
Treasurer.
Section 4.13. SALARIES. The salaries of the officers shall be fixed
from time to time by the Board of Directors, and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the corporation.
Section 4.14. BONDS. If the Board of Directors or the chief executive
officer shall so require, any officer or agent of the corporation shall give
bond to the corporation in such amount and with such surety as the Board of
Directors or the chief executive officer, as the case may be, may deem
sufficient, conditioned upon the faithful performance of their respective duties
and offices.
Section 4.15. DELEGATION OF DUTIES. In case of the absence of any
officer of the corporation or for any other reason which may seem sufficient to
the Board of Directors, the Board of Directors may, for the time being, delegate
his powers and duties, or any of them, to any other officer or to any director.
ARTICLE V
SHARES OF STOCK
Section 5.1. REGULATION. Subject to the terms of any contract of the
corporation, the Board of Directors may make such rules and regulations as it
may deem expedient concerning the issue, transfer, and registration of
certificates for shares of the stock of the corporation, including the issue
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of new certificates for lost, stolen or destroyed certificates, and including
the appointment of transfer agents and registrars.
Section 5.2. STOCK CERTIFICATES. Certificates for shares of the stock
of the corporation shall be respectively numbered serially for each class of
stock, or series thereof, as they are issued, shall be impressed with the
corporate seal or a facsimile thereof, and shall be signed by the Chairman of
the Board, or the President or a Vice President, and by the Secretary or
Treasurer, or an Assistant Secretary or an Assistant Treasurer, provided that
such signatures may be facsimiles on any certificate countersigned by a transfer
agent other than the corporation or its employee. Each certificate shall exhibit
the name of the corporation, the class (or series of any class) and number of
shares represented thereby, and the name of the holder. Each certificate shall
be otherwise in such form as may be prescribed by the Board of Directors.
Section 5.3. RESTRICTION ON TRANSFER OF SECURITIES. A restriction on
the transfer or registration of transfer of securities of the corporation may be
imposed either by the Certificate of Incorporation or by these By-Laws or by an
agreement among any number of security holders or among such holders and the
corporation. No restriction so imposed shall be binding with respect to
securities issued prior to the adoption of the restriction unless the holders of
the securities are parties to an agreement or voted in favor of the restriction.
A restriction on the transfer of securities of the corporation is
permitted by this Section if it:
(a) Obligates the holder of the restricted securities to offer to
the corporation or to any other holders of securities of the
corporation or to any other person or to any combination of the
foregoing a prior opportunity, to be exercised within a reasonable
time, to acquire the restricted securities; or
(b) Obligates the corporation or any holder of securities of the
corporation or any other person or any combination of the foregoing to
purchase the securities which are the subject of an agreement
respecting the purchase and sale of the restricted securities; or
(c) Requires the corporation or the holders of any class of
securities of the corporation to consent to any proposed transfer of
the restricted securities or to approve the proposed transferee of the
restricted securities; or
(d) Prohibits the transfer of the restricted securities to
designated persons or classes of persons; and such designation is not
manifestly unreasonable; or
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(e) Restricts transfer or registration of transfer in any other
lawful manner.
Unless noted conspicuously on the security, a restriction, even though
permitted by this Section, is ineffective except against a person with actual
knowledge of the restriction.
Section 5.4. TRANSFER OF SHARES. Subject to the restrictions permitted
by Section 5.3, shares of the capital stock of the corporation shall be
transferable on the books of the corporation by the holder thereof in person or
by his duly authorized attorney, upon the surrender or cancellation of a
certificate or certificates for a like number of shares. As against the
corporation, a transfer of shares can be made only on the books of the
corporation and in the manner hereinabove provided, and the corporation shall be
entitled to treat the registered holder of any share as the owner thereof and
shall not be bound to recognize any equitable or other claim to or interest in
such share on the part of any other person, whether or not it shall have express
or other notice thereof, save as expressly provided by the statutes of the State
of Delaware.
Section 5.5. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date,
which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which
record date shall not be more than sixty nor less than ten days before
the date of such meeting. If no record is fixed by the Board of
Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day immediately preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting,
the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors. If no record date has been fixed
by the Board of Directors, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is required by the
General Corporation Law of the
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State of Delaware, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer
or agent of the corporation having custody of the book in which
proceedings of meetings by stockholders are recorded. Delivery made to
a corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been
fixed by the Board of Directors and prior action by the Board of
Directors is required by the General Corporation Law of the State of
Delaware, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts
the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or
for the purpose of any other lawful action, the Board of Directors may
fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted, and which
record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on
which the Board of Directors adopts the resolution relating thereto.
Section 5.6. LOST CERTIFICATE. Any stockholder claiming that a
certificate representing shares of stock has been lost, stolen or destroyed may
make an affidavit or affirmation of the fact and, if the Board of Directors so
requires, advertise the same in a manner designated by the Board, and give the
corporation a bond of indemnity in form and with security for an amount
satisfactory to the Board (or an officer or officers designated by the Board),
whereupon a new certificate may be issued of the same tenor and representing the
same number, class and/or series of shares as were represented by the
certificate alleged to have been lost, stolen or destroyed.
ARTICLE VI
BOOKS AND RECORDS
Section 6.1. LOCATION. The books, accounts and records of the
corporation may be kept at such place or places within or without the State of
Delaware as the Board of Directors may from time to time determine.
Section 6.2. INSPECTION. The books, accounts, and records of the
corporation shall be open to inspection by any member of the Board of Directors
at all times; and open to inspection by the
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stockholders at such times, and subject to such regulations as the Board of
Directors may prescribe, except as otherwise provided by statute.
Section 6.3. CORPORATE SEAL. The corporate seal shall contain two
concentric circles between which shall be the name of the corporation and the
word "Delaware" and in the center shall be inscribed the words "Corporate Seal."
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ARTICLE VII
DIVIDENDS AND RESERVES
Section 7.1. DIVIDENDS. The Board of Directors of the corporation,
subject to any restrictions contained in the Certificate of Incorporation and
other lawful commitments of the corporation, may declare and pay dividends upon
the shares of its capital stock either out of the surplus of the corporation, as
defined in and computed in accordance with the General Corporation Law of the
State of Delaware, or in case there shall be no such surplus, out of the net
profits of the corporation for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. If the capital of the corporation, computed in
accordance with the General Corporation Law of the State of Delaware, shall have
been diminished by depreciation in the value of its property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, the Board of Directors of the
corporation shall not declare and pay out of such net profits any dividends upon
any shares of any classes of its capital stock until the deficiency in the
amount of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets shall have been repaired.
Section 7.2. RESERVES. The Board of Directors of the corporation may
set apart, out of any of the funds of the corporation available for dividends, a
reserve or reserves for any proper purpose and may abolish any such reserve.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.1. FISCAL YEAR. The fiscal year of the corporation shall end
on the 31st day of December of each year.
Section 8.2. DEPOSITORIES. The Board of Directors or an officer
designated by the Board shall appoint banks, trust companies, or other
depositories in which shall be deposited from time to time the money or
securities of the corporation.
Section 8.3. CHECKS, DRAFTS AND NOTES. All checks, drafts, or other
orders for the payment of money and all notes or other evidences of indebtedness
issued in the name of the corporation shall be signed by such officer or
officers or agent or agents as shall from time to time be designated by
resolution of the Board of Directors or by an officer appointed by the Board.
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Section 8.4. CONTRACTS AND OTHER INSTRUMENTS. The Board of Directors
may authorize any officer, agent or agents to enter into any contract or execute
and deliver any instrument in the name and on behalf of the corporation and such
authority may be general or confined to specific instances.
Section 8.5. NOTICES. Whenever under the provisions of the statutes or
of the Certificate of Incorporation or of these By-Laws notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, by depositing the same
in a post office or letter box, in a postpaid sealed wrapper, or by delivery to
a telegraph company, addressed to such director or stockholder at such address
as appears on the records of the corporation, or, in default of other address,
to such director or stockholder at the General Post Office in the City of Dover,
Delaware, and such notice shall be deemed to be given at the time when the same
shall be thus mailed or delivered to a telegraph company.
Section 8.6. WAIVERS OF NOTICE. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these By-Laws, a waiver thereof in writing signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person at
a meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders, directors or
members of a committee of directors need be specified in any written waiver of
notice.
Section 8.7. STOCK IN OTHER CORPORATIONS. Any shares of stock in any
other corporation which may from time to time be held by this corporation may be
represented and voted at any meeting of shareholders of such corporation by the
President or a Vice President, or by any other person or persons thereunto
authorized by the Board of Directors, or by any proxy designated by written
instrument of appointment executed in the name of this corporation by its
President or a Vice President. Shares of stock belonging to the corporation need
not stand in the name of the corporation, but may be held for the benefit of the
corporation in the individual name of the Treasurer or of any other nominee
designated for the purpose by the Board of Directors. Certificates for shares so
held for the benefit of the corporation shall be endorsed in blank or have
proper stock powers attached so that said certificates are at all times in due
form for transfer, and shall be held for safekeeping in such manner as shall be
determined from time to time by the Board of Directors.
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Section 8.8. INDEMNIFICATION
(a) Each person who was or is a party or is threatened to be made
a party to or is involved in any pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he, or a
person of whom he is the legal representative, is or was a director or
officer of the corporation or is or was a director or officer of the
corporation who is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, shall be indemnified
and held harmless by the corporation to the fullest extent authorized
by the laws of Delaware as the same now or may hereafter exist (but, in
the case of any change, only to the extent that such change authorizes
the corporation to provide broader indemnification rights than said law
permitted the corporation to provide prior to such change) against all
costs, charges, expenses, liabilities and losses (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of his heirs, executors and administrators.
The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the
corporation the expenses incurred in defending any such proceeding in
advance of its final disposition upon receipt by the corporation of an
undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that the
director or officer is not entitled to be indemnified under this
Section or otherwise. The corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the
corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
(b) If a claim under subsection (a) of this Section is not paid in
full by the corporation within thirty days after a written claim has
been received by the corporation, the claimant may at any time
thereafter bring suit against the corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the
claimant shall also be entitled to be paid the expense of prosecuting
such claim. It shall be a defense to any action (other than an action
brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required
undertaking has been tendered to the corporation) that the claimant has
failed to meet a standard of conduct which makes it permissible under
Delaware law for the corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including its
Board of Directors, independent legal counsel, or its stockholders) to
have made a determination prior to the commencement of such action that
indemnification of the claimant is permissible in the circumstances
because he has met such standard of conduct, nor an actual
determination by the corporation (including its Board of
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Directors, independent legal counsel, or its stockholders) that the
claimant has not met such standard of conduct, nor the termination of
any proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall be a defense to the
action or create a presumption that the claimant has failed to meet the
required standard of conduct.
(c) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition
conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity
while holding such office.
(d) The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or
not the corporation would have the power to indemnify such person
against such expense, liability or loss under Delaware law.
(e) To the extent that any director, officer, employee or agent of
the corporation is by reason of such position, or a position with
another entity at the request of the corporation, a witness in any
proceeding, he shall be indemnified against all costs and expenses
actually and reasonably incurred by him or on his behalf in connection
therewith.
(f) The corporation shall have the power to indemnify any person
who is or was a director, officer, employee or agent of a constituent
corporation absorbed in a consolidation or merger with this corporation
or who is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, in the same
manner as hereinabove provided so that such persons will stand in the
same position under this Section 8.8 with respect to this corporation
as he would have stood with respect to such constituent corporation if
its separate existence had continued.
(g) In addition to the foregoing, the corporation shall have the
power, to the full extent provided by law, to indemnify any person for
any act or omission of such person against all loss, cost, damage and
expense (including attorney's fees) if such person is determined to
have acted
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in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interest of the corporation.
(h) No director shall be personally liable to the corporation or
any stockholder for monetary damages for breach of fiduciary duty as a
director; provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) under Section 174 of the General
Corporation Law of the State of Delaware; or (iv) for any transaction
from which the director derived an improper personal benefit.
(i) Any amendment, repeal or modification of any provision of this
Section by the stockholders or the directors of the corporation shall
not adversely affect any right or protection of a director or officer
of the corporation existing at the time of such amendment, repeal or
modification.
Section 8.9. AMENDMENT OF BY-LAWS. The stockholders, by the affirmative
vote of the holders of a majority of the stock issued and outstanding and having
voting power may, at any annual or special meeting if notice of such alteration
or amendment of the By-Laws is contained in the notice of such meeting, adopt,
amend, or repeal these By-Laws, and alterations or amendments of By-Laws made by
the stockholders shall not be altered or amended by the Board of Directors.
The Board of Directors, by the affirmative vote of a majority of the
whole Board, may adopt, amend, or repeal these By-Laws at any meeting, except as
provided in the above paragraph. By-Laws made by the Board of Directors may be
altered or repealed by the stockholders.
* * *
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Exhibit C
BILL OF SALE, ASSIGNMENT AND
ASSUMPTION AND INDEMNITY AGREEMENT
This AGREEMENT is dated as of _________, 1999 ("Agreement"), by and between
________________________ a Delaware corporation ("Seller") and
________________________ a Delaware corporation ("Buyer"). Capitalized terms
used in this Agreement shall, unless otherwise defined herein, have the
meanings ascribed to them in the Glossary attached as Annex A hereto.
WHEREAS, Seller is engaged in the ______ Contributed Business;
WHEREAS, Buyer desires to purchase from Seller and Seller desires to sell to
Buyer, subject to the assumption of the associated liabilities and
obligations, certain assets, properties and rights used in the ______
Contributed Business upon the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements contained herein, the parties hereto
mutually agree as follows:
ARTICLE I
THE TRANSACTION
1.1. Purchase and Sale of Contributed Assets.
Seller hereby sells, transfers, assigns and delivers to Buyer, and Buyer shall
purchase, accept and receive, all of Seller's right, title and interest in and
to the Contributed Assets (as defined below) as they exist on the date hereof.
1.2. Contributed Assets.
The "Contributed Assets" are all of Seller's right, title and interest in and to
the following :
(a) all accounts and notes receivable of the ______ Contributed
Business;
(b) the assets listed on Schedule _________1;
(c) customer databases of the ______ Contributed Business;
(d) all Intellectual Property (as defined below) listed
specifically on Schedule _______1;
(e) the customer files and all lists of customers, suppliers and
vendors of the ______ Contributed Business;
(f) all rights and claims under lease, management or sale
contracts, customer orders, service agreements and other
similar commitments of the ______ Contributed Business as set
forth on Schedule ______2;
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(g) the software listed specifically on Schedule _____1;
(h) documents and records directly and solely relating to the
Contributed Assets, including accounts receivable and accounts
payable ledgers, records and files; and
(i) to the extent assignable and transferable to Buyer, permits
and licenses (and pending applications for any thereof)
related to the operation of the ______ Contributed Business
or the Contributed Assets;
provided, however, that the definition of Contributed Assets shall not include
any items defined as Excluded Assets in Section 1.3 below.
1.3. Excluded Assets.
Seller will retain and not transfer, and Buyer will not acquire any assets of
Seller, other than the Contributed Assets, (collectively, the "Excluded
Assets"), including, the following assets which shall not be sold or
transferred to Buyer:
(a) all cash and cash equivalents, including cash on hand or in
bank accounts;
(b) the name, marks and other designations, including any
derivations thereof listed on Schedule 1.3;
(c) corporate accounting journals and corporate books of account
which comprise Seller's or any Affiliate's permanent
accounting or tax records;
(d) corporate minute books, stock records and corporate seals of
Seller;
(e) refunds pertaining to any Tax obligations of Seller or any of
its Affiliates;
(f) software and information systems, including the software
listed on Schedule 1.3, but excluding the software listed on
Schedule _____1;
(g) the assets listed on Schedule 1.3; and
(h) items sold, transferred, disposed of or consumed in the
ordinary course prior to the date hereof;
provided, however, that the definition of Excluded Assets shall not include any
items defined as Contributed Assets in Section 1.2.
1.4. Assumed Liabilities and Obligations.
Buyer hereby assumes and agrees to discharge promptly as they become due any and
all liabilities and obligations and agreements related to or arising from the
operation of ______ Contributed Business or the ownership of the Contributed
Assets, including all contracts and obligations which constitute Contributed
Assets or to which the Contributed Assets are subject or
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by which they are bound, all of which liabilities and obligations are set forth
on Schedule _____3 (the "Assumed Liabilities"); provided, however, that
notwithstanding the foregoing, none of the Excluded Liabilities (as defined
below) shall be included as Assumed Liabilities. Buyer shall forever defend,
indemnify and hold harmless Seller from and against any and all liabilities,
obligations, claims, damages, costs and expenses (including court costs and
reasonable attorneys' fees) related to or arising from Buyer's failure to fully
perform and discharge the responsibilities of Seller with respect to the Assumed
Liabilities. Buyer further agrees to pay and discharge all such liabilities and
obligations as they become due.
1.5. Excluded Liabilities and Obligations.
Buyer shall not assume any liabilities or obligations of Seller, any of its
Affiliates or the ______ Contributed Business for Federal, state or local
taxes on income for all periods prior to the date hereof and any obligation
or liability to pay benefits under Seller's employee benefit plans to the
Transferred Employees for all periods ending prior to the date hereof (the
"Excluded Liabilities"). Seller shall forever defend, indemnify and hold
harmless Buyer from and against any and all liabilities, obligations, claims,
damages, costs and expenses (including court costs and reasonable attorneys'
fees) related to or arising from Seller's failure to fully perform and
discharge the Excluded Liabilities. Seller further agrees to pay and
discharge all such liabilities and obligations as they become due.
1.6. Assignment of Contracts.
Anything contained in this Agreement to the contrary notwithstanding, this
Agreement shall not constitute an agreement to assign the right, title or
interest of Seller in, to or under any contract or any claim or right of any
benefit arising thereunder or resulting therefrom if any attempted assignment
thereof, without the consent of a third party thereto, would constitute a breach
thereof or in any way adversely affect the rights of Buyer or Seller thereunder
or if by its nature such contract cannot be assigned. Seller shall use its
reasonable commercial efforts to obtain, and Buyer agrees to cooperate with
Seller in its efforts to obtain, the consent of each such third party to the
assignment or transfer thereof to Buyer in all cases in which such consent is
required for assignment or transfer. If such consent is not obtained, Seller and
Buyer shall cooperate in any reasonable arrangements on mutually acceptable
terms designed to provide Buyer the obligations and benefits thereunder such as,
by example, entering into a subcontract, management agreement, or other similar
relationship. Notwithstanding the foregoing, the obligations of Seller under
this Section shall not include any obligation to make any unreimbursed payment
or incur any economic burden.
ARTICLE II
CONSIDERATION
2.1. Consideration.
The consideration to be paid by Buyer for the Contributed Assets shall be
_____ shares of Common Stock of Buyer as provided for in the Master
Transaction Agreement.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.1. Absence of Certain Changes.
Except as set forth in Schedule 4.1 of the Disclosure Annex and for trends
which may affect the economy or the information industry as a whole, since
December 31, 1998 (the "Balance Sheet Date") the ______ Contributed Business
has not suffered any adverse change in the operation or financial condition
thereof, except such changes which, in the aggregate, are not reasonably
likely to have a Material Adverse Effect.
3.2. Title to Tangible Assets.
Seller has good title to the Contributed Assets which it purports to own, free
and clear of any [Liens], except for:
(a) Liens for current taxes not yet due and payable;
(b) Liens which would not, in the aggregate, have a Material
Adverse Effect;
(c) mechanics', carriers', workers' and other similar Liens
arising or incurred in the ordinary course of business
consistent with past practice;
(d) in the case of properties or assets acquired after the Balance
Sheet Date, Liens securing all or a part of the purchase price
thereof; and
(e) Liens in favor of Seller's creditors which are being released
as of the date hereof.
The Contributed Assets will furnish Buyer with all of the capacity and rights
to produce, develop, use, sell, distribute, install and service the products
and to perform the same services in the same manner as presently being
provided or performed by Seller with respect to the ______ Contributed Business.
3.3. Intellectual Property.
3.3.1. Schedule 3.3 of the Disclosure Annex sets forth a list of all of the
following which are owned or licensed by Seller or any of its
Affiliates and which are primarily used by or licensed to the ______
Contributed Business:
(a) trademark, servicemark and trade name registrations and
applications and all material unregistered trademarks, trade
names and service marks and domain names;
(b) registered and applied for copyrights;
(c) patents and patent applications; and
(d) material trademark, copyright and patent license agreements,
in each case currently used in connection with the ______
Contributed Business.
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3.3.2. The foregoing items and their respective rights under any license
agreement relating thereto (whether as licensee or licensor
thereunder), are referred to herein as the "Intellectual Property."
3.3.3. Upon consummation of the transactions contemplated hereby, Buyer has
adequate and customary rights to use all of the Intellectual Property
including all trade secrets to conduct the ______ Contributed Business
as currently conducted by Seller, except where the failure to have
such rights would not, in the aggregate, have a Material Adverse
Effect.
3.3.4. All proprietary information in the nature of trade secrets, including
Software:
(a) is accessible, readily available and evidenced by
Documentation adequate and customary for use in the ______
Contributed Business (i.e., in the case of Software,
is sufficient in scope, content and level of detail to enable
a person with relevant programming experience to modify and
maintain the Software) and such Documentation, including
relevant source code, is in the possession of Seller and its
Affiliates (or appropriate Software escrows) under customary
security conditions; and
(b) has been the subject of reasonable efforts to maintain it in
confidence by the Seller, except for those instances which,
in the aggregate, would not be reasonably expected to have a
Material Adverse Effect.
3.3.5. Except as set forth in Schedule 3.3 of the Disclosure Annex, no claim
is pending or, to the Knowledge of Seller, threatened against Seller
or any Affiliate to the effect that the rights of Seller or any
Affiliate in or to any Intellectual Property are invalid or
unenforceable or that the use by the ______ Contributed Business of the
Intellectual Property infringes on the rights of any third party, or
which challenges Seller's or any Affiliate's ownership of the
Intellectual Property, except for such claims as would not reasonably
be expected to, in the aggregate, have a Material Adverse Effect.
3.4. Material Contracts.
3.4.1. Each of the following Commitments to which, as of the date hereof, the
______ Contributed Business is a party or by which it is bound, is
referred to herein as a Material Commitment:
(a) Notes, bonds, mortgages, and other obligations for borrowed
money;
(b) Employment, severance, management, consulting, and other
agreements involving compensation for services rendered or to
be rendered, in each case involving payments of more than
[$200,000] per year;
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(c) Contracts relating to the licensing of Intellectual Property
(whether Seller and any Affiliate is the licensor or the
licensee thereunder) other than licenses which are not
material;
(d) Leases relating to real property; and
(e) Other contracts involving annual payments in excess of
[$200,000] unless cancelable on 60 days or less notice for a
nominal payment.
3.4.2. Seller has made available to Buyer true and complete copies of all such
Material Commitments or representative forms thereof. Such Material
Commitments are valid and binding obligations of Seller or any
Affiliate and, to the Knowledge of Seller, the other party thereto.
None of the members of the ______ Contributed Business nor, to the
Knowledge of Seller, the other party thereto is in material breach of
any such Material Commitment, except for such breaches as would not
reasonably be expected to have a Material Adverse Effect.
3.5. Contracts with Affiliates.
Except as set forth in Schedule 3.5 of the Disclosure Annex, there are no
Commitments between the ______ Contributed Business and Seller or any of
Seller's other Affiliates.
3.6. Litigation.
Except as set forth on Schedule 3.6 of the Disclosure Annex, there is no
Proceeding, or to the Knowledge of Seller, threatened involving the ______
Contributed Business, at law or in equity, or before any governmental entity,
which in the aggregate would reasonably be expected to have a Material
Adverse Effect. The ______ Contributed Business as conducted by the Seller is
not being conducted in violation of any applicable law, ordinance, rule,
regulation, decree or order of any domestic or foreign court or governmental
entity, except for violations which in the aggregate would reasonably be
expected to have a Material Adverse Effect.
3.7. Employee Benefit Plans.
3.7.1. Schedule 3.7 of the Disclosure Annex lists each Employee Benefit Plan
covering Transferred Employees. Except as set forth in Schedule 3.7 of
the Disclosure Annex:
(a) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) substantially complies in form
and in operation in all material respects with the applicable
requirements of ERISA, the Code, and other applicable laws.
(b) All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, and Summary Plan
Descriptions) have been filed or distributed appropriately
with respect to each such Employee Benefit Plan. The
requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code Sec. 4980B have been substantially satisfied with
respect to each such Employee
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Benefit Plan which is an Employee Welfare Benefit Plan.
(c) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have
been paid to each such Employee Benefit Plan which is an
Employee Pension Benefit Plan and all contributions for any
period ending on or before the date hereof which are not yet
due have been paid to each such Employee Pension Benefit Plan
or accrued in accordance with the past custom and practice of
the Seller. All premiums or other payments for all periods
ending on or before the date hereof have been paid with
respect to each such Employee Benefit Plan which is an
Employee Welfare Benefit Plan.
(d) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan and which is described on Schedule 3.7 of the
Disclosure Annex as meeting the requirements of Code Sec.
401(a), meets the requirements of a "qualified plan" under
Code Sec. 401(a) and has within the last two years, either
received a favorable determination letter from the IRS
or has requested such a letter within the remedial amendment
period of Code Sec. 401(b).
(e) Seller has delivered to the Buyer correct copies of the plan
documents and Summary Plan Descriptions, the most recent
determination letter received from the IRS, the most recent
Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which
implement each such Employee Benefit Plan.
3.7.2. With respect to each Employee Benefit Plan that Seller, and the
[Controlled Group of Corporations] which includes Seller maintains or
ever has maintained or to which any of them contributes, ever has
contributed, or ever has been required to contribute:
(a) No such Employee Benefit Plan which is an Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been
completely or partially terminated or been the subject of a
[Reportable Event] as to which notices would be required to be
filed with the PBGC. No proceeding by the PBGC to terminate
any such Employee Pension Benefit Plan (other than any
Multiemployer Plan) has been instituted or threatened.
(b) To the Knowledge of Seller, there have been no Prohibited
Transactions with respect to any such Employee Benefit Plan,
and no fiduciary has incurred any liability for breach of
fiduciary duty or any other failure to act or comply in
connection with the administration or investment of the assets
of any such Employee Benefit Plan. To the Knowledge of Seller,
no action, suit, proceeding, hearing, or investigation with
respect to the administration or the investment of the assets
of any such Employee Benefit Plan (other than routine claims
for benefits) is pending or threatened.
(c) Seller has not incurred any Liability to the PBGC (other
than PBGC
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premium payments) or otherwise under Title IV of ERISA
(including any withdrawal Liability) or under the Code with
respect to any such Employee Benefit Plan which is an Employee
Pension Benefit Plan.
3.7.3. Except as set forth on SCHEDULE 3.7 of the Disclosure Annex, none of
Seller, its Affiliates, and the other members of the Controlled Group
of Corporations that includes the Seller contributes to, ever has
contributed to, or ever has been required to contribute to any
[Multiemployer Plan] or has any [Liability] (including withdrawal
Liability) under any Multiemployer Plan.
3.7.4. Except as set forth on SCHEDULE 3.7 of the Disclosure Annex, Seller
does not maintain or contribute to any Employee Welfare Benefit Plan
providing medical, health, or life insurance or other welfare-type
benefits for current or future retired or terminated employees, their
spouses, or their dependents (other than in accordance with Code Sec.
4980B).
3.8. ENVIRONMENTAL MATTERS.
Except as set forth in Schedule 3.8 of the Disclosure Annex or in the Phase I
Studies:
(a) Seller and its Affiliates hold, and are in compliance with,
all permits, licenses and government authorizations required
for the ______ Contributed Business to hold its assets and to
conduct the ______ Contributed Business under any
Environmental Law, except where the failure to be in such
compliance would not have a Material Adverse Effect;
(b) Seller and its Affiliates are in compliance with all
applicable Environmental Laws, except where the failure to be
in compliance would not have a Material Adverse Effect;
(c) Seller and its Affiliates have not received any written
request for information, or has been notified that it is a
potentially responsible party, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act or any
similar local, state or foreign law with respect to any
on-site or off-site location;
(d) Seller and its Affiliates have not entered into or agreed to
any consent decree or order, and is not subject to any
judgment, decree or judicial order relating to compliance
with, or the cleanup of regulated substances under, any
applicable Environmental Law.
3.9. LABOR RELATIONS.
3.9.1. No member of the ______ Contributed Business is a party to any
collective bargaining agreement.
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3.9.2. There is no unfair labor practice complaint or other proceeding against
the ______ Contributed Business pending before the National Labor
Relations Board which, if adversely decided, is reasonably likely to
have a Material Adverse Effect. There is no labor strike, work stoppage
or arbitration proceeding pending or involving or, to the Knowledge of
Seller, threatened against Seller or any Affiliate which is reasonably
likely to have a Material Adverse Effect. To the Knowledge of Seller,
there are no organizing efforts by any union or other group seeking to
represent the employees of the Seller.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that the following statements are
true and correct in all material respects:
4.1. CORPORATE ORGANIZATION; ETC.
Buyer is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has all requisite
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted, except where the failure to have such power or
authority is not, in the aggregate, reasonably likely to have a Material Adverse
Effect.
4.2. AUTHORITY RELATIVE TO THIS AGREEMENT.
Buyer has all requisite corporate authority and power to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Buyer have been duly and validly
authorized by all required corporate action on the part of Buyer and no other
corporate proceedings on the part of Buyer are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Buyer and,
assuming this Agreement has been duly authorized, executed and delivered by
Seller, constitutes a valid and binding agreement of Buyer, enforceable
against Buyer in accordance with its terms.
4.3. CONSENTS AND APPROVALS; NO VIOLATIONS.
4.3.1. No filing with, and no permit, authorization, Consent or approval of,
any Government Authority is necessary for the consummation by Buyer
of the transactions contemplated by this Agreement.
4.3.2. Neither the execution and delivery of this Agreement by Buyer nor the
consummation by Buyer of the transactions contemplated hereby nor
compliance by Buyer with any of the provisions hereof will:
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(a) conflict with or result in any breach of any provision of the
charter or by-laws of Buyer,
(b) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both), a default (or
give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation to which
Buyer or any of its Subsidiaries is a party or by which any of
them or any of their properties or assets may be bound, or
(c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Buyer, any of its Subsidiaries or any
of their properties or assets,
except, in the case of (b) and (c) for violations, breaches or defaults which
are not in the aggregate reasonably likely to have a Material Adverse Effect or
prevent or delay the consummation of the transactions contemplated hereby.
ARTICLE V
SURVIVAL AND INDEMNIFICATION
5.1. SURVIVAL PERIODS.
5.1.1. All representations and warranties of the parties contained in this
Agreement shall survive the consummation of the transactions
contemplated hereby until 12 months after the date hereof.
5.1.2. The covenants and agreements of the parties hereto shall survive the
consummation of the transactions contemplated hereby in accordance with
their terms.
5.1.3. From and after the date hereof, Seller hereby agrees to indemnify and
hold harmless Buyer, and Buyer hereby agrees to indemnify and hold
harmless Seller, against certain liabilities, in accordance with the
terms of this Article V.
5.1.4. No party providing indemnification pursuant to this Article V (an
"Indemnifying Party") shall be obligated to provide such
indemnification with respect to representations and warranties to the
other party (the "Indemnified Party") unless the Indemnifying Party
shall have received written notice within 12 months after the date
hereof.
5.2. INDEMNIFICATION.
Subject to the other provisions of this Article V, from and after the date
hereof, the Indemnifying Party shall indemnify and hold harmless the Indemnified
Party from and against any Damages to the extent they are the result of any
breach of any representation or warranty or failure to perform
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any covenant or agreement made by the Indemnifying Party under this Agreement.
5.3. INDEMNIFICATION AMOUNTS.
Notwithstanding any provision to the contrary contained in this Agreement, the
Indemnifying Party shall not be obligated to indemnify the Indemnified Party for
any Damages with respect to representations and warranties:
(a) unless and until the amount of all such Damages shall equal in
the aggregate an amount equal to $100,000, and then only to
the extent of such excess, and
(b) to the extent that the amount of all such payments by Seller
would exceed Twenty Million Dollars ($20,000,000).
5.4. CLAIMS.
5.4.1. If an Indemnified Party intends to seek indemnification pursuant to
this Article V, such Indemnified Party shall promptly give the
Indemnifying Party a Notice of Claim describing such Claim in
reasonable detail; provided, that the failure to provide such notice
shall not affect the obligations of the Indemnifying Party unless it is
actually prejudiced thereby, subject, however, to the time periods
specified in Section 5.1 hereof. In the event that such Claim involves
a claim by a third party against the Indemnified Party, the
Indemnifying Party shall have 30 days after receipt of such notice to
decide whether it will undertake, conduct and control, through counsel
of its own choosing and at its own expense, the settlement or defense
thereof, and if it so decides, the Indemnified Party shall cooperate
with it in connection therewith; provided, that the Indemnified Party
may participate in such settlement or defense through counsel chosen by
it; and provided further, that the fees and expenses of such counsel
shall be borne by the Indemnified Party.
5.4.2. The Indemnifying Party shall not, without the written consent of the
Indemnified Party, settle or compromise any action in any manner that
would materially and adversely affect the Indemnified Party, other than
as a result of money damages or other money payments.
5.4.3. If the Indemnifying Party does not notify the Indemnified Party within
30 days after the receipt of the Indemnified Party's Notice of a Claim
of indemnity hereunder that it elects to undertake the defense thereof,
the Indemnified Party shall have the right to contest, settle or
compromise the Claim but shall not thereby waive any right to indemnity
therefor pursuant to this Agreement.
5.4.4. As long as the Indemnifying Party is contesting any such Claim in good
faith, the Indemnified Party shall not pay or settle any such Claim.
Notwithstanding the foregoing, the Indemnified Party shall have the
right to pay or settle any such Claim; provided, that:
(a) as long as the Indemnifying Party is contesting such Claim in
good faith, any
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such settlement shall include as an unconditional term thereof
the delivery by the Claimant or plaintiff to the Indemnifying
Party of a duly executed written release of the Indemnifying
Party from all liability and obligation in respect of such
action;
(b) in such event Indemnified Party shall waive any right to
indemnity therefor by the Indemnifying Party; and
(c) that the Indemnified Party shall provide the Indemnifying
Party reasonable advance notice of any proposed settlement or
payment and shall not pay or settle any Claim if the
Indemnifying Party shall reasonably object.
5.4.5. The Indemnified Party shall cooperate fully in all aspects of any
investigation, defense, pretrial activities, trial, compromise,
settlement or discharge of any Claim in respect of which indemnity is
sought pursuant to Article V, including, but not limited to, by
providing the other party with reasonable access to employees and
officers (including as witnesses) and other information.
5.5. EXCLUSIVE REMEDY.
5.5.1. The indemnification provisions of this Article V shall be the exclusive
remedy following the date hereof for any breaches or alleged breaches
of any representation, warranty or other provision of this Agreement
or the transactions contemplated hereby. Buyer shall have the right to
set-off against any dividends, distributions or other payments to be
made by Buyer pursuant to this Agreement or otherwise.
5.5.2. Each of the parties hereto, on behalf of itself and its officers,
directors, employees, shareholders, partners, affiliates, agents or
representatives (collectively, such party's "Representatives") agrees
not to bring any actions or proceedings, at law, equity or otherwise,
against any other party or its Representatives, in respect of any
breaches or alleged breaches of any representation, warranty or other
provision of this Agreement, except pursuant to the express provisions
of this Article V.
5.5.3. The parties hereby agree that no party has made any representations and
warranties, express or implied, with respect to this Agreement or the
matters contemplated hereby, except as explicitly set forth in this
Agreement.
5.6. TAX AND INSURANCE OFFSETS.
The amount of any Damages suffered by an Indemnified Party shall be reduced
by any Tax Benefit, insurance or other benefits which are available to such
party or its Representatives in respect of or as a result of such Damages or
the facts or circumstances relating thereto. If any Damages for which
indemnification is made hereunder are subsequently reduced by any Tax
Benefit, insurance payment or other recovery from a third party, the value of
such Tax Benefit or other benefit or the amount of such payment or other
recovery shall be remitted to the Indemnifying Party.
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ARTICLE VI
GENERAL PROVISIONS
6.1. AMENDMENTS AND WAIVER.
(a) No amendment, waiver or consent with respect to any provision
of this Agreement shall in any event be effective, unless the
same shall be in writing and signed by the parties hereto, and
then such amendment, waiver or consent shall be effective only
in the specific instance and for the specific purpose for
which given.
(b) The failure of any party at any time or times to require
performance of any provisions hereof shall in no manner affect
that party's right at a later time to enforce the same. No
waiver by any party of the breach of any term or covenant
contained in this Agreement in any one or more instances shall
be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any
other term or covenant contained in this Agreement.
6.2. NOTICES.
All notices, requests, demands and other communications hereunder shall be in
writing and shall be, personally delivered or sent by facsimile transmission
with confirming copy sent by overnight courier (such as Express Mail, Federal
Express, etc.) and a delivery receipt obtained and addressed to the intended
recipient as follows:
(c) If to Seller:
Attention:
Telecopy No.:
With a copy to:
Attention:
Telecopy No.:
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and
Attention:
Telecopy No.:
(d) If to Buyer:
---------------------
---------------------
---------------------
Attention:
Telecopy No.:
With a copy to:
Any party may change its address for receiving notice by written notice given to
the others named above. Notices shall be deemed given as of the date of receipt.
6.3. EXPENSES.
Except as otherwise expressly provided herein, each party to this Agreement
shall pay its own costs and expenses in connection with the transactions
contemplated herein, including fees of counsel, investment bankers and
accountants. The provisions of this Section shall survive any termination of
this Agreement.
6.4. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
6.5. CAPTIONS.
The captions contained in this Agreement are for convenience of reference only,
shall not be given meaning and do not form a part of this Agreement.
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6.6. SUCCESSORS AND ASSIGNS.
This Agreement shall bind and inure to the benefit of the parties named herein
and their respective successors and permitted assigns. This Agreement shall not
be assigned by either party hereto without the express prior written consent of
the other party and any attempted assignment, without such consents, shall be
null and void. This Agreement does not create any rights, claims or benefits
inuring to any person that is not a party hereto nor create or establish any
third-party beneficiary hereto.
6.7. ENTIRE TRANSACTION.
This Agreement and the agreements and documents referred to herein contain the
entire agreement and understanding among the parties with respect to the
transactions contemplated hereby and supersede all other agreements,
understandings and undertakings among the parties on the subject matter hereof.
All exhibits and schedules hereto are hereby incorporated by reference and made
a part of this Agreement.
6.8. APPLICABLE LAW.
This Agreement shall be governed by and construed in accordance with the
internal substantive laws of the state of Delaware, without giving effect to
conflict of laws rules.
6.9. OTHER RULES OF CONSTRUCTION.
References in this Agreement to Sections, Schedules, Annexes and Exhibits are
to Sections of, and Schedules, Annexes and Exhibits to, this Agreement unless
otherwise indicated. Words in the singular include the plural and in the
plural include the singular. The word "or" is not exclusive. The word
"including" shall mean including, without limitation. The term "ordinary
course" means the ordinary course of the ______ Contributed Business
consistent with the past practice of the ______ Contributed Business. The
section and other headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.
6.10. PARTIAL INVALIDITY.
In the event that any provision of this Agreement shall be held invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provision hereof.
6.11. AUTHORSHIP.
The parties hereto agree that the terms and language of this Agreement were the
result of negotiations between the parties and, as a result, there shall be no
presumption that any ambiguities in this Agreement shall be resolved against
either party. Any controversy over construction of this Agreement shall be
decided without regard to events of authorship or negotiation.
15
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be
signed by its duly authorized officer as of the date first above written.
By:
---------------------------
Name:
Title:
By:
---------------------------
Name:
Title:
16
<PAGE>
Exhibit D-1
BHIL TECHNICAL SERVICES AGREEMENT (Section 2.3.1)
Parties: BHIL and EDCO.
Term: 36 months, renewable by mutual agreement of
the parties. EDCO can terminate upon 90 days
written notice, provided, however, that if
EDCO wants to use a third Person to provide
the services hereunder:
(i) EDCO shall obtain three bids from
independent third Persons,
(ii) the cost of the third Person must be 90%
or less of the costs charged by BHIL for
the same services, and
(iii) BHIL has not exercised its right of
first refusal to match the costs of the
third Person, which right of first
refusal will not be unreasonably
exercised.
Charges: The Fully Loaded Costs to provide the services
which initially shall equal XXX of EDCO's Net
Revenue from ProQuest for the first 12 months
and thereafter shall be adjusted to the Fully
Loaded Costs incurred during the preceding 12
month period on each anniversary of this
Agreement, subject to a mutually agreed upon
reduction if there is a shift from peak to
non-peak usage by EDCO.
Scope of Services: Data Center and Information Technology Support
services, consisting of the following:
a) BHIL will keep available sufficient
hardware and systems software to support
the use of ProQuest by EDCO's customers in
the K-12 Segment.
b) BHIL will provide the same service level to
EDCO as BHIL provides to the Post Secondary
Education Segment.
<PAGE>
c) EDCO may request that BHIL load additional
license material to the "electronic vault"
of BHIL. Loading such materials shall be at
additional cost and subject to reasonable
scheduling pursuant to a written work order
executed by BHIL and EDCO.
d) BHIL will create, manufacture and ship such
ProQuest CD-ROM products as are currently
licensed by BHIL into the K-12 Segment as
long as it is economically reasonable for
BHIL to provide such products and services.
e) The Services are more fully described in
the attached Technical Support Term Sheet
and Data Center Term Sheet. (Attachments 1
and 2 to this Exhibit D-1)
f) BHIL will respond to questions and assist
with implementation as specified in the
Technical Support Term Sheet. (Attachment 1
to this Exhibit D-1).
g) In the event that the Scope of the Services
shall increase materially from the level at
which they exist at the effective date of
this Agreement, and such increases require
BHIL to purchase or lease such hardware and
systems software as necessary to support
such increased usage, the increased costs
will be shared by EDCO and BHIL
proportionately based upon the need for
increased usage. The purchase or lease of
such hardware and systems software shall be
pursuant to a written work order executed
by BHIL and EDCO.
h) In the event that EDCO terminates this
Agreement, it will assume the obligations
of any hardware lease or software license
of BHIL that is used primarily to satisfy
EDCO's system usage (unless BHIL waives
such obligation).
Enhancements: To the extent there are enhancements or
modifications to the BHIL Software that
require
D-2
<PAGE>
additional hardware, software or labor, the
parties shall negotiate in good faith an
increase in the cost of this Agreement to EDCO
to compensate BHIL for such increased
hardware, software and/or labor costs. The
enhancements or modifications shall be agreed
to pursuant to a written work order executed
by BHIL and EDCO.
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provisions
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
D-3
<PAGE>
Attachment 1 TO Exhibit D-1
TECHNICAL SUPPORT TERM SHEET (Section 2.3.3)
This sheet describes the terms and conditions under which BHIL will provide
technical support for the software licensed to EDCO under the BHIL Software
License and support under this BHIL Technical Services Agreement.
- - It is expected that EDCO will have questions about the design, functionality
and algorithms utilized in BHIL's software. A BHIL technical resource will
be designated as a point of contact for such questions. An EDCO technical
point of contact should also be designated to facilitate these discussions.
- - Given that the BHIL system is so large, no one person possesses the
knowledge to answer every question. Thus, the BHIL contact person will often
need to identify an expert and allow some time for a response. It is
expected that questions will be answered in no more than a week's time.
- - BHIL will incorporate BHIL's current problem escalation procedure.
- - The BHIL technical point of contact must make the EDCO technical point of
contact aware of BHIL system releases for the purpose of impact analysis.
This should occur no later than a month prior to the BHIL system release.
- - Conversely, the EDCO technical point of contact must make the BHIL technical
point of contact aware of EDCO system releases for the purpose of impact
analysis. This should occur no later than a month prior to the EDCO system
release.
- - No work will be initiated for EDCO without a written work order signed by
EDCO and BHIL.
D-4
<PAGE>
Attachment 2 TO Exhibit D-1
DATA CENTER TERM SHEET (Section 2.3.2)
The following points describe the terms, means and manner in which the BHIL data
center services may be utilized by EDCO.
- - PROQUEST: The term "BHIL ProQuest Systems" refers to the data center
resources running in BHIL's Ann Arbor location as well as BHIL's systems
remotely hosted by EMC in Hopkinton, MA, or any other location necessary to
provide the ProQuest service. BHIL data manufacturing systems are also
utilized to produce CD-ROMs.
- - SYSTEM AVAILABILITY: Until 8/1/1999, BHIL's online systems are unavailable
from 2-3.a.m. weekdays and 10:00 p.m. Saturday - 10:00 a.m. Sunday. After
8/1/99, BHIL's systems are targeted to be available 24 hours a day, 7 days a
week, with possible exceptions several times a quarter for hardware
maintenance or major changes. This is barring Acts of God or situations
beyond our control.
- - ACCESS: EDCO customers will access BHIL online services and content via
existing (or presently under development) External Interfaces (Z39.50,
ProQuest Direct, KidQuest, JuniorQuest, ClassMate, Site Builder). Additional
methods of access will require development and will be considered
incremental product development.
- - AUTHENTICATION: Authentication will generally be performed based upon the
EDCO customers entering a valid PQD User Account ID and Password. In some
cases authentication may be skipped if access comes from a list of specified
IP addresses.
- - SEARCH RESPONSE TIMES: Provided Search Response times for EDCO customers
will be the same as those provided to BHIL PQD customers; this is currently
10 seconds.
- - DATA COLLECTIONS: BHIL will maintain complete, correct and current data
content collections of the material chosen to be accessible by EDCO
customers. BHIL content is generally not searchable until the day after it
has been loaded into the content warehouse.
- - NETWORK: Any incremental network costs (such as telecommunications lines,
routers, switches or firewalls, as well as monthly charges) necessary to
provide functionality between EDCO systems and BHIL systems will be supplied
by BHIL at cost pursuant to a written work order executed by BHIL and EDCO.
- - SYSTEM CAPACITY: BHIL will supply the system capacity resources (Network,
Hardware, software) to service EDCO customers within its data center. EDCO
will provide BHIL with a forecast (updated quarterly) of its capacity needs
for the next twelve months. This will be expressed as numbers of customers
(total and / or concurrent), numbers of searches, time of day, numbers of
content retrievals and other meaningful metrics as mutually agreed to by the
parties.
D-5
<PAGE>
- - TIME of SYSTEM USAGE: The BHIL systems will monitor and provide the means
for reporting the times when EDCO customers' usage occurred, in categories
of "Peak," during the weekday, or "Off-Peak."
- - EDCO BRANDING & DOMAIN NAMES: EDCO will reimburse BHIL for any costs
incurred in the event EDCO wishes to establish its own product brand and /
or unique domain names for their products. The scope of this includes any
domain name registration fees, network engineering changes, hardware, third
party web server software or BHIL software modifications. EDCO will not be
obligated to pay for any costs hereunder without a signed work order from
EDCO.
D-6
<PAGE>
Exhibit D-2
BHIL NON-TECHNICAL SUPPORT SERVICES AGREEMENT (Section 2.5)
PARTIES: BHIL and EDCO
TERM: 6 months.
COST: a) Customer Support - free
b) Billing and Accounting Support - free
c) Human Resources - free
d) Office Space - market rate
e) Office Equipment - market rate (depreciated
value remaining - includes computer
hardware, software, and office furniture
and fixtures) (other than the office
equipment included as a Contributed Asset).
f) Trade Show and Promotional Materials -
actual cost
Scope of Services: BHIL will provide EDCO:
a) Customer Support
b) Billing and Accounting Support
c) Human Resources
d) Office Space
e) Office Equipment
f) Trade Show and Promotional Materials
g) Other services as required
All services shall be provided on same basis
as currently provided by bhil for the bhil
contributed business.
D-7
<PAGE>
Liaisons: Each party shall designate a primary liaison
for this agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provision
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
D-8
<PAGE>
Exhibit D-3
REPRESENTATION AGREEMENT (2.3.3)
Parties: EDCO and BHIL
Term: 36 months
Cost: On terms to be mutually agreed upon.
Scope of Services: a) Upon EDCO's request, BHIL will act as a
sales agent for the sale of EDCO products
into the Excluded Segments and in all
market segments outside of North America.
The terms of such arrangement to be subject
to mutual agreement. If EDCO intends to
Distribute ProQuest through a third Person
in market segments outside of North
America, BHIL has a right of first refusal
to Distribute ProQuest on the same terms
and conditions as such third Person
intended to do so.
b) In bids to consortia that span the Excluded
Segments and the K-12 Segment:
(i) BHIL and EDCO will cooperate with
each other in making joint bids,
including revenue allocation and
pricing, and in the performance of
any contracts resulting therefrom.
EDCO and BHIL can only make joint
bids with each other and no other
third Person with respect to the
products and services provided by
EDCO or BHIL, as the case may be. If
the parties do not make a joint bid,
either party can make an independent
bid to such consortia with respect
to the market segment served by such
party.
(ii) BHIL retains the right to include
the Excluded BHIL Products in bids
to library or other consortia that
span the
D-9
<PAGE>
Excluded Segments and the EDCO
Segment in bids with EDCO or
independent bids by BHIL alone.
(iii) With respect to the Public Library
Segment, (i) if ProQuest is used in
the joint bid, BHIL shall determine
the terms and conditions, including
pricing, (ii) if Electric Library is
used in the joint bid, EDCO shall
determine the terms and conditions,
including pricing and (iii) if the
parties cannot agree, either party
can make an independent bid to such
consortia with respect to the market
served by such party.
c) The existing INFO contracts with the Post
Secondary Education Segment shall be
transferred to EDCO; provided, however,
that EDCO will not renew such contracts on
the renewal date and will use its best
efforts to cause the customer of the Post
Secondary Education Segment to use BHIL's
ProQuest products and services.
Miscellaneous: This Agreement shall contain provisions
regarding Indemnification, Proprietary Rights,
Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
D-10
<PAGE>
Exhibit E-1
EDCO TECHNICAL SERVICES AGREEMENT
Parties: INFO and EDCO.
Term: 36 months, renewable by mutual agreement of
the parties. INFO can terminate upon 90 days
written notice, provided, however, that if
INFO wants to use a third Person to provide
the services hereunder:
(i) INFO shall obtain three bids from
independent third parties,
(ii) the cost of the third Person must be 90%
or less of the costs charged by EDCO for
the same services, and
(iii) EDCO has not exercised its right of
first refusal to match the costs of the
third Person which right of first
refusal will not be unreasonably
exercised.
Charges: The Fully Loaded Costs to provide Services
which initially shall equal XXX of INFO's Net
Revenue from Electric Library Technology for
the first 12 months and thereafter shall be
adjusted to the Fully Loaded Costs incurred
during the preceding 12 month period on each
anniversary of this Agreement, subject to a
mutually agreed upon reduction if there is a
shift from peak to non-peak usage by INFO.
Scope of Services: Data Center and Information Technology Support
services, consisting of the following:
a) EDCO will keep available sufficient
hardware and systems software to support
the use of the Electric Library by INFO's
customers in the INFO End-User Business.
b) EDCO will provide the same service level to
INFO as EDCO provides to the EDCO Segment.
<PAGE>
c) INFO may request that EDCO load additional
license material specific to EDCO's needs.
Loading such materials shall be at
additional cost and subject to reasonable
scheduling pursuant to a written work order
signed by INFO and EDCO.
d) The Services are more fully described in
the attached Technical Support Term Sheet
and Data Center Term Sheet. (Attachments 1
and 2 to this Exhibit E-1)
e) EDCO will respond to questions and assist
with implementation as specified in the
Technical Support Term Sheet. (Attachment 1
to this Exhibit E-1).
f) In the event that the Scope of the Services
shall increase materially from the level at
which they exist at the effective date of
this Agreement, and such increases requires
EDCO to purchase or lease such hardware and
systems software as necessary to support
such increased usage, the increased costs
will be shared by EDCO and INFO
proportionately based upon the need for
increased usage. The purchase or lease of
such hardware and systems software shall be
pursuant to a written work order executed
by INFO and EDCO.
g) In the event that INFO terminates this
Agreement, it will assume the obligations
of any hardware lease or software license
of EDCO that is used primarily to satisfy
INFO's system usage (unless EDCO waives
such obligation).
Enhancements: To the extent there are enhancements or
modifications to the INFO Software that
require additional hardware, software or
labor, the parties shall negotiate in good
faith an increase in the cost of this
Agreement to INFO to compensate EDCO for such
increased hardware, software and/or labor
costs. The enhancements or modifications shall
be
E-2
<PAGE>
agreed to pursuant to a written work order
signed by INFO and EDCO.
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provisions
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
E-3
<PAGE>
Attachment 1 TO Exhibit E-1
TECHNICAL SUPPORT TERM SHEET
This sheet describes the terms and conditions under which EDCO will provide
technical support for the software licensed to INFO under the EDCO Software and
Technology License and support under this EDCO Technical Services Agreement.
- - It is expected that INFO will have questions about the design, functionality
and algorithms utilized in EDCO's software. An EDCO technical resource will
be designated as a point of contact for such questions. An INFO technical
point of contact should also be designated to facilitate these discussions.
- - Given that the EDCO system is so large, no one person possesses the
knowledge to answer every question. Thus, the EDCO contact person will often
need to identify an expert and allow some time for a response. It is
expected that questions will be answered in no more than a week's time.
- - EDCO will incorporate EDCO's current problem escalation procedure.
- - The EDCO technical point of contact must make the INFO technical point of
contact aware of EDCO system releases for the purpose of impact analysis.
This should occur no later than a month prior to the EDCO system release.
- - Conversely, the INFO technical point of contact must make the EDCO technical
point of contact aware of INFO system releases for the purpose of impact
analysis. This should occur no later than a month prior to the INFO system
release.
- - No work will be initiated for INFO without a written work order signed by
INFO and EDCO.
E-4
<PAGE>
Attachment 2 TO Exhibit E-1
DATA CENTER TERM SHEET
The following points describe the terms, means and manner in
which the EDCO data center services may be utilized by INFO.
- - ELECTRIC LIBRARy: The term "Electric Library" refers to the data center
resources running in EDCO's Wayne, Pennsylvania location or any other
location necessary to provide the Electric Library Service.
- - SYSTEM AVAILABILITY: EDCO's systems are available 24 hours a day, 7 days a
week, with scheduled exceptions several times a quarter for hardware
maintenance or major changes. This is barring Acts of God or situations
beyond our control.
- - ACCESS: INFO customers will access Electric Library and EDCO and BHIL
content via existing (or presently under development) External Interfaces.
Additional methods of access may require development and will be considered
incremental product development.
- - AUTHENTICATION: Authentication will generally be performed based upon the
INFO customers entering a valid Electric Library User Account ID and
Password. In some cases authentication may be skipped if access comes from a
list of specified IP addresses.
- - SEARCH RESPONSE TIMES: Provided Search Response times for INFO customers
will be the same as those provided to EDCO Library Users.
- - DATA COLLECTIONS: EDCO will maintain complete, correct and current data
content collections of the material chosen to be accessible by INFO
customers. BHIL and EDCO content is generally not searchable until the day
after it has been loaded into the content warehouse.
- - NETWORK: Any incremental network costs (such as telecommunications lines,
routers, switches or firewalls, as well as monthly charges) necessary to
provide functionality between INFO systems and EDCO systems will be supplied
by EDCO at cost pursuant to a written work order executed by INFO and EDCO.
- - SYSTEM CAPACITY: EDCO will supply the system capacity resources (Network,
Hardware, software) to service INFO customers within its data center. INFO
will provide EDCO with a forecast (updated quarterly) of its capacity needs
for the next twelve months. This will be expressed as numbers of customers
(total and / or concurrent), numbers of searches, time of day, numbers of
content retrievals and other meaningful metrics as mutually agreed to by the
parties.
- - TIME of SYSTEM USAGE: The EDCO systems will monitor and provide the means
for reporting the times when INFO customers' usage occurred, in categories
of "Peak", during the weekday, or "Off-Peak".
E-5
<PAGE>
- - INFO BRANDING & DOMAIN NAMES: INFO will reimburse EDCO for any costs
incurred in the event INFO wishes to establish its own product brand and /
or unique domain names for their products. The scope of this includes any
domain name registration fees, network engineering changes, hardware, third
party web server software or EDCO software modifications. INFO will not be
obligated to pay for any costs hereunder without a signed work order from
INFO.
E-6
<PAGE>
Exhibit E-2
EDCO NON-TECHNICAL SUPPORT SERVICES AGREEMENT
Parties: INFO and EDCO
Term: 6 months.
Cost: a) Customer Support - free
b) Billing and Accounting Support - free
c) Human Resources - free
d) Office Space - market rate
e) Office Equipment - market rate (depreciated
value remaining - includes computer
hardware, software, and office furniture
and fixtures) (other than the office
equipment included as a Contributed Asset).
f) Trade Show and Promotional Materials -
actual cost
Scope of Services: EDCO will provide INFO and INFO will provide
EDCO:
a) Customer Support
b) Billing and Accounting Support
c) Human Resources
d) Office Space
e) Office Equipment
f) Other services as required
All services shall be provided on same basis
as INFO currently provides to the INFO
Contributed Business.
E-7
<PAGE>
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provision
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
E-8
<PAGE>
Exhibit F
BHIL CONTENT LICENSE AGREEMENT (Section 2.6.1)
Parties: BHIL (licensor) and EDCO (licensee).
Licensed Materials: a) All materials currently included in BHIL
K-12 Products to the extent the content of
such BHIL K-12 Products can be licensed to
EDCO, currently estimated by BHIL to be
approximately 2000 titles.
b) The license to the Licensed Materials shall
be limited to the EDCO Segment and as
provided for in the EDCO Content License
Agreement and shall not include the
Excluded Segments.
c) BHIL shall be the exclusive provider of the
type of content contained in BHIL K-12
Products. BHIL shall have the right of
first offer if EDCO desires to obtain
rights to content not contained in the
Licensed Materials.
Term: 5 years.
Cost: a) For the first 12 months of the term of this
Agreement, the license fee shall be XXX of
Net Revenues of EDCO derived from the
Licensed Materials, calculated as follows:
i) Royalties equal to XXX of the Net
Revenues of EDCO derived from the
Licensed Materials. To the extent
that actual royalties paid by BHIL
to the licensors of the Licensed
Materials exceeds an average of XXX,
BHIL shall increase the cost to EDCO
hereunder for the following year by
a proportionate amount. To the
extent that actual royalties paid by
BHIL to the licensors of the
Licensed Materials is less than an
average of XXX, BHIL shall decrease
the cost to EDCO hereunder for the
following year by a
<PAGE>
proportionate amount. The
adjustments shall be calculated
annually on the anniversary date
hereof based upon the preceding
twelve month royalties; and
ii) BHIL shall receive as a royalty XX
of Net Revenues of EDCO derived from
the Licensed Materials, in addition
to the publisher royalty referred to
in the preceding paragraph. The XX
fee is for content preparation,
content loading and publisher
relations.
Scope of Use: a) EDCO may request that BHIL acquire rights
to additional Licensed Materials.
Acquisition of such rights shall be at
additional cost and subject to a work order
signed by EDCO and BHIL.
b) Except as provided in the EDCO Content
License Agreement, EDCO can only sublicense
to customers of the EDCO Segment.
c) EDCO will have the right to license the
Licensed Material, in whole or in part, to
the EDCO Segment.
Modifications and Termination
of Publisher Rights: To the extent that BHIL's rights to license
the Licensed Materials to EDCO are modified or
terminated by the licensor, they shall be
removed or modified from this license
accordingly.
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provision
regarding Indemnification, Proprietary Rights,
Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
F-2
<PAGE>
Exhibit G
BHIL SOFTWARE LICENSE (Section 2.6.1(C))
Parties: BHIL and EDCO
Licensed Software: BHIL license to EDCO:
a) ProQuest, including applications
such as SiteBuilder and ClassMate,
including reasonable specifications.
b) ProQuest Searchware for Windows and DOS
including reasonable specifications.
c) The license is not transferable.
Maintenance: a) Corrections ("bug fixes") and
modifications.
b) Updates, upgrades, new releases and
enhancements.
Term: Perpetual license. BHIL has the right to
terminate this Agreement upon a Change of
Control of EDCO.
Cost: Free.
Scope of Use: a) Use and Distribution of Licensed Software
(including document linking software) shall
be limited to the K-12 Segment.
b) A trademark license for a period of 12
months to use the ProQuest family of
trademarks and the domain names registered
to BHIL that are currently used in the EDCO
Segment. EDCO may continue to use the
ProQuest family of trademarks after the
12-month period in the K-12 Segment only
provided the use of the ProQuest trademarks
and domain names in such K-12 Segment do
not create confusion to BHIL customers. If
confusion does occur, the parties agree to
use reasonable efforts to remedy such
confusion.
<PAGE>
c) All rights not specifically granted to EDCO
are retained by BHIL.
d) BHIL's integrated systems utilize several
third party software products, such as
Oracle. BHIL cannot license these products
to EDCO; if EDCO wishes to run the
integrated software, it would have to
obtain its own licenses. (A list of such
third party software shall be included in
the specifications to the Licensed
Software.)
e) Upon termination of the BHIL Technical
Services Agreement, EDCO will be given
possession of the source code of the
Licensed Software and BHIL will discontinue
maintenance and technical support of the
Licensed Software.
f) The Licensed Software will be licensed to
End- Users pursuant to the form of license
agreement provided by BHIL, which form will
not be altered by EDCO without BHIL's
written consent.
Enhancements: a) EDCO may request enhancements or
modifications to the Licensed Software
during the period of maintenance and BHIL
will develop such enhancements subject to
mutually-agreed specifications, costs,
expenses, schedules and level of effort all
of which shall be documented in a work
order executed by BHIL and EDCO.
b) EDCO's request for system modifications to
the Licensed Software in order to provide
new functionality or product/content
offerings will be written and provided to
the BHIL point of contact. Within three
weeks, the BHIL point of contact will
provide EDCO and BHIL management with:
G-2
<PAGE>
(i) A concept-level estimate of the
effort involved (stated in a measure
such as person-months);
(ii) An expectation of a target date for
completion. This date will be
determined by many factors, such as
resource availability and other
concurrent development
projects/releases.
c) Modifications requiring up to two weeks of
development may be handled by BHIL
sustaining resources.
d) Modifications requiring more than two weeks
should be presented to BHIL's Project
Resource Team (PRT) for approval and
prioritization. It is expected the PRT will
be supported with the information necessary
to make a business decision about the
project.
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provision
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
G-3
<PAGE>
Exhibit H
EDCO CONTENT LICENSE AGREEMENT (Section 2.7.2)
Parties: EDCO (licensor) and INFO (licensee)
Licensed Materials: a) EDCO will license INFO all materials
currently included in the INFO End-User
Business and Slueth-type applications as
well as all licensed materials made
available to EDCO under the BHIL content
agreement as set forth in Exhibit F to
which EDCO holds sublicensing rights and to
which EDCO may license in connection with
the Electric Library Technology.
b) The license to the Licensed Materials shall
be limited to the INFO End-User Business
Slueth- type products, and any new INFO
products, subject to the Scope of Use
below.
c) EDCO shall be the preferred provider of the
type of content contained in the Electric
Library and BHIL K-12 Products. EDCO shall
have the right of first refusal if INFO
intends to obtain content similar to the
content contained in the Electric Library
and BHIL K-12 Products, on the same terms
and conditions to be provided by such third
Person.
Term: 5 years.
Cost: a) License fee for content provided by BHIL
and provided by EDCO to INFO pursuant to
this EDCO Content License Agreement shall
be calculated as follows:
i) For the first 12 months of the term
of this Agreement, the license fee
shall be XXX (calculated pursuant to
(a) (ii) and (a) (iii) below) of
sales of Electric Library, publisher
royalty to be paid on Net Revenue to
INFO for the Licensed Materials
sublicensed by EDCO to INFO.
<PAGE>
ii) To the extent that actual royalties
paid by EDCO to BHIL for any year
exceeds an average of XXX, EDCO
shall increase the cost to INFO
hereunder for the following year by
a proportionate amount. To the
extent that actual royalties paid by
EDCO to BHIL is less than an average
of XXX for any year, EDCO shall
decrease the cost to INFO hereunder
for the following year by a
proportionate amount. The
adjustments shall be calculated
annually on the anniversary date
hereof based upon the preceding
twelve month royalties.
iii) In any event, EDCO shall receive as
a royalty XX of the sales by INFO
of the Electric Library and
BHIL K-12 Products and/or publisher
royalty referred to in the preceding
paragraph. The XX fee is for
content preparation, content
loading and publisher relations.
(b) License fee for content provided to EDCO
by INFO shall be calculated as follows:
i) For the first 12 months of the term
of this Agreement, the license fee
shall be XXX (calculated pursuant to
(b)(ii) and (b)(iii) below) of sales
of Electric Library, publisher
royalty to be paid on Net Revenue to
INFO for the Licensed Materials
sublicensed by EDCO to INFO.
ii) To the extent that actual royalties
paid by EDCO for any year exceeds an
average of XXX, EDCO shall increase
the cost to INFO hereunder for the
following year by a proportionate
amount. To the extent that actual
H-2
<PAGE>
royalties paid by EDCO for any year
is less than an average of XXX for
any year, EDCO shall decrease the
cost to INFO hereunder for the
following year by a proportionate
amount. The adjustments shall be
calculated annually on the
anniversary date hereof based upon
the proceeding twelve months
royalties.
iii) In any event, EDCO shall receive as
a royalty equal to XX of the sales
by INFO of the Electric Library
Technology and BHIL K-12 Products
and/or publisher royalty referred to
in the preceding paragraph. The XXX
fee is for content preparation,
content loading and publisher
relations.
(c) In the event EDCO has the opportunity to
provide the same Licensed Materials to
INFO from either BHIL provided content or
INFO provided content, EDCO will use
commercially reasonable efforts to provide
such Licensed Materials to INFO at the
lowest cost to INFO.
Scope of Use: INFO can only use the content hereunder in
the INFO End-User Business, but such business
shall not be limited to the Electric Library
Technology. Notwithstanding the foregoing, the
content hereunder may only be used, if and
only if, all of the following conditions are
met:
(a) such Licensed Materials are Distributed
directly to End-Users and not to or
through or in cooperation with any school,
library or other institution or
organization in the EDCO Segment;
(b) such Licensed Materials are Distributed
only in connection with a discrete product
or service on a stand alone basis, having
its own separately stated fee or charge
for such product or service;
H-3
<PAGE>
(c) such Licensed Materials are Distributed to
such End-User not as part of or pursuant
to a marketing effort directed toward the
EDCO Segment;
(d) such Licensed Materials are not
Distributed under or in connection with
the endorsement or recommendation or
cooperation of any Person who is marketing
to or participating in the K-12 Segment;
and
(e) the Licensed Materials are not Distributed
to or through a Person who redistributes
the Licensed Materials to the EDCO Segment
or Post Secondary Education Segment.
Modifications and Termination
of Publisher Rights: To the extent that EDCO's rights to license
the Licensed Materials to INFO are modified or
terminated by the licensor, they shall be
removed or modified from this license
accordingly.
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provision
regarding Indemnification, Proprietary Rights,
Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
H-4
<PAGE>
Exhibit I
EDCO SOFTWARE AND TECHNOLOGY LICENSE (Section 2.8)
Parties: EDCO (licensor) and INFO (licensee)
Licensed Software & Technology: EDCO license to INFO:
a) U.S. Patent Nos.: 5,873,076
5,742,816
5,737,734
5,721,902
5,675,788
5,659,742
09/088,188
b) Oracle (as customized);
Excalibur/Retrievalware (as customized);
BFS (as customized);
Internal reporting software;
Web Manager, session manager, data base
dispatcher, query dispatcher;
Customizations to off-the-shelf software;
Project "Retriever";
Project "Pointer";
All software or technology used in the INFO
Contributed Business.
c) Electric Library client software for
Windows and DOS including reasonable
specifications.
d) The license is not transferable.
Maintenance: a) Corrections ("bug fixes") and
modifications.
b) Updates, upgrades, new releases and
enhancements.
Term: Perpetual license. EDCO has the right to
terminate this License upon a Change of
Control of INFO.
Cost: Free.
Scope of Use: a) Use and Distribution of Licensed Software
and Technology shall be limited to the INFO
End-
<PAGE>
User Business, Sleuth-type products, and
any new INFO products, subject to Scope of
Use below.
b) A trademark license for a period that lasts
as long as INFO makes such Electric Library
products or services available in the INFO
End-User Business to use the Electric
Library family of trademarks and the domain
names registered to EDCO that are currently
used in the EDCO Segment.
c) All rights not specifically granted to INFO
are retained by EDCO.
d) EDCO's integrated systems utilize several
third party software products, such as
Oracle. EDCO may not be able to license
these products to INFO; if INFO wishes to
run the integrated software, it would have
to obtain its own licenses.
e) Upon termination of the EDCO Technical
Services Agreement, INFO will be given
possession of the source code of the
Licensed Software & Technology and EDCO
will discontinue maintenance and technical
support of the Licensed Software &
Technology.
f) INFO shall have full rights under all U.S.
patents of the Licensed Software &
Technology to make, use, and sell the
inventions disclosed and claimed in such
patents, subject to the INFO
non-competition agreement.
g) INFO shall have full rights to use the
Licensed Software and Technology as set
forth in items b) or c) in the Licensed
Software and Technology section hereof, in
the INFO End-User Business but such
business shall not be limited to the
Electric Library Technology.
Enhancements: a) INFO may request enhancements or
modifications to the Licensed Software &
Technology during the period of maintenance
I-2
<PAGE>
and EDCO will develop such enhancements
subject to mutually-agreed specifications,
costs, expenses, schedules and level of
effort, and a work order executed by both
INFO and EDCO.
b) INFO's request for system modifications to
the EDCO software in order to provide new
functionality or product/content offerings
will be written and provided to the EDCO
point of contact. Within three weeks, the
EDCO point of contact will provide INFO and
EDCO management with:
(i) A concept-level estimate of the
effort involved (stated in a measure
such as person-months);
(ii) An expectation of a target date for
completion. This date will be
determined by many factors, such as
resource availability and other
concurrent development
projects/releases.
c) Modifications requiring up to two weeks of
development may be handled by EDCO
sustaining resources.
d) Modifications requiring more than two weeks
should be presented to EDCO's liaison for
approval and prioritization. It is expected
the liaison will be supported with the
information necessary to make a business
decision about the project.
Liaisons: Each party shall designate a primary liaison
for this Agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this Agreement.
Miscellaneous: This Agreement shall contain provision
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
I-3
<PAGE>
Exhibit J-1
ONLINE PUBLISHING LICENSE AGREEMENT (Section 2.9.3)
Parties: BHIL, INFO and EDCO
Licensed Software: BHIL will license to INFO and EDCO the Online
Publishing Software as set forth on Schedules
OPB1, OPB2 and OPB3.
Term: Perpetual.
Cost: Free.
Scope of Use: a) Neither INFO nor EDCO may use the Online
Publishing Software to provide Online
Publishing services.
b) Source code and documentation delivered
within 60 days following Closing.
Enhancements: As reasonably requested by INFO or EDCO and
subject to BHIL's written agreement.
Miscellaneous: This Agreement shall contain provision
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
Online Publishing Services: Shall mean the provision of publishing or
hosting services to a third Person for such
third Person's publication.
<PAGE>
Exhibit J-2
INFO SLEUTH SOFTWARE AND TECHNOLOGY LICENSE
Parties: INFO (licensor) and BHIL and EDCO (licensees)
Licensed Software & Technology: a) INFO licenses the proprietary software and
technology related to INFO's "Sleuth"
products, including reasonable
specifications.
b) The license is not transferable.
Maintenance: a) Corrections ("bug fixes") and
modifications.
b) Updates, upgrades, new releases and
enhancements.
Term: Perpetual license. INFO has the right to
terminate this License upon a Change of
Control of EDCO or BHIL, respectively.
Cost: Free.
Scope of Use: a) Use and Distribution of Licensed Software
and Technology by EDCO shall be limited to
the EDCO Segment.
b) Use and Distribution of Licensed Software
and Technology by BHIL shall be limited to
the Online Publishing Business and Post
Secondary Education Segment.
c) All rights not specifically granted by INFO
are retained by INFO.
d) The Licensed Software & Technology utilize
several third party software products, such
as Statistic Server, Cold Fusion, Oracle,
Survey Site, and Microsoft Internet
Information Service. INFO cannot license
these products to EDCO and BHIL; if EDCO
and/or BHIL wish to run the Licensed
Software & Technology, they would each have
to obtain licenses themselves. (A list of
such third party software
J-2
<PAGE>
shall be included in the specifications to
the Licensed Software & Technology.)
Liaisons: Each party shall designate a primary liaison
for this agreement who shall be the single
person authorized to agree to changes,
modifications or methods of implementation of
this agreement.
Miscellaneous: This Agreement shall contain provision
regarding Warranty, Limitation of Liability,
Confidentiality, Governing Law and other
standard provisions.
J-3
<PAGE>
Exhibit L
INFO NONCOMPETITION AGREEMENT
1. RESTRICTED ACTIVITIES.
For a period of three (3) years from the Closing Date (the "Restricted Term"),
INFO shall not, without the prior written consent of EDCO:
(i) engage in any INFO Restricted Activities anywhere in the
world;
(ii) own, manage, operate, be compensated by, participate in,
render advice to, have any right to or interest in any other
business directly or indirectly engaged in the INFO
Restricted Activities, with the exception of INFO ownership
interest (10% or less as of the date of the Master
Transaction Agreement) in Electric Schoolhouse, LLC or its
successor;
(iii) divulge, communicate, use or disclose any nonpublic
information concerning EDCO or any of its Affiliates, their
personnel, business and affairs;
(iv) interfere with the business relationships or disparage the
good name or reputation of EDCO or any of its Affiliates or
take any action which brings EDCO or any of its Affiliates or
its business into public ridicule or disrepute; or
(v) solicit for employment or employ any employee of EDCO or any
of its Affiliates, or request, induce or advise any employee
to leave the employ of EDCO or any of its Affiliates.
The ownership of less than one-tenth of one percent (.1%) of a publicly
traded corporation engaged in INFO Restricted Activities shall not in and
of itself be deemed to be a violation of this covenant.
2. TOLLING OF RESTRICTED TERM.
If INFO violates the provisions of Section 1, EDCO shall not, as a result
of the time involved in obtaining relief, be deprived of the benefit of the
full period of the restrictive covenant. Accordingly,
1
<PAGE>
the restrictive covenant of Section 1 shall be deemed to have the duration
specified in Section 1, computed from the date the relief is granted, but
reduced by the time between the period when the restriction began to run and
the date of the first violation of the covenant by INFO.
3. ACCOUNTING.
INFO agrees that, if INFO shall be determined by an appropriate judicial
process to have violated any of the provisions of this Agreement, EDCO shall
be entitled to an accounting and repayment of all profits, compensation,
commission, remuneration or other benefits that INFO, directly or
indirectly, may realize arising from or related to any such violation. These
remedies shall be in addition to, and not in limitation of, any injunctive
relief or other rights to which EDCO may be entitled.
4. REFORMATION OF PROVISIONS.
The parties agree and acknowledge that the duration, scope and geographic
areas applicable to the covenant not to compete described in this Agreement
are fair, reasonable and necessary, that adequate compensation has been
received by INFO for such obligations. If, however, for any reason any
court determines that the restrictions in this Agreement are not reasonable
or that consideration is inadequate such restrictions shall be interpreted,
modified or rewritten to include as much of the duration, scope and
geographic area identified in this Agreement as will render such restrictions
valid and enforceable.
5. INJUNCTION RELIEF.
INFO hereby waives any requirement of proof that such breach will cause
serious or irreparable injury to EDCO, or that there is an adequate remedy at
law. In any proceeding, either at law or in equity, between the parties
hereto, INFO hereby agrees that INFO shall not raise as a defense:
(i) that the duration, scope or geographical area in which
INFO is prohibited from competition is unfair, unnecessary
or unreasonable,
(ii) that this Agreement is in restraint of trade,
(iii) lack of irreparable injury to EDCO, or
(iv) lack of any protectable business interest of EDCO.
2
<PAGE>
Further, the existence of any claim or cause of action of INFO against EDCO or
any of its Affiliates, whether or not predicated on the terms of this Agreement,
shall not constitute a defense to the enforcement of INFO obligations under
this Agreement. INFO shall pay or reimburse EDCO for all costs and expenses,
including court costs, amounts paid in settlement, judgments, reasonable
attorneys', legal assistants', and experts' fees incurred or paid by EDCO in
protecting or enforcing its rights and remedies hereunder.
6. INDIVIDUAL END-USER CARVE OUT.
Notwithstanding the restriction set forth in Section 1, INFO shall be entitled
to engage in INFO Restricted Activities if, and only if, all of the following
conditions are met:
(a) such product or service is Distributed directly to End-Users
and not to or through or in cooperation with any school,
library or other institution or organization in the EDCO
Segment;
(b) such product or service is Distributed only as a discrete
product or service on a stand alone basis, having its own
separately stated fee or charge for such product or service;
(c) such product or service is Distributed to such End-User not
as part of or pursuant to a marketing effort directed toward
the EDCO Segment;
(d) such product or service is not Distributed under or in
connection with the endorsement or recommendation or
cooperation of any Person who is marketing to or
participating in the K-12 Segment; and
(e) the product or service is not Distributed to or through a
Person who redistributes the product or service to the EDCO
Segment or Post Secondary Education Segment.
3
<PAGE>
Exhibit M
EDCO NONCOMPETITION AGREEMENT
1. RESTRICTED ACTIVITIES.
For a period of three (3) years from the Closing Date (the "Restricted Term"),
EDCO shall not, without the prior written consent of both BHIL and INFO:
(i) engage in any EDCO Restricted Activities anywhere in the
world;
(ii) own, manage, operate, be compensated by, participate in,
render advice to, have any right to or interest in any other
business directly or indirectly engaged in the EDCO
Restricted Activities;
(iii) divulge, communicate, use or disclose any nonpublic
information concerning BHIL or INFO or any of its
Affiliates, their personnel, business and affairs;
(iv) interfere with the business relationships or disparage the
good name or reputation of BHIL or INFO or any of their
Affiliates or take any action which brings BHIL or INFO or
any of their Affiliates or their businesses into public
ridicule or disrepute; or
(v) solicit for employment or employ any employee of BHIL or
INFO or any of their Affiliates, or request, induce or
advise any employee to leave the employ of BHIL or INFO
or any of their Affiliates.
The ownership of less than one-tenth of one percent (.1%) of a publicly traded
corporation engaged in EDCO Restricted Activities shall not in and of itself be
deemed to be a violation of this covenant.
2. TOLLING OF RESTRICTED TERM.
If EDCO violates the provisions of Section 1, EDCO shall not, as a result of the
time involved in obtaining relief, be deprived of the benefit of the full period
of the restrictive covenant. Accordingly, the restrictive covenant of Section 1
shall be deemed to have the duration specified in Section 1,
1
<PAGE>
computed from the date the relief is granted, but reduced by the time between
the period when the restriction began to run and the date of the first violation
of the covenant by EDCO.
3. ACCOUNTING.
EDCO agrees that, if EDCO shall be determined by an appropriate judicial
process to have violated any of the provisions of this Agreement, BHIL and
INFO shall be entitled to an accounting and repayment of all profits,
compensation, commission, remuneration or other benefits that EDCO, directly
or indirectly, may realize arising from or related to any such violation.
These remedies shall be in addition to, and not in limitation of, any
injunctive relief or other rights to which BHIL and INFO may be entitled.
4. REFORMATION OF PROVISIONS.
The parties agree and acknowledge that the duration, scope and geographic areas
applicable to the covenant not to compete described in this Agreement are fair,
reasonable and necessary, that adequate compensation has been received by EDCO
for such obligations. If, however, for any reason any court determines that the
restrictions in this Agreement are not reasonable or that consideration is
inadequate such restrictions shall be interpreted, modified or rewritten to
include as much of the duration, scope and geographic area identified in this
Agreement as will render such restrictions valid and enforceable.
5. INJUNCTION RELIEF.
EDCO hereby waives any requirement of proof that such breach will cause serious
or irreparable injury to BHIL and INFO, or that there is an adequate remedy at
law. In any proceeding, either at law or in equity, between the parties hereto,
EDCO hereby agrees that EDCO shall not raise as a defense:
(i) that the duration, scope or geographical area in which EDCO
is prohibited from competition is unfair, unnecessary or
unreasonable,
(ii) that this Agreement is in restraint of trade,
(iii) lack of irreparable injury to BHIL or INFO, or
(iv) lack of any protectable business interest of BHIL or INFO.
2
<PAGE>
Further, the existence of any claim or cause of action of EDCO against BHIL
or INFO or any of their Affiliates, whether or not predicated on the terms
of this Agreement, shall not constitute a defense to the enforcement of
EDCO's obligations under this Agreement. EDCO shall pay or reimburse BHIL and
INFO for all costs and expenses, including court costs, amounts paid in
settlement, judgments, reasonable attorneys', legal assistants', and experts'
fees incurred or paid by BHIL or INFO, respectively, in protecting or
enforcing its rights and remedies hereunder.
3
<PAGE>
Exhibit N
BHIL NONCOMPETITION AGREEMENT
1. RESTRICTED ACTIVITIES.
For a period of three (3) years from the Closing Date (the "Restricted Term"),
BHIL shall not, without the prior written consent of EDCO:
(i) engage in any BHIL Restricted Activities anywhere in the
world;
(ii) own, manage, operate, be compensated by, participate in,
render advice to, have any right to or interest in any other
business directly or indirectly engaged in the BHIL
Restricted Activities;
(iii) divulge, communicate, use or disclose any nonpublic
information concerning EDCO or any of its Affiliates, their
personnel, business and affairs;
(iv) interfere with the business relationships or disparage the
good name or reputation of EDCO or any of its Affiliates or
take any action which brings EDCO or any of its Affiliates or
its business into public ridicule or disrepute; or
(v) solicit for employment or employ any employee of EDCO or any
of its Affiliates, or request, induce or advise any employee
to leave the employ of EDCO or any of its Affiliates.
The ownership of less than one-tenth of one percent (.1%) of a publicly traded
corporation engaged in BHIL Restricted Activities shall not in and of itself be
deemed to be a violation of this covenant.
2. TOLLING OF RESTRICTED TERM.
If BHIL violates the provisions of Section 1, EDCO shall not, as a result of the
time involved in obtaining relief, be deprived of the benefit of the full period
of the restrictive covenant. Accordingly, the restrictive covenant of Section 1
shall be deemed to have the duration specified in Section 1,
1
<PAGE>
computed from the date the relief is granted, but reduced by the time between
the period when the restriction began to run and the date of the first violation
of the covenant by BHIL.
3. ACCOUNTING.
BHIL agrees that, if BHIL shall be determined by an appropriate judicial process
to have violated any of the provisions of this Agreement, EDCO shall be entitled
to an accounting and repayment of all profits, compensation, commission,
remuneration or other benefits that BHIL, directly or indirectly, may realize
arising from or related to any such violation. These remedies shall be in
addition to, and not in limitation of, any injunctive relief or other rights to
which EDCO may be entitled.
4. REFORMATION OF PROVISIONS.
The parties agree and acknowledge that the duration, scope and geographic areas
applicable to the covenant not to compete described in this Agreement are fair,
reasonable and necessary, that adequate compensation has been received by BHIL
for such obligations. If, however, for any reason any court determines that the
restrictions in this Agreement are not reasonable or that consideration is
inadequate such restrictions shall be interpreted, modified or rewritten to
include as much of the duration, scope and geographic area identified in this
Agreement as will render such restrictions valid and enforceable.
5. INJUNCTION RELIEF.
BHIL hereby waives any requirement of proof that such breach will cause serious
or irreparable injury to EDCO, or that there is an adequate remedy at law. In
any proceeding, either at law or in equity, between the parties hereto, BHIL
hereby agrees that BHIL shall not raise as a defense:
(i) that the duration, scope or geographical area in which BHIL
is prohibited from competition is unfair, unnecessary or
unreasonable,
(ii) that this Agreement is in restraint of trade,
(iii) lack of irreparable injury to EDCO, or
(iv) lack of any protectable business interest of EDCO.
Further, the existence of any claim or cause of action of BHIL against EDCO or
any of its Affiliates, whether or not predicated on the terms of this Agreement,
shall not constitute a defense to the enforcement of BHIL's obligations under
this Agreement. BHIL shall pay or reimburse EDCO for all
2
<PAGE>
costs and expenses, including court costs, amounts paid in settlement,
judgments, reasonable attorneys', legal assistants', and experts' fees incurred
or paid by EDCO in protecting or enforcing its rights and remedies hereunder.
6. CONSORTIA CARVE OUT.
Notwithstanding the restrictions set forth in Section 1, BHIL shall be entitled
to engage in BHIL Restricted Activities in connection with consortia bids as set
forth in the BHIL Representation Agreement.
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<PAGE>
Exhibit O
ONLINE NONCOMPETITION AGREEMENT
1. RESTRICTED ACTIVITIES.
For a period of three (3) years from the Closing Date (the "Restricted Term"),
INFO and EDCO shall not, without the prior written consent of BHIL:
(i) engage in any Online Publishing services anywhere in the
world;
(ii) own, manage, operate, be compensated by, participate in,
render advice to, have any right to or interest in any other
business directly or indirectly engaged in Online Publishing
services;
(iii) divulge, communicate, use or disclose any nonpublic
information concerning BHIL or any of its Affiliates, their
personnel, business and affairs;
(iv) interfere with the business relationships or disparage the
good name or reputation of BHIL or any of its Affiliates or
take any action which brings BHIL or any of its Affiliates or
its business into public ridicule or disrepute; or
(v) solicit for employment or employ any employee of BHIL or any
of its Affiliates, or request, induce or advise any employee
to leave the employ of BHIL or any of its Affiliates.
The ownership of less than one-tenth of one percent (.1%) of a publicly traded
corporation engaged in EDCO Restricted Activities shall not in and of itself be
deemed to be a violation of this covenant.
2. TOLLING OF RESTRICTED TERM.
If EDCO or INFO violates the provisions of Section 1, BHIL shall not, as a
result of the time involved in obtaining relief, be deprived of the benefit of
the full period of the restrictive covenant. Accordingly, the restrictive
covenant of Section 1 shall be deemed to have the duration specified in Section
1, computed from the date the relief is granted, but reduced by the
1
<PAGE>
time between the period when the restriction began to run and the date of the
first violation of the covenant by EDCO or INFO, respectively.
3. ACCOUNTING.
EDCO and INFO each agrees that, if EDCO or INFO shall be determined by an
appropriate judicial process to have violated any of the provisions of this
Agreement, BHIL shall be entitled to an accounting and repayment of all profits,
compensation, commission, remuneration or other benefits that EDCO or INFO,
directly or indirectly, may realize arising from or related to any such
violation. These remedies shall be in addition to, and not in limitation of, any
injunctive relief or other rights to which BHIL may be entitled.
4. REFORMATION OF PROVISIONS.
The parties agree and acknowledge that the duration, scope and geographic
areas applicable to the covenant not to compete described in this Agreement
are fair, reasonable and necessary, that adequate compensation has been
received by EDCO and INFO for such obligations. If, however, for any reason
any court determines that the restrictions in this Agreement are not
reasonable or that consideration is inadequate such restrictions shall be
interpreted, modified or rewritten to include as much of the duration, scope
and geographic area identified in this Agreement as will render such
restrictions valid and enforceable.
5. INJUNCTION RELIEF.
EDCO and INFO hereby waive any requirement of proof that such breach will
cause serious or irreparable injury to BHIL, or that there is an adequate
remedy at law. In any proceeding, either at law or in equity, between the
parties hereto, EDCO and INFO EACH hereby agrees that EDCO and INFO shall
not raise as a defense:
(i) that the duration, scope or geographical area in which is
prohibited from competition is unfair, unnecessary or
unreasonable,
(ii) that this Agreement is in restraint of trade,
(iii) lack of irreparable injury to BHIL, or
(iv) lack of any protectable business interest of BHIL.
2
<PAGE>
Further, the existence of any claim or cause of action against BHIL or any of
their Affiliates, whether or not predicated on the terms of this Agreement,
shall not constitute a defense to the enforcement of the obligations under
this Agreement. EDCO and INFO, respectively, shall pay or reimburse BHIL
for all costs and expenses, including court costs, amounts paid in
settlement, judgments, reasonable attorneys', legal assistants', and experts'
fees incurred or paid by BHIL, in protecting or enforcing its rights and
remedies hereunder.
3
<PAGE>
Exhibit P
SERVICE AGREEMENT
THIS SERVICE AGREEMENT (the "Agreement") is made effective as of the ____ day of
_____________, 1999, by and between ___________________, a Delaware corporation
("Contractor") and ____________, a Delaware corporation ("Company").
RECITALS:
WHEREAS, Company has limited resources in the areas of certain important
functions which are important to its business; and
WHEREAS, Contractor has extensive experience in the performance of the Services
described in Section 3;
NOW, THEREFORE, in consideration of the promises and covenants contained herein,
Contractor and Company hereby enter into this Services Agreement and mutually
agree as follows:
1. ENGAGEMENT.
Company agrees to and does hereby engage Contractor to provide to Company the
Services described in Section 3 in connection with its operations and Contractor
hereby accepts this appointment and agrees to provide Company with such Services
as are more particularly provided for in Section 3 of this Agreement.
2. TERM.
The Term of this Agreement shall commence effective as of the Closing Date
described in the Master Transaction Agreement to which Contractor and Company
are parties, and shall continue until the close of business on ____________.
Thereafter, the Term of the Agreement shall continue from _____ to ______ unless
terminated by written notice provided by either party to the other at least 90
days prior to the date of termination.
3. SERVICES.
Contractor shall provide to Company the Services described on Schedule ___1
hereto.
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4. COMPENSATION.
As compensation for all Services to be rendered hereunder by Contractor and its
personnel in connection with the provisions of the Services described above,
Company shall pay Contractor the fee specified on Schedule ____2.
5. INDEMNITY.
5.1 Except as set forth in Section 5.2, Company shall indemnify Contractor and
its principals, agents or employees and shall hold each of them harmless from
liability for any acts or decisions made by them in good faith while performing
Services for Company. Company will pay all expenses including attorneys' fees
actually and reasonably incurred by Contractor in connection with the defense of
any act, suit or proceeding and in connection with any appeal thereof, including
the cost of out-of-court settlements.
5.2 Contractor shall indemnify Company and its principals, agents or employees
and shall hold each of them harmless from liability for any acts or decisions
made by them in good faith while performing Services for Contractor. Contractor
will pay all expenses including attorneys' fees actually and reasonably incurred
by Company in connection with the defense of any act, suit or proceeding and in
connection with any appeal thereof, including the cost of out-of-court
settlements.
6. REPRESENTATIONS AND WARRANTIES OF COMPANY.
Company expressly represents and warrants to Contractor as follows:
(a) Company is a corporation duly organized and existing in good
standing under the laws of the State of Delaware with full
power and authority, corporate or otherwise, to own its
properties and to carry on its business as currently
conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification necessary.
(b) Execution and delivery of this Agreement has been authorized
and approved by the Board of Directors of Company.
7. REPRESENTATIONS AND WARRANTIES OF CONTRACTOR
Contractor expressly represents and warrants to Company as follows:
(a) Contractor is a corporation duly organized and existing in
good standing under the laws of the State of Delaware with
full power and authority, corporate or otherwise, to own its
2
<PAGE>
properties and to carry on its business as currently
conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification necessary.
(b) Execution and delivery of this Agreement has been authorized
and approved by the Board of Directors of Contractor.
8. LIMITATION OF LIABILITY
Except as set forth in Section 5, the liability of Contractor and Company
arising out of this Agreement shall be limited to $1,000,000. In no event shall
Contractor or Company be liable to the other for any special, consequential,
incidental, or indirect damages, however caused, on any theory of liability, and
whether or not Contractor has been advised of the possibility of such damages.
These limitations shall apply notwithstanding any failure of essential purpose
of any limited remedy.
9. NOTICES.
All notices, requests, demands or other communications provided for by this
Agreement shall be in writing and shall be addressed to the address of the
respective parties stated below or to such changed address as such party may
have affixed by notice:
To: Contractor:
To: Company:
10. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding upon Contractor and
Company, their successors and assigns, including, without limitation, any
corporation that may acquire all or substantially all of their assets or
business or with which Company or Contractor may be consolidated or merged. The
obligations of Contractor hereunder may not be assigned without the prior
written consent of Company; provided, however, that the obligations of
Contractor hereunder may be assigned without the prior written consent of
Company to an affiliate of Contractor.
11. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of _________.
3
<PAGE>
12. ENTIRE AGREEMENT.
This Agreement supersedes all prior understandings and agreements between the
parties concerning the Services and may not be amended orally, but only by a
writing signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers duly authorized effective as of the date and year first above
written.
4
<PAGE>
CONTRACTOR:
By:
Name:
Title:
COMPANY:
By:
Name:
Title:
5
<PAGE>
Exhibit Q
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is made effective as of the ____ day of
_____________, 1999, by and between ___________________, a Delaware corporation
("Licensor") and ____________, a Delaware corporation ("Company").
RECITALS:
WHEREAS, Company has need of certain technology and/or content which are
important to its business and
WHEREAS, Licensor has certain technology and/or content described in Schedule 1
which Company desires to use within the scope of the terms of this License
Agreement.
NOW, THEREFORE, in consideration of the promises and covenants contained herein,
intending to be legally bound, Licensor and Company hereby enter into this
License Agreement and mutually agree as follows:
1. LICENSE GRANT.
Licensor hereby grants to Company the nonexclusive, nonassignable right and
license to use the technology and/or content defined and described in Section 3
("Licensed Materials") in connection with its operations, but only in the
Territory described on Schedule 2 in accordance with the terms and conditions of
this Agreement. Company hereby accepts this license and agrees not to use, copy,
sell, lease, assign, sublicense or otherwise transfer or disclose or distribute
the Licensed Materials except in accordance with the terms and conditions of
this Agreement. All copies of the LICENSED Materials must contain all
proprietary marks, legends and copyright notices that appear on the original
copies delivered to Company by Licensor. [If the applicable Exhibit provides for
specific use limitations, they should be added here.]
2. TERM.
The Term of this License shall commence effective as of the Closing Date
described in the Master Transaction Agreement to which Licensor and Company are
parties, and shall continue for a period of ______ months ("Initial Term").
Thereafter, the Term of this Agreement shall be automatically renewed for
consecutive additional _______ terms ("Renewal Terms") unless
1
<PAGE>
this Agreement is terminated by written notice provided by either party to the
other at least 90 days prior to the date of EXPIRATION of the Initial Term or
any Renewal Term.
3. LICENSED MATERIALS.
Licensor shall provide to Company the Licensed Materials described on Schedule 1
attached hereto.
4. LICENSE FEES.
As compensation for the License to be granted hereunder by Licensor, Company
shall pay Licensor the license fees and other consideration specified on
Schedule 2.
5. INDEMNITY.
5.1 Except as set forth in Section 5.2, Company shall indemnify Licensor and its
principals, agents or employees and shall hold each of them harmless from
liability for any Claims by third parties arising from the use by Company of the
Licensed Materials. Company will pay all expenses including attorneys' fees
actually and reasonably incurred by Licensor in connection with the defense of
any act, suit or proceeding and in connection with any appeal thereof, including
the cost of out-of-court settlements.
5.2 Licensor shall indemnify Company and its principals, agents or employees and
shall hold each of them harmless from liability for any Claims by third parties
that the Licensed Materials infringes any proprietary rights owned by such third
parties. LICENSOR will pay all expenses including attorneys' fees actually and
reasonably incurred by COMPANY in connection with the defense of any act, suit
or proceeding and in connection with any appeal thereof, including the cost of
out-of-court settlements.
6. REPRESENTATIONS AND WARRANTIES OF COMPANY.
Company expressly represents and warrants to Licensor as follows:
(a) Company is a corporation duly organized and existing in good
standing under the laws of the State of Delaware with full
power and authority, corporate or otherwise, to own its
properties and to carry on its business as currently
conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification necessary.
2
<PAGE>
Execution and delivery of this Agreement has been authorized
and approved by the Board of Directors of Company.
7. REPRESENTATIONS AND WARRANTIES OF LICENSOR
Licensor expressly represents and warrants to Company as follows:
(a) Licensor is a corporation duly organized and existing in good
standing under the laws of the State of Delaware with full
power and authority, corporate or otherwise, to own its
properties and to carry on its business as currently
conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification necessary.
Execution and delivery of this Agreement has been
authorized and approved by the Board of Directors of
Licensor.
Licensor warrants that it has a right to grant a license
to use the Licensed Materials in accordance with the terms
of this Agreement.
Licensor warrants that to the Knowledge of Licensor, the
Licensed Materials do not infringe any proprietary rights
owned by any third parties.
8. LIMITATION OF LIABILITY
Except as set forth in Section 5, the liability of Licensor and Company arising
out of this Agreement shall be limited to $1,000,000. In no event shall Licensor
or Company be liable to the other for any special, consequential, incidental, or
indirect damages, however caused, on any theory of liability, and whether or not
Licensor has been advised of the possibility of such damages. These limitations
shall apply notwithstanding any failure of essential purpose of any limited
remedy.
9. CERTAIN OBLIGATIONS OF LICENSOR.
During the Term, Licensor agrees to perform the following obligations:
[If the applicable Exhibit provides for specific obligations, they should be
added here.]
10. CERTAIN OBLIGATIONS OF COMPANY.
During the Term, Company agrees to perform the following obligations:
[If the applicable Exhibit provides for specific use limitations, they should be
added here.]
3
<PAGE>
11. NOTICES.
All notices, requests, demands or other communications provided for by this
Agreement shall be in writing and shall be addressed to the address of the
respective parties stated below or to such changed address as such party may
have affixed by notice:
To: Licensor:
To: Company:
12. SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding upon Licensor and
Company, their successors and assigns, including, without limitation, any
corporation that may acquire all or substantially all of their assets or
business or with which Company or Licensor may be consolidated or merged. The
obligations of Licensor OR COMPANY hereunder may not be assigned without the
prior written consent of THE OTHER PARTY; provided, however, that the
obligations of Licensor hereunder may be assigned without the prior written
consent of Company to an affiliate of Licensor.
13 APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of _________.
14. ENTIRE AGREEMENT.
This Agreement supersedes all prior understandings and agreements between the
parties concerning the LICENSED MATERIALS and may be amended only by a writing
signed by each of the parties hereto.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers duly authorized effective as of the date and year first above
written.
LICENSOR:
By:
Name:
Title:
COMPANY:
By:
Name:
Title:
5
<PAGE>
Annex A
GLOSSARY OF TERMS
Affiliate: Affiliate of any Person shall mean any
Person which, directly or indirectly,
controls, is controlled by or is under
common control with such Person (excluding
any trustee under, or any committee with
responsibility for administering, any ERISA
Plan).
Agreement: The Master Transaction Agreement by and
among BHW, BHIL, INFO and INFO Corporation
dated July 8, 1999, including the Annexes,
Schedules and Attachments thereto.
Alternative Proposal: Any proposal for an Alternative Transaction.
Alternative Transaction: As defined in Section 5.8.1 of the Master
Transaction Agreement.
BHIL: Bell & Howell Information and Learning
Company, a Delaware corporation and
wholly-owned subsidiary of BHW.
BHIL Capitalization Agreement: The Bill of Sale, Assignment and Assumption
and Indemnity Agreement to be entered into
by and between BHIL and EDCO in the form
attached to the Master Transaction Agreement
as Exhibit C.
BHIL Content License: License between BHIL and EDCO containing the
terms set forth on Exhibit F to the Master
Transaction Agreement.
BHIL Contributed Business: Accounts receivable, customer contracts,
customer data bases, sales orders, trade
payables, vendor records, obligations to
customers, employee records and other assets
and liabilities of BHIL which relate
exclusively to or arise from sales to the
K-12 Segment and shall include all assets,
contracts, obligations and liabilities
listed on Schedules BHW1, BHW2
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<PAGE>
and BHW3.
BHIL K-12 Products: ProQuest Direct and ProQuest CDROM and tape
product currently sold by BHIL to the K-12
Segment and new products and product
enhancements of the K-12 Products.
BHIL Noncompetition Agreement: Noncompetiton Agreement attached to the
Agreement as Exhibit L.
BHIL Restricted Activities: The Distribution, whether alone or with the
cooperation or support or through a third
Person, of products or services which are
delivered either electronically or in
machine readable format to the K-12 Segment.
BHIL Services Agreement: BHIL Services Agreement between BHIL and
EDCO containing the terms set forth on
Exhibit D to the Master Transaction
Agreement and the BHIL Non-Technical Support
Services Agreement between BHIL and EDCO
containing the terms set forth on Exhibit
D-2 to the Master Transaction Agreement.
BHW: Bell & Howell Company, a Delaware
corporation.
BHW Related Agreements: The BHIL Capitalization Agreement and any
other agreement to which BHW or BHIL is a
party as contemplated by the Master
Transaction Agreement.
BHW Representatives: BHW, its accountants, counsel, financial
advisors and other representatives.
Business Day: Any day excluding Saturday, Sunday and any
other day which banks in Chicago are
permitted or authorized to close.
Call Option: BHW's right to purchase INFO's equity
position in EDCO pursuant to Section 10.1 of
the Master Transaction Agreement.
Capitalization Agreements: The BHW Capitalization Agreement and the
INFO Capitalization Agreement.
2
<PAGE>
Change of Control: "Change of Control" shall mean with respect
to a party the occurrence of any of the
following events:
(i) an acquisition (whether directly
from such party or otherwise) of
any voting securities of such
party by any Person immediately
after which such Person has or
would have Beneficial Ownership
(within the meaning of Rule
13d-3 promulgated under the
Exchange Act) of fifty percent
(50%) or more of the combined
voting power of such party's
then outstanding Voting
Securities;
(ii) the consummation of, or
agreement to consummate:
(A) a merger, consolidation,
share exchange or reorganization of such
party in which the stockholders of such
party, as a group, cease to hold a majority
equity interest in the surviving entity;
(B) a liquidation or dissolution
of or appointment of a receiver,
rehabilitator, conservator or similar person
for, such party; or
(C) the sale or other
disposition of all or substantially all of
the assets of such party to any Person
(other than a transfer to a subsidiary); or
(iii) any other change in "control"
(as defined in Rule 405
promulgated pursuant to the
Securities Act) of such Party.
Classmate: BHIL's proprietary software which is
marketed under the name "ProQuest
Classmate", including any successor or
modified products thereto.
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<PAGE>
Closing: The contribution of assets to, and the
assumption of liabilities by EDCO and the
issuance of the stock to INFO and BHW
contemplated by the Master Transaction
Agreement.
Closing Date: The fifth Business Day following the
satisfaction or waiver of all conditions to
the obligations of the Parties contemplated
by the Master Transaction Agreement.
Contract: Any contract, agreement, instrument, lease,
license, guarantee or other evidence of an
obligation of any Person.
Contributed Assets: Those assets listed on Schedules BHW1, BHW2,
INFO1 and INFO2 to the Agreement.
Contributed Businesses: The BHIL Contributed Business and the INFO
Contributed Business.
Damages: Actual, out-of-pocket losses, fines and
other damages (excluding incidental and
consequential damages) together with related
costs and expenses (including court costs,
reasonable attorneys' fees and expenses,
including those related to investigation and
expert assistance, and amounts paid in
settlement).
Distribution: The marketing, promotion, sale, license,
distribution, lease, transfer, electronic
transmission or other distribution, directly
or indirectly, of a product or service and
the subscription rights thereto (and when
used as a verb, the act of doing any of the
foregoing).
EDCO: EDCO, Inc., a Delaware corporation in the
process of formation as a subsidiary of
BHIL.
EDCO Business: The business, operations and activities
incident to the
4
<PAGE>
development and operation of an internet
portal for the EDCO Segment, including the
acquisition and development of research and
reference tools and services and curricular
and extracurricular materials and the
Distribution thereof, either electronically
or in machine readable format, on a
worldwide basis to the EDCO Segment as
contemplated by the Master Transaction
Agreement and the Related Agreements.
EDCO Noncompetition Agreements: Noncompetition Agreement from EDCO to each
of BHIL and INFO containing the terms set
forth on Exhibit L to the Master Transaction
Agreement.
EDCO Restricted Activities: The Distribution, whether alone or with the
cooperation or support or through a third
Person, of products or services which are
either:
(i) Distributed to the Post
Secondary Education Segment, or
(ii) targeted primarily for
Distribution to the Post
Secondary Education Segment.
EDCO Segment: The K-12 Segment and Public Library Segment.
EDCO Services Agreement: Services Agreement between EDCO and
INFO containing the terms set forth
on Exhibit E to the Master
Transaction Agreement.
Electric Library Technology: INFO's proprietary software and
content distributed under the
trademark "Electric Library",
including any successor or modified
products thereto.
End-Users: Customers that are actual users of the
products, both Individuals and corporations
that are not schools, libraries or other
institutions in the EDCO Segment or
resellers.
5
<PAGE>
Exchange Act: The Securities Exchange Act of 1934, as
amended.
Excluded BHIL Products: BHIL's Digital Vault products, Post
Secondary Education Segment and corporate
market databases, i.e., all versions of
ABI/INFORM, Periodical Abstracts, Newspaper
Abstracts, Newsstand and Business Dateline
and Product Course Packs, Case Studies and
Academic Edition; provided, however, that
BHIL will not modify or create derivatives
of such products specifically for the K-12
Segment.
Excluded Segments: All customers for information products or
services not included in the EDCO Segment,
including without limitation corporate, "at
home" customers for business materials and
Post Secondary Education Segment.
Fully Loaded Cost: All elements of cost, including allocable
share of interest, depreciation,
amortization and corporate overhead.
GAAP: Generally accepted accounting principles.
Glossary: This Glossary of Terms incorporated by
reference as Annex A to the Master
Transaction Agreement and each of the
Related Agreements.
Hart-Scott-Rodino Act: Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the applicable
rules and regulations thereunder.
Individual: Persons who are natural persons in their
capacity as retail customers and who are not
commercial resellers or Persons who are
institutions, schools, libraries or
educational or cultural organizations,
institutions or service providers.
6
<PAGE>
INFO: Infonautics, Inc., a Pennsylvania
corporation.
INFO Capitalization Agreement: The Bill of Sale, Assignment and Assumption
and Indemnity Agreement to be entered into
by and between EDCO and INFO in the form
attached to the Master Transaction Agreement
as Exhibit C.
INFO Contributed Business: All accounts receivable, customer contracts,
customer data bases, domain names, trade
names and trade marks (i.e., Electric
Library, Researchpaper.com) and intellectual
property, software, hardware, patents,
processes and know-how, employee records,
sales orders, supplies, inventories, fixed
assets, software development processes,
Electric Library Technology, training
procedures, vendor records, prepaid amounts,
service contracts, and any other rights or
arrangements, and normal trade payables and
customer obligations, including deferred
revenues which relate exclusively to or
arise from the Electric Library Technology
(but excluding the deferred revenues,
customer contracts and customer obligations
directly related to the INFO End-User
Business) and shall include all assets,
contracts, obligations and liabilities
listed on Schedules INFO1, INFO2 and INFO3.
INFO Corporation: Infonautics Corporation, a Pennsylvania
corporation and a wholly-owned subsidiary of
INFO.
INFO/EDCO Remarketing and
License Agreement: Remarketing and License Agreement to be
entered into between INFO and EDCO
containing the terms set forth on Exhibit G
to the Master Transaction Agreement.
INFO End-User Business: The Distribution of Electric Library
Technology to End- Users in the Excluded
Segments excluding the Post-
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Secondary Education Segment.
INFO Noncompetition Agreement: Noncompetition Agreement attached to the
Agreement as Exhibit K.
INFO Online Publishing Business: Accounts receivable, customer contracts,
customer data bases, sales orders, trade
payables, vendor records, obligations to
customers, employee records and other assets
and liabilities of INFO which relate to or
arise from INFO's Online Publishing Business
and shall include all assets, contracts,
obligations and liabilities listed on
Attachments 1 and 2 to Exhibit J.
INFO Related Agreements: The INFO Capitalization Agreement and any
other agreement to which it is a party as
contemplated by the Master Transaction
Agreement.
INFO Representatives: INFO, its accountants, counsel, financial
advisors and other representatives.
INFO Restricted Activities: The Distribution, whether alone or with the
cooperation or support or through a third
Person, of products or services which are
delivered either electronically or in
machine readable format and which are
either:
(i) Distributed to the EDCO Segment
or Post Secondary Education
Segment, or
(ii) are targeted primarily for
Distribution to customers in the
EDCO Segment or Post Secondary
Education Segment.
K-12 Products: Products and services targeted primarily for
Distribution to the K-12 Segment.
8
<PAGE>
K-12 Segment: Customers who are a:
(a) public and private preschool, kindergarten,
primary, middle and secondary schools and
home school K-12 programs,
(b) teachers and administrators of the K-12
institutions as set forth in (a) above in
their capacity as such; and
(c) students and parents of students of such
K-12 institutions who are targeted through
such K-12 institutions for at home use.
Laws: Any federal, state, local or foreign law,
rule, regulation, judgment, code, ruling,
statute, order or ordinance or other
requirement.
Material Adverse Effect: A material adverse effect on the BHW
Contributed Business or the INFO Contributed
Business, as the case may be, as conducted
at Closing, taken as a whole.
Net Revenue: Gross revenues from Distribution of products
or services less credits for returns and
allowances calculated in accordance with
GAAP.
Noncompetition Agreement: Noncompetition Agreement attached to the
Agreement as Exhibit I.
Offer: Third-party offer to purchase the INFO
End-User Business which INFO reasonably
establishes is bona fide.
Online Publishing Business: The provision of publishing or hosting
services to a third Person for such third
Person's publication.
Online Publishing License
Agreement: Online Publishing License Agreement in the
form attached to the Agreement as Exhibit J.
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<PAGE>
Original Notice: Notice of an Offer given by INFO to EDCO.
Person: Any individual, partnership, corporation,
association, firm, trust or any other
entity, group or organization as used in
Sections 13(d) and 14(d) of the Exchange
Act.
Post Secondary Education Segment: Public and private educational institutions
and programs suited for students who have
completed secondary education or its
equivalent, including colleges,
universities, professional schools and trade
schools.
ProQuest: BHIL proprietary software Distributed under
the tradename "ProQuest", including any
successor or modified products thereto.
Proxy Statement: INFO's proxy statement to be prepared in
accordance with Section 5.7 of the
Agreement.
Public Library Segment: Customers for K-12 Products which are
publicly owned and governmentally funded
libraries.
Put Option: INFO's right to sell its Stock to BHW
pursuant to Section 10.2 of the Agreement.
Related Agreements: The agreements contemplated by Article II of
the Master Transaction Agreement and
referenced as Exhibits to the Master
Transaction Agreement.
Researchpaper.com: INFO's proprietary website Distributed under
the tradename "Researchpaper.com, including
any successor or modified product thereto."
SEC: Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended.
Site Builder: BHIL's proprietary software Distributed
under the
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<PAGE>
tradename "Site Builder", including any
successor or modified products thereto.
Sleuth technology: INFO's proprietary software Distributed
under the tradename "Sleuth", including any
successor or modified product thereto.
Stock: The common stock (or equivalent equity
interest thereof) of EDCO.
Subsidiary: A corporation of which a Person and/or their
respective Subsidiaries, as the case may be,
own directly or indirectly, such number of
shares as have more than 50% of the ordinary
voting power for the election of directors.
Transfer: Any:
(a) sale, assignment or transfer of any
right, title or interest in any or all of a
business and any assets related thereto,
(b) pledge or hypothecation of any right,
title or interest in any or all of a
business or any assets related thereto
(other than a pledge or hypothecation to a
bank or recognized financial institution,
provided the pledgee agrees in writing at
the time of any foreclosure by such bank or
financial institution that the business and
its assets (in whole or in part) shall
continue to be subject to the terms of the
Master Transaction Agreement as if such bank
or financial institution were the original
party to the Master Transaction Agreement
who made the pledge); and
(c) any other direct or indirect, voluntary
or involuntary, sale, assignment or transfer
of the business or any of its
11
<PAGE>
assets (in whole or in part).
Transferee: The proposed purchaser of the INFO End-User
Business.
Working Capital: The current assets less the current
liabilities of EDCO.
12
<PAGE>
EXHIBIT B
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, 1998 or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
___________
Commission File Number: 0-28284
INFONAUTICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 West Valley Road, Suite 1000 19087
Wayne, Pennsylvania (Zip Code)
(address of principal executive offices)
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 |_|
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 March 17, 1999 was approximately $39.0 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
March 17, 1999 was 11,563,992.
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 1999 Annual Meeting of Shareholders to be held on May 27, 1999 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
<PAGE>
INFONAUTICS, INC.
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................22
Item 3. Legal Proceedings...................................................23
Item 4. Submission of Matters to a Vote of Security Holders.................23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................................25
Item 6. Selected Financial Data.............................................26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................28
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........36
Item 8. Financial Statements and Supplementary Data.........................36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................36
PART III
Item 10. Directors and Executive Officers of the Registrant..................36
Item 11. Executive Compensation..............................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management......36
Item 13. Certain Relationships and Related Transactions......................36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....37
Unless the context indicates otherwise, the terms "Infonautics,"
"Company," "we" and "our" refer to Infonautics, Inc. and its subsidiaries.
"Infonautics" and "Electric Library" are registered trademarks and service
marks, and "Encyclopedia.com," "Researchpaper.com," "Electric Library Business
Edition," "Electric Library Personal Edition," "IntelliBank," "Company Sleuth,"
and "Job Sleuth" 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.
<PAGE>
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 the sufficiency
of the Company's liquidity and capital, growth in the use of the Internet,
growth of consumer online services, growth in the educational and end-user
market, growth and retention of subscribers, effect of the Company's agreement
with America Online, Inc., changes in the number of publications available on
the Company's services, licensing arrangements, contract pricing and pricing
uncertainty, the Company's proprietary technology, software suppliers, system
capacity, growth, development and expansion plans, sales and marketing plans,
current and future expenses, content and publisher relationships, seasonality,
industry development and regulation, competition, operating results, market for
and volatility in the Company's stock, and Year 2000. 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 14 of this Annual Report on Form 10-K.
Overview
Infonautics is an Internet information company that provides content-rich
research and reference services to schools, libraries, individuals and
businesses. The company's subscription-based Electric Library service combines
content from magazines, newspapers, books, wire services, television and radio
transcripts, photo archives and maps. Electric Library is marketed to
educational institutions (schools and libraries) and to individuals over the
Internet and through online services.
Company Sleuth is an advertising and sponsorship supported service that is
currently provided free to the user over the Internet. Company Sleuth aggregates
free content from selected World Wide Web ("Web") sites, and provides e-mail
notification of new information posted to these Web sites on specific public
companies. The content on the site is drawn from a variety of sources, and
includes information on new patents, Internet domain name registrations, stock
prices, insider trading activity, Securities and Exchange Commission ("SEC")
filings and news reports.
The Company's e-commerce online publishing services, formerly referred to
as content management and custom archive services, make use of the Company's
technology, systems-operation and customer-care functions to provide e-commerce
archive services to publishers who wish to make their content available, for a
fee, on the Internet.
The Company was incorporated in Pennsylvania in November 1992.
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Recent Developments
Move to Nasdaq SmallCap Market. Effective January 5, 1999, trading in
Infonautics shares moved from the Nasdaq National Market to the Nasdaq SmallCap
Market. The Company retained its symbol INFO. See "-- Risk Factors - We May Be
Unable to Sustain a Trading Market for Our Stock."
Convertible Debenture Agreement. 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 are convertible
after May 12, 1999 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 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 agreed to register 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.
Amendment to America Online, Inc. Agreement. In March 1998, the Company
entered into a multi-year, multi-million dollar interactive marketing agreement
(the "AOL Agreement") with America Online, Inc. ("AOL"). On March 2, 1999, AOL
and the Company agreed to a revised payment schedule for the placement fees
required under the AOL Agreement. Through March 2, 1999, the Company has paid
AOL $1,200,000 in placement fees under the AOL Agreement. The remaining
placement fee payments will be paid to AOL as follows: Infonautics paid AOL
$223,333 at the execution of the amendment, $223,333 is due monthly from March
1999 through July 1999, and $500,000 is due in August 1999, November 1999, and
February 2000. See "-- Risk Factors -- We Are Dependent on Third Party Sites and
Services."
Hiring of Allen & Company Incorporated. In January 1999, the Company
announced that it had retained Allen & Company Incorporated, a New York
investment bank, to act as its financial advisor to explore strategic
alternatives for the Company.
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Strategy
Overview
Electric Library. The Company seeks to serve the information needs of
targeted audiences. The strategy of the Company is to leverage its core
technology, licensed content, and aggregation skills to serve multiple
customer sets and generate multiple revenue streams. In 1999, the Company
intends to remain focused on increasing its sales to the education market and
continuing to increase its market share for online reference and research
services among schools and libraries in the United States. As of March 1999,
the Company's Electric Library service was licensed for use by more than
11,000 schools and libraries in all 50 states. In other markets for
subscription-based online reference and research services, the Company
pursues a strategy of measured growth balanced by efforts to achieve specific
cost of acquisition targets for new customers.
E-Commerce Online Publishing. The Company also provides custom e-commerce
online publishing services that enable publishers and other content creators to
market and sell content directly through the Internet to customers. In February
1999, the Company announced the introduction of a new technical platform that
will allow the Company to market such services to more publishers at lower cost.
Company Sleuth. The Company launched Company Sleuth, a new, free service,
on October 19, 1998. By March 1999, the Company Sleuth service had attracted
more than 100,000 registered users. Company Sleuth is designed to make
hard-to-find current events-type information about public companies available to
anyone with access to the Web. The service checks various public and
subscription-based Web sites and databases on a daily basis for new information
in a variety of categories, including: patents, trademarks, Internet domain name
registrations, federal litigation, stock prices, insider trading activity, SEC
filings and news reports. It aggregates this information and matches it to the
personal profiles created by registered users of the service. Company Sleuth
offers users the ability to receive daily e-mails informing them of any new
items of interest relating to the companies they have entered into their
profile. The Company is pursuing various marketing agreements to attract such
users. The Company is also considering launching a premium, paid-subscription
version of the service that will contain additional information sources and that
will allow users to track more and a greater variety of types of companies.
International Electric Library. The Company continues to believe that
there is a growing market for customized versions of Electric Library outside
the United States and continues to pursue international marketing agreements.
The Company currently has contracts to provide such services: in Canada, through
a marketing agreement with Rogers Media Inc.; in South Korea, through a
marketing agreement with Hankook Compugraphy; and in Australia, New Zealand and
the South Pacific, through a marketing agreement with Infosentials Ltd. In each
instance, the Company has created or is creating a customized version or
versions or Electric Library that will include, among other things, the addition
of local content.
Knowledge Management, Business Services, and Resellers.
The Company is no longer actively pursuing new business in arena of
extranet and intranet knowledge management services and products (previously
identified as IntelliBank services and products). The Company also has reduced
efforts to market the Business Edition of the Electric Library Business service.
In addition, the Company has reduced marketing efforts for its domestic
marketing partners (previously identified as the Reseller program) for services
containing selected Electric Library content and functionality. These changes
were made in order to reduce the Company's operating costs and to focus
resources on areas the Company believes have the greatest near-term potential.
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Subscription-Based Services
Electric Library. Leveraging its investment in its 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 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 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. These versions differ primarily in the
interface used and in the content available. A version of Electric Library
marketed to schools and libraries has been optimized with a customized
interface in order to be more student-friendly, including more
educationally-specific content and no advertising. 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. During 1998, in response to market trends a greater percentage of
the Company's licenses were site licenses rather than concurrent user
licenses. The Company anticipates closing more district and state contracts,
which have a higher price per contract. The Company offers discounts in
certain circumstances, including high-volume purchases and site licenses
associated with district and state contracts. 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, including AOL, as Electric
Library@AOL Personal Edition.
Users are able to access the Electric Library Personal Edition through any
standard Web browser. The Company markets Electric Library Personal Edition 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 priced at $9.95 per month and offer virtually unlimited
consumer usage of the Electric Library service. Annual subscriptions are
available for $59.95. See "-- Risk Factors -- We are Dependent on Third Party
Sites and Services."
International Editions. The Company has developed customized versions of
Electric Library to meet the needs of marketing partners in Canada (with Rogers
Media Inc.), South Korea (with Hankook Compugraphy Ltd.) and the Australia/New
Zealand/South Pacific (Australasia) market (with Infosentials, Ltd.). Each of
these international editions features a custom interface for that market as well
the addition or planned addition of local content. See "-- Risk Factors -- We
May Not Be Able to Localize or Market Our Services for the International
Market."
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Free Internet Services
Well aware of the growth and consumer appeal of free Internet content, the
Company is actively developing its suite of free Web sites that it believes are
consistent with its core mission and which carry the potential to reach far more
Internet users than any paid-subscription service.
Company Sleuth. Introduced in the fourth quarter of 1998, Company Sleuth
is designed to make current events-type information about public companies
available to anyone with access to the Web. The service is marketed primarily at
individual investors or anyone seeking "free, legal, inside" information about
U.S. public companies. The service checks various public and subscription-based
Web sites and databases on a daily basis for new information in a variety of
categories, including: patents, trademarks, Internet domain name registrations,
federal litigation, stock prices, insider trading activity, SEC filings and news
reports. It aggregates this information and matches it to the personal profiles
created by registered users of the service. Company Sleuth offers users the
ability to receive daily e-mails informing them of any new items of interest
relating to the companies they have entered into their profile. The Company is
also considering launching a premium, paid-subscription version of the service
that will contain additional information sources and that will allow users to
track more and a greater variety of types of companies.
Other Company Sleuth-Type Services. The Company has announced its
intention to launch a new service, Job Sleuth, in the second quarter of 1999.
The Job Sleuth service will be marketed primarily at individual job seekers. The
service will check various Web-based job databases and match the results to the
personal profiles created by registered users of the service. Job Sleuth will
offer users the ability to receive daily e-mails informing them of any new jobs
that match their profile.
Acquisition Sites. The Company currently operates two
advertising-supported "acquisition sites" that provide selected research-related
information to users and that 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 more than 5,000 term-paper topics in more
than 300 subjects, a writing center with more than 100 lessons on writing a
research paper. Researchpaper.com provides the Company with a marketing vehicle
for the Electric Library service, by allowing the Company to reach the students
who are using the site.
In 1998, the Company launched Encyclopedia.com. 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 from the encyclopedia 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.
Encyclopedia.com provides the Company with a cost-effective marketing vehicle
for the Electric Library service.
E-Commerce Based Online Publishing Services
The Company has, since its founding in 1992, developed a core
technological competence in managing large volumes of information, providing
robust search capabilities across multiple stored libraries and providing
detailed reports of user activity and document usage. E-commerce-based online
publishing services are designed for publishers or other content creators who
wish to make their own content available for sale online and who wish to
outsource the entire operation (or a portion of it) to the Company. The Company
converts a publisher's content to a manageable digital format, implements the
chosen pricing and billing methodology, readies customer support and implements
systems for ongoing service, support and reporting to the publisher.
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The business and management functions of the Company's online publishing
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. In February of 1999, the Company announced
the launch of a new technology platform for its online publishing business. The
Company believes that this new platform will enable it to market its services
more effectively to a wide range of publishers and other content creators.
Currently, the Company has more than a dozen customers for these services,
including: The Associated Press, Business Week, Cox Interactive (Atlanta Journal
and Constitution, Palm Beach Post, Dayton Daily News and Austin
American-Statesman), Newsday, Media General, Inc., The Dallas Morning News, the
Denver Rocky Mountain News, the Providence Journal, The Morning Call (Allentown,
PA), Editor & Publisher, and Men's Health.
Content and Publisher Relationships
The Company believes that the relationships and contracts it maintains
with publishers and other content providers are a strategic asset. During
1998, the Company signed more than 80 content licensing contracts covering
more than 350 publications and distinct sources. While the Company expects
the content available on its services to change from time to time, it
believes that its direct licensing relationships will provide stability to
the content collection. Nevertheless, the Company may, 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 in 1998 entered into an agreement to
obtain numerous business related titles from one aggregator. The company has
subsequently licensed additional business related content to reduce the
dependence on this aggregator. At the same time, and in conjunction with its
reduced investment in the Business Edition, the Company intends to reduce the
content-associated costs of that service. This will likely bring about some
changes in the overall amount of content available to those customers. See
"--Risk Factors -- We Are Dependent on and May Be Required to Make
Significant Payments to Content Providers."
While the Company continues to seek high-value content to enhance the
breadth and depth of the information available on its Electric Library service,
it believes that the content licensing agreements it has in place today provide
it with sufficient content to effectively market and sell the service into the
K-12 market as well as into the end-user market.
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, wire services, magazines, journals, books, photos, maps,
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Magazines and Journals
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Business Week Industry Week Sports Illustrated
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Computerworld InfoWorld The Economist
Discover Magazine Maclean's The New Republic
Editor & Publisher Men's Health Time
Entertainment Weekly Money Time for Kids
Forbes Magazine National Review US News & World Report
Fortune National Wildlife Washington Monthly
Harvard Business Review Popular Science Mechanic Wilson Quarterly
- ------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------
Newspapers & Newswires
- ------------------------------------------------------------------------------------------
Associated Press Independent (UK) St. Louis Post-Dispatch
Atlanta Journal-Constitution International Herald Tribune Reuters
Business Wire Los Angeles Times Toronto Star
Christian Science Monitor Minneapolis Star-Tribune UPI
Dallas Morning News Newsday USA Today
- ------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------
Television & Radio Transcripts
- ------------------------------------------------------------------------------------------
ABC World News Tonight MSNBC Business Video Congressional Testimony
Good Morning America Nightly Business Reports Regulatory Intelligence Data
Morning Edition (NPR) Nightline (ABC)
- ------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------
Reference Works, Photographs and Maps
- ------------------------------------------------------------------------------------------
Mostly Medical Encyclopaedia Archive Photos Magellan Geographix
The Columbia Encyclopaedia Index Stock Photography King James Bible
The World Almanac and Book Geosystems Hoovers Company Capsules and
of Facts Profiles
NY Library Science Desk Complete Works of Reuters
Reference Shakespeare
- ------------------------------------------------------------------------------------------
</TABLE>
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 are compensated
on a flat-fee basis. Certain agreements with content providers provide for
minimum fees or guaranteed payments. Payments to content providers from the
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<PAGE>
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 -- We Are Dependent on and May Be
Required to Make Significant Payments to Content Providers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
In addition to the content the Company licenses directly from content
providers, the Company also accesses certain Web-based content in some of its
services including, for example, Company Sleuth. The Company accesses Web-based
content primarily by searching selected third party Web sites for relevant
content and then providing links to that content from the Company's services. In
most cases, clicking on the link to that content takes a user of the Company's
services directly to the third party Web site where the content is located.
Typically, the Company pays no fee or a nominal fee for these links to content
on third party Web sites. See "--Risk Factors - We Are Dependent on and May Be
Required to Pay for Some Web-Based Content."
Markets and Customers
The Company's educational customers include libraries, schools and other
educational institutions, its end-user customers are individuals and its
e-commerce online publishing services customers include corporations, publishers
and other content creators. As of March 1999, the Company had approximately
75,000 individual paying subscribers, or customers, for its online reference
services. In March 1999, the Company had more than 3,600 contracts covering
approximately 11,000 institutions for the use of Electric Library. As of March
1999, the Company also had approximately 100,000 registered users of its Company
Sleuth service. No single customer of the Company accounted for more than 10% of
the Company's consolidated revenue for the fiscal year ended December 31, 1998.
The Electric Library product line addresses three broad markets: (i)
educational, including schools, libraries and other educational organizations;
(ii) end-user; and (iii) international. E-commerce based online publishing
primarily address the publishers and other content creators market for
e-commerce. In 1998, approximately half of the Company's revenues were derived
from the educational market, and together with revenues from the end user
market, international market, and other revenue from Electric Library sales
aggregated 83% of revenues.
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
1998, the Company introduced a version of Electric Library to address the
information and research needs of elementary schools.
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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
A primary marketing goal of the Company is to acquire customers in a
cost efficient manner and 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 -- We Are a Relatively New Company" and
"--Risk Factors -- We Operate in a New and Developing Market."
International
The Company believes that as international Internet penetration rates
rise, there is a significant market for country-specific versions of the
Electric Library service to serve both the educational and end-user markets. See
"-- Risk Factors -- We May Not Be Able to Localize or Market Our Services for
the International Market."
E-Commerce Online Publishing
As publishers and other content creators enter the online information
markets, the Company believes there is a growing need for cost-effective
e-commerce online publishing 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 online publishing 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 more than a dozen agreements for such services. See "-- Services --
Content Management and Custom Archive Services."
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
1998, the Company received and responded to an average of more than 20,000
e-mails and 5,000 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, as of March 1999, consisted of
19 people. The technical support coordinators provide centralized support for
all users. The billing services teams provide centralized support for all
billing-related inquiries.
Sales and Marketing
The Company's primary marketing goal is to attract and retain customers
for its various services, to build a strong customer following, and to create
a strong brand identity as a leading Internet information company. In
particular, a key marketing and sales effort in 1999 is to focus on
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<PAGE>
renewing a high-percentage of its one-year education contracts sold in 1998. In
the end-user market, the Company generally structures strategic alliances with
marketing partners that include bounty and royalty incentives to reward
partners for both attracting new subscribers and cultivating loyal and frequent
users of its services. See " --Risk Factors -- We May Not Be Able to Retain Our
Customers or Maintain the Price of Our Services."
Direct Sales
The Company currently utilizes its own sales force to sell educational and
corporate site licenses for Electric Library and to market its content
management services to publishers and other content creators. The educational
sales force focuses its efforts on making telephonic sales calls and in-person
presentations, and on exhibiting the Company's services at key educational
product trade shows. In 1999 the Company initiated a program designed to more
closely track and target large district and state educational contracts. In
addition, the educational sales force responds to school and library inquiries
generated by users of the Company's end-user reference services.
Marketing
The Company's most significant marketing efforts are aimed at attracting
new customers, educational and end-user alike, to its online reference service,
Electric Library. In 1998, the Company reached an agreement to place Electric
Library Personal Edition and Electric Library Business Edition as anchor tenants
on AOL's "Research and Learn" and "WorkPlace" channels, respectively. Electric
Library is also the featured "Research Service" on Wired Digital Inc.'s HotBot
search and directory service, generating significant Web site visits and product
trials. The Company also has bounty relationships with several Web sites in
which the Company pays the Web sites a bounty for every visitor that results in
a trial of Electric Library. The Company believes that these bounty programs are
a cost-effective means of acquiring customers and intends to pursue additional
similar relationships.
The Company is also focused on creating awareness of and generating
traffic for its Company Sleuth service. The Company currently promotes Company
Sleuth on several Internet sites including Raging Bull, Morningstar, Earnings
Whispers, Stocks.com and Ask Jeeves, through paid advertisements as well as
through bounty incentive arrangements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "-- Risk Factors -- We May
Need More Money" and "-- Risk Factors -- We Are Dependent on Third Party Sites
and Services."
International Sales
The Company has an active international sales and product development
department that pursues marketing agreements with international partners. See "
- -- Risk Factors -- We May Not Be Able to Localize or Market Our Services for the
International Market."
Technology
The Company's base technology comprises technologies proprietary to the
Company in combination with those licensed from third parties, including
components of the Company's basic search, digital signature and online
publishing software. The Company's Electric Library technology runs on a
distributed, scaleable, and open information search and retrieval system that
currently supports thousands of concurrent users, and millions of page
impressions daily. The system is easy to use and enables users to access and
search the Company's extensive database and receive rapid responses to their
queries. The Company's online publishing e-commerce product is built on a
massively parallel, highly scaleable, low cost and high efficiency architecture
that is compliant with significant Internet standards. This
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<PAGE>
technology is used as the basis for a service for publishers and other content
creators who wish to have their own complete online information service. This
technology is accessible as intranet, extranet or Internet information delivery
systems. The Company also invented new technologies to support its Company
Sleuth product, which encompasses deep search and retrieval of changes to
Internet Web sites that provide highly relevant results to registered users of
the service. During 1998, the Company's technical operations and development
expenses were $7.6 million. See "-- Risk Factors -- We Are at Risk for System or
Service Failures or Inadequacies" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's technology is characterized by the following important features:
Capacity and Scalability. The Company's products are based on individual,
multi-threaded, and distributed architectures that allow for vast scalability.
(Scalability is the ability of a computer system to maintain high user
performance and low cost per transaction as the system's size, volume and
transactions grow, as well as take full advantage of the growth.) The Company's
products rank in the top 150 most trafficked sites on the Internet, and the
Company's products serve up millions of pages daily in a low-cost, high
performance manner. The modular structure of the Company's products and software
allows separation by flexible application programming interfaces (or APIs),
which permits the system to be expanded rapidly at low cost 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 multiple components,
such as e-commerce, search and retrieval or database engines, without changing
the entire system.
Content Management. 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 managed
content (from publishers) and unmanaged content (from Web sites) into a unified
and standard format for loading into the company's databases. As a result, the
Company can accept multiple data sources, including print or digital media, in
multiple formats, such as XML, SGML, ASCII or major graphic formats, and can
accommodate real-time digital and streaming data feeds.
Time to Market. The Company's base technology provides the ability to
take a new product from inception to production quickly.
E-Commerce Specialization. The Company's e-commerce specialization allows
the Company's products to leverage a common e-commerce transaction processing
capability. This has allowed packaging of documents in monthly and annual
subscriptions, as well as in multi-user, multiple duration packs, including
support of transactions in multiple currencies.
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 -- We Are Dependent on Proprietary
Technology" and "-- Risk Factors -- We Are Dependent on Excalibur Technologies
Corporation."
Electric Library
The Company's Electric Library technology is characterized by the
following features:
Search Accuracy. The Company's search 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. Documents are returned to the
user ranked in
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order of relevancy.
Ease of Use and Flexible Architecture. The Company's technology
delivers flexibility for the product developer and for the end-user. Products
targeted to a broad or specific marketplace can be quickly defined and
implemented with minimal testing, thereby decreasing time to market. Electric
Library's award-winning system interface can be accessed through any Web
browser, or through the Company's enhanced Windows version of its client
software (created for Windows 98/95/NT and Windows 3.1) as well as a custom
Macintosh version of its client software. The Company has invested in a
dispatch-based, distributed architecture that has allowed system capacity to
more than double in the past year with a linear capacity fulfillment growth
curve. The APIs support a broad spectrum of ease-of-use features such as the
"Recurring Themes" feature, and the "Go to Best Part" button that transports
users to the most relevant parts of a retrieved article. In addition, the
APIs support advanced searches, document categorization and a server-based
dictionary and thesaurus.
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. Based on a statistical match of
results that return in real-time, combined with an auto-subjecting technology
engine creates a set of ancillary results that provide more depth into the
results users ask.
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."
Online Publishing Product
The Company introduced a new e-commerce product aimed at the online
publishing market, in the first quarter of 1999. This product, based extensively
on open Web protocols, dramatically reduces the time to market to go online for
any publisher, sometimes reducing time to market from months to weeks. The
online publishing product provides a foundation architecture that is modular,
structured and implemented in components, resulting in highly scaleable, rapid
deployment publishing solutions.
The online publishing product supports multiple industry-standard content
formats, and stores them in an XML (extensible markup language) format. A
flexible administration interface allows publishers to make changes to their Web
sites without requiring significant intervention from the information technology
departments of their companies.
The online publishing product supports multiple e-commerce models and
formats. The product's modular architecture provides flexibility in a
combination of transaction models that are currently used in the Internet
marketplace.
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 end-user services, the Company competes
directly or indirectly with other information services and sources, including
consumer online reference services (such as Encyclopedia Britannica, Microsoft's
Encarta Online Library and Northern Light ); educational database providers and
content aggregators (such as EBSCO, Information Access Company, UMI and
Newsbank); CD-ROM encyclopedias and other reference sources (such as
Encyclopedia Britannica, Microsoft Encarta, World Book and Comptons
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Multimedia Encyclopedia); publishers offering online or Internet access to their
own content; Internet search service companies; and individually-maintained Web
sites on the Internet.
In the area of free Internet services, the Company currently believes that
Company Sleuth is a unique service. However, it does compete in the broad market
for Internet-based business information with a variety of free and paid
information sources on the Internet.
With respect to its e-commerce online publishing services, the Company
competes primarily with one other provider of online archive services,
MediaStream, Inc., a subsidiary of Knight Ridder. See "-- Risk Factors -- We
Have 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 thirteen United
States patents and has one additional United States patent that is pending. The
Company may consider filing 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 (three registrations) and seven trademark
applications are either pending or published. The Company has secured twenty
trademark registrations in certain foreign countries and the European Community
for the trademarks Electric Library and Infonautics and has filed applications
to register the trademarks Electric Library and Infonautics in ten countries and
the European Community. Thirteen 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 -- We Are Dependent 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, 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 (or a successor to it) 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
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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 -- We May Be Subject to Government Regulation
and Legal Uncertainties."
Employees
As of February 28, 1999, the Company had 164 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. Effective January 31, 1999, the
Company and Israel J. Melman terminated his consulting agreement with the
Company.
Risk Factors
You should consider carefully the following factors in addition to the
other information contained or incorporated by reference in this Annual Report
on Form 10-K.
We Have a History of Losses and Expect Future Losses
Since our company was founded, we have a history of losses and have had a
negative cash flow. As of December 31, 1998, we experienced cumulative net
losses of about $60.1 million, with net losses of about $13.8 million, $17.4
million and $17.4 million, respectively, for each of the years ended December
31, 1996, December 31, 1997 and December 31, 1998. We can offer no assurance
that our company will ever be profitable.
We Are a Relatively New Company
We began operating in November 1992 and introduced our first online
service early in 1995. Our online services generated total net revenue of
about $1.1 million in 1996, $5.9 million in 1997 and $11.6 million in 1998.
This represents 81%, 86% and 78% of our revenues, respectively, in 1996, 1997
and 1998. Our content management and custom archive services and any
licensing of our core technology generated revenues of $272,000 in 1996,
$937,000 in 1997 and $2.6 million in 1998. This represents 19%, 13% and 17%
of our revenues, respectively, in 1996, 1997 and 1998. We must expand
distribution and achieve market penetration for our services in order to
achieve revenue growth. Further, we must continue to upgrade and add
technologies to our existing and new services to achieve revenue growth.
We Operate in a New and Developing Market
We operate in a new and rapidly evolving market that has an increasing
number of other companies that compete with us either directly or indirectly.
Because the market for our services is new and evolving and because we are a
relatively new company, we do not know the growth rate of these markets, if any.
Therefore, we cannot predict whether we will be able to develop markets for our
services. If we do not develop markets or develop markets slower than expected,
our results may suffer.
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We May Need More Money
At December 31, 1998, we had $3.3 million in cash and $5.6 million in
working capital deficit. We anticipate that we will have enough money to
continue operating for at least the next 12 months. If we do need more money, we
may be able to obtain it through additional equity financing, debt financing or
other sources, but this may result in significant dilution to existing
shareholders.
Also, we may make strategic decisions that could negatively affect us. In
March 1998, we entered into a multi-year, multi-million dollar marketing
agreement with America Online, Inc. Pursuant to this agreement, we must pay $4
million to AOL for placement fees and the Company has paid $1.2 million of this
amount in 1998. We may not make enough money under this agreement to cover the
associated expenses. In this event, we would have a shortfall which would
negatively affect us.
We May Be Unable to Sustain a Trading Market for Our Stock
Effective January 5, 1999, our stock is traded on the Nasdaq SmallCap
Market. We must maintain certain standards in the Nasdaq Stock Market listing
requirements to stay listed on the Nasdaq SmallCap Market. We may not be able to
continue to meet these standards. If we do not continue to meet these standards,
our stock may be traded on the over-the-counter market. If our stock is traded
on the over-the-counter market, our shareholders would have less liquidity. In
addition, we would be less visible in the public markets.
We Have Competition
There are many entities, both public and private, including companies with
greater resources and name recognition that are or may become competitors of
ours. Many of these companies have substantially greater experience and larger
existing customer bases than we do. Accordingly, our competitors may succeed in:
o responding more quickly to new or emerging technologies;
o responding more rapidly to changes in customer requirements;
o devoting greater resources to the development, promotion and sale of
their products or services than us; and
o establishing relationships with content providers that have not
entered into agreements with us.
Competitors may succeed in developing services and products which are
superior to ours and also may prove more successful in marketing their
products or services to the same customers we intend to market our products
or services to. Also, our competitors may be more successful in obtaining
agreements with our content providers. Moreover, if our strategic partners'
products fail, it could affect us negatively as our success is partially
dependent on the success of our relationship with our strategic partners.
We Are Dependent on Third Party Sites and Services
We have entered into agreements with third parties in order to acquire new
subscribers for our Electric Library service. Typically, these agreements
provide our Electric Library service with promotion and placement on the third
parties' web sites. These agreements usually require us to pay the third parties
a fixed fee plus a variable fee based on the number of qualified users who
enroll for our service.
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In some cases, we pay only a variable fee. Examples of these agreements include
our Interactive Marketing Agreement with America Online, Inc., our Distinguished
Provider Services Agreement with Netscape Communications Corporation, and our
Wired Digital, Inc. agreement (for the HotBot search engine). Some of our third
party agreements have one and two year terms and may only be terminated early in
certain cases. Others may be terminated on short notice by either us or the
third party. One or more of these agreements may not generate enough revenue to
cover the associated costs, and a significant shortfall could negatively affect
us. Additionally, one or more of these agreements may not be renewed. If they
are not renewed, this could reduce our acquisition rate for new subscribers,
which could also negatively affect us.
We Are Dependent on and May Be Required to Make Significant Payments to Content
Providers
We have relationships with content providers that are fundamental to our
goal of becoming a leading online reference service. To date, we have entered
into supply agreements with various content providers, including publishers, to
provide information for use in our 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:
o breach of any material obligation, if the breach remains uncured
within a specified number of days after written notice; or
o a bankruptcy, insolvency or similar filing, if the filing is not
withdrawn within a specified number of days.
The content providers may unilaterally terminate some of the agreements
under certain circumstances, including our failure 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, we also obtain
representations from our publishers and content providers in these agreements as
to the ownership of licensed content and obtain indemnification to cover any
breach of any of these representations.
Our future success also partially depends on our ability to license
additional content on a cost-effective basis and to maintain our existing
relationships with our content providers, which we may not be able to do. We are
reducing our reliance on content aggregators and concurrently are contracting
directly with publishers. As a result, from time to time, there may be changes
in the number of publications available on our services. Nevertheless, we may on
a case-by-case basis, enter into relationships with third-party content
aggregators to fill our specific needs. In addition, the combination of
contracting directly with publishers and our overall effort to increase the
content available under our Electric Library service will result in an increase
in data preparation costs. We believe that the possible reduction of content or
the increase in data preparation costs will not negatively affect us but we are
not certain.
In addition, while fees payable to our content providers constitute a
significant portion of our cost of revenues, we are not sure that the content
providers will be satisfied with the revenue received through our arrangements.
Nor are we sure that content providers will enter into prospective agreements
with us. If we must increase the fees payable to our content providers, we may
be negatively affected.
We Are Dependent on and May Be Required to Pay for Some Web-Based Content
We license content from publishers and other sources for our Electric
Library services. We also access and provide links to Web-based content in our
Company Sleuth service (and other Company Sleuth-type services). We access this
content mainly by searching selected Web sites and then providing links to
relevant content from Company Sleuth. Usually, we pay no fee, or a small fee,
for accessing
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Web-based content in this manner. Our ability to continue to use Web-based
content in this manner for free, or for small fees, is fundamental to our goal
of providing free, or low cost, Internet-based products and services. If we are
not able to continue to access and provide Web-based content like we have been,
we may be negatively affected. For example, if we have to pay fees or develop
technology in order to access and provide Web-based content, our costs will
rise. If we are not able to access and provide Web-based content on favorable
terms, we may be negatively affected in our ability to deliver Company Sleuth
service (and other Company Sleuth-type services).
We May Not Be Able to Retain Our Customers or Maintain the Price of Our Services
Our Electric Library marketing strategy and objectives depend in part on
our ability to retain and renew customers, especially in the educational market,
after their subscription period has ended. In the educational market, renewals
depend on many factors. These include the funding available for educational
customers to license services like Electric Library and the availability of
competitive services. In the end-user market, industry experience indicates that
a significant number of subscribers to our services will likely end their
subscriptions over time, but tend to be replaced by new subscribers. Also, we
may reduce the selling price of our online reference services due to factors
such as increased competition or loss of customers. If our retention and renewal
rates or pricing decreases significantly, our results may suffer.
We Are at Risk for System or Service Failures or Inadequacies
We have occasionally suffered failures of the computer hardware and
software and telecommunications systems that we use to deliver our services to
customers. These failures have caused interruptions in the services our
customers receive from us. Also, the growth of our customer base, content base
or both may strain the systems we use to deliver our service to customers to the
point where the system may perform poorly or fail. Any such delay or failure to
the systems we use to deliver our services to customers would negatively affect
us. We are also dependent on the ability to maintain our systems in effective
working order and to protect it against damage from:
o fire;
o natural disaster;
o power loss;
o telecommunications failure; or
o similar events.
All of the systems we use to deliver our services to customers (except for
external telecommunications systems) are located at our headquarters facilities
in Wayne, Pennsylvania. Although we maintain property insurance, claims could
exceed the coverage obtained.
We, along with our customers, test and perform quality assurance efforts
in connection with our services. We may, however, find errors in our services or
our service upgrades that could result in:
o loss of or delay in market acceptance and sales;
o diversion of development resources;
o injury to our reputation; or
o increased service and support costs.
Our Quarterly Results May Fluctuate
We expect to experience significant fluctuations in future quarterly
operating results that may be
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caused by:
o demand for our services;
o introduction or enhancement of services and products by us and our
competitors;
o market acceptance of new services;
o the mix of distribution channels through which services are sold;
o the mix of services sold;
o seasonality of the online services and educational markets; and
o general economic conditions.
Therefore, we believe that comparing our quarterly results will not
necessarily be informative and is not an indication of future performance.
We Are Dependent on Proprietary Technology
Our success depends on proprietary software technology and software
developed by us and licensed from third parties. We have decreased our
dependence on and have some alternatives to certain third party technology and
software. We may not, however, be able to license similar technology at a
comparable cost.
In order to establish and protect our proprietary rights in our services,
we rely on patents, trademarks, copyrights and trade secrets. We also routinely
enter into confidentiality and non-disclosure agreements with our employees,
consultants, advisors and partners. However, these parties may not honor these
agreements. Further, we may not successfully protect our rights to unpatented
trade secrets, know-how and confidential information. Others may also
independently develop substantially equivalent or even superior proprietary
information and techniques, or otherwise gain access to our trade secrets,
know-how and confidential information. While we believe that our services and
the proprietary rights developed or licensed to us do not infringe on the rights
or others, we cannot be sure that others will not bring an infringement claim
against us or those licensing information to us. Any patents we now hold, or any
patents that may issue from patent applications we file, may not be broad enough
to protect what we believe are our proprietary rights. Also, any current or
future patents may not give us any competitive advantages. The U.S. Patent and
Trademark Office or a private party could institute an interference proceeding
relating to our patents or patent applications. We may incur substantial costs
in asserting any patent rights and in defending suits against us related to
intellectual property rights. We may also incur substantial costs in asserting
our intellectual property rights against others.
Laws of some foreign countries do not protect proprietary rights to as
great an extent as do the laws of the United States. As the nature of online
services and the Internet is global, we cannot control the ultimate destination
or our services. Policing the unauthorized use of our technology and proprietary
rights is often difficult and expensive anywhere in the world.
We Are in an Industry that Is Subject to Rapid Technological Change
The information services, software and communications industries are
characterized by:
o rapid technological change;
o changes in customer requirements;
o frequent new product and service introductions; and
o enhancements and emerging industry standards.
The introduction of new technologies and the emergence of new industry
standards and practices
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can render our existing products and services obsolete and unmarketable.
Additionally, it could require us to make significant unanticipated investments
in research and development. We are dependent, in part, on our ability to keep
pace with:
o the latest technologies and technological development;
o changing customer requirements; and
o frequent new product introductions.
We Are Dependent on Our Personnel and Must Effectively Manage Our Growth
We are highly dependent on the performance of our executive officers and
key employees. Some of our officers and all of our other employees have not
entered into employment agreements with us. There is intense competition for
qualified personnel. Therefore, we may not be able to attract and retain the
qualified personnel necessary for the development of our business. The loss of
the services of existing personnel, as well as the failure to recruit additional
key technical, managerial and sales personnel in a timely manner, would be
detrimental to our business. Furthermore, we may incur substantial expenses in
connection with hiring and retaining employees.
We must manage our operations effectively while responding to constant
changes in both technology and the markets where we compete if we are to grow in
the future. Our results will suffer if we cannot manage growth effectively.
We Are Dependent on Excalibur Technologies Corporation
Excalibur Technologies Corporation licenses to us components of the basic
search software we use. Excalibur may not continue to support or maintain the
software adequately and may terminate the arrangement with us. Our agreement
with Excalibur terminates January 31, 2010. It may be terminated early by either
party upon breach of any material obligation, after a notice period. We believe,
however, that we could find replacement suppliers to provide us with comparable
software within a reasonable timeframe if Excalibur became unable to adequately
supply the software to us. If we are unable to find replacement suppliers that
could offer us comparable software on similar terms, our business will be
negatively affected.
We Are Dependent on the Internet
Our success depends, in part, on the continued expansion of the
Internet and its network infrastructure. The Internet may not continue to
expand as quickly as needed to continue to be a viable commercial marketplace
because of factors that may inhibit its ability to handle increased levels of
activity, such as:
o inadequate development of the necessary infrastructure (i.e., a
reliable network backbone);
o delayed development of complementary products and technologies
(i.e., high speed modems and security procedures for financial
transactions); and
o delays in the development or adoption of new standards and protocols
(i.e., the next-generation Internet protocol).
Our business will suffer if the Internet does not expand as quickly as
needed to continue be a viable commercial marketplace. Moreover, our business
may be negatively affected by critical issues concerning online services and the
Internet, including:
o security;
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o cost;
o ease of use and access;
o property ownership; and
o other legal liability issues.
We May Be Subject to Government Regulation and Legal Uncertainties
We are not subject to direct regulation by any U.S. government agency
other than the laws and regulations applicable to businesses generally. Also,
there are few laws or regulations directly applicable to access to or commerce
on the Internet. We believe such laws and regulation do not seriously affect our
operations and that we are in compliance currently with such laws. Governments
may adopt laws or regulation in the future with respect to commercial online
services and the Internet, which may cover issues such as:
o user privacy;
o pricing;
o taxation; and
o the characteristics and quality of products and services.
For example, provisions of the Communications Decency Act of 1996 may
apply to us. Although portions of the Communications Decency Act were struck
down as unconstitutional by the U.S. Supreme Court, other portions of it remain
in effect. We do not know the manner in which the remaining portions of the
Communications Decency Act will be enforced or its effect on our operation. It
is possible that the Communications Decency Act (or a successor to it) will
expose us to substantial liability. This Act or other laws and regulations
enacted within the United States or outside could decrease the growth of
commercial online services and Internet content and activity. This could
decrease the demand for our services while increasing our cost of doing
business.
Although transmission of our services primarily originates in
Pennsylvania, the Web is global in nature. Therefore, governments of other
states and foreign countries might try to regulate our transmissions or
prosecute us for violations of their laws. We may incur substantial costs in
responding to charges of violations of local laws by state or foreign
governments. Moreover, existing United States and foreign laws and regulations
could expose us to substantial liability in areas such as:
o intellectual property ownership;
o defamation;
o personal privacy;
o obscenity; and
o export restrictions.
In such case, our content providers, other licensors or insurance may not
indemnify us. For example, governmental entities or private parties may sue us
for:
o copyright or trademark infringement;
o defamation;
o negligence; or
o theories based on the nature and content of the materials we made
available.
Although we maintain general liability insurance, claims could exceed the
coverage obtained or could not be covered by our insurance. In addition, we
obtain representations from our publishers and content providers as to the
ownership of licensed informational content and obtain indemnification to
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cover any breach of these representations. We still may not receive accurate
representations or adequate compensation for any breach of such representations.
We will be negatively affected by claims which are not covered by
indemnification.
We May Incur Costs Related to the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. To date, we experienced very few problems related to Year
2000 testing and those requiring immediate modification have been fixed in our
day-to-day operating environment. We do not believe that we have material
exposure to the Year 2000 issue with respect to our information systems since
our existing systems correctly define the Year 2000.
We are currently conducting an analysis to determine the extent to which
others have Year 2000 issues. These include our major suppliers' systems
(insofar as they relate to our business), including the systems of credit card
processors, telecommunications providers, and we are currently unable to predict
the extent to which the Year 2000 issue will affect our suppliers, or the extent
to which we would be vulnerable to our suppliers' failure to remediate any Year
2000 issues on a timely basis. We would be negatively affected by the failure of
a major supplier subject to the Year 2000 issue to convert its systems on a
timely basis or a conversion that is incompatible with our systems. In addition,
most of our customers pay with credit cards, and our operations may be
materially adversely affected to the extent our customers are unable to use
their credit cards due to Year 2000 issues that are not rectified by their
credit card providers.
We May Not Be Able to Localize or Market Our Services for the International
Market
We are seeking to license our services internationally in order to
increase our growth and markets. Our success in the international market may
depend, in part, on our ability to create localized versions of our services and
market them internationally. We may not be able to localize or market our
services internationally in all cases and the costs for doing so may be
significant. Our revenues from international activities may not be enough to
cover our costs for doing business internationally and we may face new and
existing competitors internationally.
We do not have significant experience in localizing and marketing our
services internationally. We are also subject to many difficulties inherent in
doing business internationally, such as:
o compliance with regulatory requirements;
o export restrictions;
o export controls relating to technology, tariffs and other trade
barriers;
o protection of intellectual property rights;
o difficulties in staffing and managing international operations;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability;
o fluctuations in currency exchange rates; or
o potentially adverse tax consequences.
Any or all of these factors could cause our results to suffer.
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Our Stock Price May Vary Significantly
The price of our stock has varied significantly at times and may continue
to do so. There may be several factors contributing to this behavior, including:
o quarterly results of operations;
o announcements of new technologies or new services by us or our
competitors;
o changes in financial estimates and recommendations by securities
analysts;
o the operating and stock price performance of other companies that
investors may view as comparable to us; and
o news relating to trends in our markets.
The stock market in general, and the market for Internet-related companies
in particular, have experienced extreme volatility. This volatility often has
been unrelated to the operating performance of these companies. These broad
market and industry fluctuations may cause the price of our stock to drop,
regardless of our performance.
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. In the fourth quarter of 1998, the Company
canceled a sublease which had been used as a sales office in California.
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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, 1998.
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* :
Name Age Position
- ---- --- --------
David Van Riper ("Van") Morris...... 44 President and Chief Executive Officer
Joshua M. Kopelman.................. 27 Executive Vice President, Secretary
and co-founder
Federica F. O'Brien................. 41 Acting Chief Financial Officer
William R. Burger................... 41 Vice President, Content and Media
Services
Gerard J. Lewis, Jr................. 38 Vice President, General Counsel and
Assistant Secretary
Alan S. Preston..................... 37 Vice President, Human Resources
Cedarampattu ("Ram") Mohan.......... 30 Vice President, Technology
Van Morris has been President and Chief Executive Officer of the Company
since March 31, 1998. Mr. Morris originally 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, a systems management software company.
Joshua M. Kopelman, a co-founder of the Company in 1991, is Executive Vice
President and
- ----------
* Effective December 1, 1998, James T. Beattie, a former executive officer and
Vice President of the Company, ended his employment with the Company.
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Secretary of the Company. In addition, Mr. Kopelman is responsible for the
Company's sales and marketing functions of the Company's newest product, Company
Sleuth.
Federica F. O'Brien joined the Company as Director of Finance in June
1996. Ms. O'Brien was appointed Acting Chief Financial Officer upon the
resignation of the previous CFO in June 1998. Prior to joining Infonautics, Ms.
O'Brien was a Business Assurance Manager with Coopers & Lybrand L.L.P. and is a
certified public accountant.
William R. Burger joined the Company as Vice President, Content and Media
Services 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.
Alan S. Preston was named Vice President of Human Resources in January
1999. From November 1996 to December 1998, Mr. Preston served the Company as
Director of Human Resources. Prior to joining the Company in November 1996, Mr.
Preston was an HR Consultant with The Rosen Group, Inc., a full-service human
resource solutions company. From 1992 to 1996, Preston was Executive Vice
President of the Phi Kappa Sigma Foundation, Inc., an international collegiate
organization that provides leadership development and educational scholarships
and services to its membership.
Ram Mohan was named Vice President of Technology in January 1999. From May
1997 to December 1998, Mr. Mohan served the Company as Director of Software
Product Development. Mr. Mohan was hired in 1995 as a senior Engineer. Prior to
joining the Company, Mr. Mohan worked with First Data Corporation, Unisys
Corporation and KPMG Peat Marwick in a variety of engineering, technical and
leadership positions. He was involved with computer networking technologies,
massively parallel real-time systems, as well as early work on Microsoft's
Object Linking and Embedding technology.
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<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. As of January 5, 1999, the Company's Common Stock has traded on
the Nasdaq SmallCap Market.
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.
Year Fiscal Quarter Ended High Low
---- -------------------- ---- ---
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 ....................... 5.625 1.875
June 30, 1998 ....................... 7.938 2.625
September 30, 1998 ....................... 4.438 1.938
December 31, 1998 7.094 1.250
As of March 17, 1999, the Company had approximately 197 shareholders
of record and 6,823 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.
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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, 1998 and under the caption Consolidated Balance Sheet
Data at December 31, 1998 and 1997, are derived from the consolidated financial
statements of the Company and its subsidiaries, which financial statements have
been audited by PricewaterhouseCoopers LLP, 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,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Consolidated Statements of (in thousands, except share and per share data)
Operations Data:
<S> <C> <C> <C> <C> <C>
Revenue ................................ $ -- $ 448 $ 1,441 $ 6,832 $ 14,925
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues ..................... -- 282 822 2,641 4,384
Customer support expenses ............ -- 146 324 578 1,093
Technical operations and
development expenses ............... 2,009 3,554 5,210 6,272 7,606
Sales and marketing expenses ......... -- 1,979 6,142 10,674 14,835
General and administrative expenses .. 1,581 1,982 3,927 5,029 4,609
---------- ---------- ---------- ---------- ----------
Total costs and expenses ........... 3,590 7,943 16,425 25,194 32,527
---------- ---------- ---------- ---------- ----------
Loss from operations ................... (3,590) (7,495) (14,984) (18,362) (17,602)
Interest income (expense), net ......... (109) 14 1,198 1,003 154
---------- ---------- ---------- ---------- ----------
Net loss ............................... $ (3,699) $ (7,481) $ (13,786) $ (17,359) $ (17,448)
========== ========== ========== ========== ==========
Loss per common share-basic
and diluted ............................ $ (1.21) $ (1.51) $ (1.61) $ (1.83) $ (1.77)
========== ========== ========== ========== ==========
Weighted average number of common and
equivalent shares outstanding .......... 3,069,800 4,940,400 8,549,800 9,491,600 9,830,900
========== ========== ========== ========== ==========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments ...... $ 718 $ 962 $27,379 $12,997 $ 3,268
Working capital (deficit) ................... (224) (1,514) 25,841 7,163 (5,561)
Total assets ................................ 1,254 2,532 30,227 18,794 10,192
Long-term obligations, net of current portion 204 138 -- 404 577
Shareholders' equity (deficit) .............. 51 (549) 27,688 10,460 (3,298)
</TABLE>
- ----------
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<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 the sufficiency of the Company's
liquidity, including cash resources and capital, the number of subscribers,
gross margins, current and future expenses, future revenues and shortfall 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 expenses, seasonality, Electric
Schoolhouse, and operating results . 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 is an Internet information company that serves the needs of
selected markets. The Company provides premium, subscription-based online
information services to the educational and end-user markets as well as a
free, advertising supported Web-based service to registered users. It also
supplies e-commerce-based online publishing services to publishers and other
content creators who wish to offer their content for sale over the Web
directly to customers. The Company's educational customers include libraries,
schools and other educational institutions, its end-user customers are
individuals and its e-commerce based online publishing customers include
publishers and other content creators.
The Company's largest revenue-generating service, Electric Library, was
introduced to the end-user market in the first quarter of 1996, followed
thereafter by a version designed for the educational market where it is sold to
schools, libraries and other educational institutions. Leveraging its investment
in its information system architecture, the Company continues to enhance and
extend its flagship Electric Library service, with particular emphasis on the
needs of the educational market.
In October of 1998, the Company entered the market for free, advertising
supported Internet-based content services with the launch of Company Sleuth.
Company Sleuth aggregates hard to find current events-type information on
publicly traded companies for the use of registered users to the service, and
provides those users with daily e-mail updates to new content as it becomes
available. This service produced no revenues during 1998, but has begun to
generate advertising and other associated revenues beginning in 1999.
In late 1998, the company determined that it will no longer actively
pursue new business in the arena of extranet and intranet knowledge
management services and products (previously identified as IntelliBank
services and products). The Company also has reduced efforts to market the
Business Edition of the Electric Library Business service. In addition, the
Company has reduced marketing efforts for its domestic marketing partners
(previously identified as the Reseller program) for services containing
selected Electric Library content and functionality. These changes were made
in order to reduce the Company's operating costs and to focus resources on
areas the Company believes have the greatest near-term potential. While 1999
sales comparisons to the prior years will be somewhat impacted by the Company
curtailing its direct sales efforts to the IntelliBank market, the Company
also eliminated the
28
<PAGE>
related marketing and development costs. The Company also reduced its headcount
and certain other operating costs, primarily as part of this focus.
During 1998, sales growth was achieved in both the educational and
end-user markets for Electric Library, with increases in the number of schools
and libraries served and the number of individual subscribers. Revenues
increased as well in the Company's online publishing division, with an increase
in the number of publishers who contracted with the Company to host and maintain
their online archives. New sales bookings and revenues also increased for the
Company's other lines of business, including some of which the Company has
chosen to withdraw for 1999.
Revenue from educational institutions is recognized ratably over the term
of the contract. During 1998, in response to market trends a greater percentage
of the Company's licenses were site licenses rather than concurrent user
licenses. The Company anticipates closing more district and state contracts,
which have a higher price per contract. The Company offers discounts in certain
circumstances, including high-volume purchases and site licenses associated with
district and state contracts. Revenues from online monthly end-user
subscriptions are recognized in the month the subscription service is provided,
and for annual end-user subscriptions, revenues are recognized ratably over the
term of the subscription. 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. Revenue from
contracts for online publishing hosting services are recognized ratably over the
term of the contract. Revenue from implementation or integration services
associated with online publishing agreements are recognized upon customer
acceptance.
Content providers are compensated from a royalty pool which is funded in
accordance with applicable contract provisions. "See Business -- Content and
Publisher Relationships."
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, but may not be able to further
significantly decrease expenses. Additionally, 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, which provides for the
Company's online service to be marketed within AOL, may not generate adequate
revenues to cover the remaining 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 -- We
Are a Relatively New Company," "Business -- Risk Factors -- We May Need More
Money" and "Business -- Risk Factors -- We are Dependent on Third Party Sites
and Services."
Results of Operations
Revenues. Revenue was $14.9 million in 1998, $6.8 million in 1997 and $1.4
million in 1996, representing an increase of 118% in 1998 and more than 370%
increase in 1997. An amount of $500,000 was included in revenues for 1997, which
was received in 1995 as consideration for limited exclusivity contained in a
marketing agreement. During 1997 this amount was recognized as the period of
exclusivity ended, and the Company had no further obligation under the marketing
agreement. This amount is excluded for period to period comparisons, and
comparison of expenses as a percentage of revenues.
Educational revenue accounted for $7.0 million or 47% of revenue in 1998,
$2.1 million or 31% of revenue in 1997 and $144,000 or 10% of revenue in 1996.
The Company had over 3,200 educational contracts at December 31, 1998, compared
with 1,400 educational contracts at December 31, 1997 and
29
<PAGE>
160 at December 31, 1996. The 3,200 contracts cover approximately 10,500
institutions.
End-user revenue accounted for $4.7 million or 31% of revenue in 1998,
$3.8 million or 55% of revenue in 1997, $1.0 million or 71% of revenue in 1996.
Electric Library had approximately 60,000 subscribers at December 31, 1998 as
compared to 47,000 subscribers at December 31, 1997 and 10,500 subscribers at
December 31, 1996.
Content management and custom archive services (referred to as
e-commerce online publishing in 1999) revenue was $857,000 or 5% of revenue
in 1998, compared to $580,000, or 9% in 1997, and $272,000, or 19% in 1996.
Content management and custom archive services revenue was generated from
primarily archive services while in 1996, the revenue was generated from a
technology license. The Company had 9 archive customers at December 31, 1998
compared to 5 in 1997 and 2 in 1996.
Extranet and intranet knowledge management services (Intellibank)
revenue was $1.7 million, or 12% of revenue in 1998, compared to $357,000, or
5% of revenue in 1997. There was no Intellibank revenue in 1996. While 1999
sales comparisons to the prior years will be somewhat impacted by the Company
curtailing its direct sales efforts to the IntelliBank market, the Company
has also eliminated the related marketing and development costs.
Other revenue was $700,000, or 5% of revenue in 1998. The comparable
revenue amounts in 1997 were less than $100,000. Other revenue consists of sales
of the Electric Library through international partners and through partners in
the US. During 1998, the Company signed agreements with companies to sell
Electric Library to end users in Canada, Australia and Korea. The services in
Canada and Australia began during 1998. These agreements provide for the Company
to earn minimum guaranteed revenues over the term of the agreement. These
minimum revenues are being earned ratably over the term of each agreement.
As of December 31, 1998, deferred revenue amounted to $8.3 million. This
is an increase of $4.3 million over a balance of $4.0 million at December 31,
1997. This increase is attributable to increased customer commitments. The
deferred revenue balance of $8.3 million includes revenue to be recognized from
institutional contracts, annual end-user subscriptions and contracted archive
services. Deferred revenue at December 31, 1998 consists of $7.0 million related
to educational subscriptions, $826,000 from end-user subscriptions and $512,000
from international agreements.
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, communication costs associated with the delivery of the online
services, as well as performance based bounties paid to Web sites to obtain
trials. Cost of revenues was $4.4 million, $2.6 million and $823,000, and
gross margins were 71%, 61% and 43%, in 1998, 1997 and 1996, respectively.
The absolute dollar increase in cost of revenue for each period primarily
reflects costs incurred to provide services to an increased number of users.
The improvement in gross margin as a percentage of revenues in 1998 was
primarily due to a change in the revenue mix, with 78% of revenues derived
from Internet services in 1998, compared to 87% in 1997. Revenue from
Internet services have royalty costs as well as bounties, compared to a
higher gross margin on content management, custom archive, and knowledge
management contracts. The improvement in the gross margin was also from the
effect of the prior years restructuring of certain agreements with hardware,
software and content providers, as well as the Company spreading its fixed
costs over more contracts.
Customer Support. Customer support expenses consist primarily of costs
associated with the
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<PAGE>
staffing of professionals responsible for assisting users with technical and
product issues and monitoring customer feedback, and centralized support for all
billing-related inquiries. Customer support expenses were $1,093,000 in 1998,
$578,000 in 1997 and $324,000 in 1996, representing an increase of 89% in 1998
and 78% in 1997. As a percentage of revenue, customer support expenses were 7%
in 1998, 9% in 1997 and 22% in 1996. 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. As a percentage of
revenues, customer support costs declined in 1998 as the staffing levels were
able to support a greater number of users. The Company anticipates continuing to
make increasing customer support expenditures as the 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. Technical
operations and development expenses were $7.6 million in 1998, $6.3 million in
1997 and $5.2 million in 1996, representing an increase of 21% in 1998 and 20%
in 1997. 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 Company did not incur any material costs to launch of its new
product, Company Sleuth.
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.
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 $14.8
million in 1998, $10.7 million in 1997 and $6.1 million in 1996, representing an
increase of 39% in 1998 and 74% in 1997. The principal reasons for the increase
in absolute dollars was 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, such as the agreement
with AOL in 1998. As a percentage of sales, sales and marketing costs were 99%,
156% and 426% of revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. The decrease of costs as a percentage of sales is a result of the
Company's cost reduction efforts, lower costs associated with renewals, and the
effect of earlier period efforts to build up the sales force achieving results
in 1998. The Company opened and closed a sales office in California during 1998.
While the number of sales people increased during the year, the headcount was
lowered by the end of 1998. The Company does not anticipate significantly
increasing its sales force during 1999.
General and Administrative. General and administrative expenses consist
primarily of expenses for content, administration, office operations, finance
and general management activities, including legal, accounting and other
professional fees. General and administrative expenses were $4.6 million in
1998, $5.0 million in 1997 and $3.9 million in 1996, representing a decrease of
8% in 1998 and an increase of 28% in 1997. The increase in 1997 and the
subsequent decrease in 1998 were the result of costs associated with the
staffing and costs incurred with the Electric Schoolhouse project in 1997, which
were
31
<PAGE>
in excess of the severance costs recognized in 1998 when the project was spun
off to the former chairman of the board who resigned in February 1998. (See Note
8 of Notes to Consolidated Financial Statements for agreement with Marvin
Weinberger.) The Company does not anticipate that general and administrative
expenses will increase significantly.
Interest Income, net. Interest income, net was approximately $154,000 in
1998, $1.0 million in 1997 and $1.2 million in 1996, a decrease of 85% in 1998
and 16% in 1997, resulting 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 $139,000 and $40,000 in 1998 and 1997,
respectively, 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, 1998,
the Company had approximately $49.6 million in Federal net operating loss
carryforwards. The federal net operating losses will expire beginning in 2008
through 2018 if not utilized. The state net operating losses of $4 million will
expire beginning in 2005 if not utilized. See Note 5 of Notes to Consolidated
Financial Statements. 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
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. For the remainder of 1999, the
Company believes it will be able to fund its operations through existing cash
and cash generated through operations. There can be no assurance, however,
that the Company will meet its planned budget will not have a shortfall in
cash collections, or will meet projected expenditures, any of which could
require the Company to sell additional debt or equity securities, or seek
other financing.
The Company had cash, cash equivalents and investment balances of
approximately $3.3 million at December 31, 1998 and $13.0 million at December
31, 1997. The Company had a working capital deficiency of approximately
$5,561,000 at December 31, 1998. This working capital deficiency includes a
deferred revenue amount of approximately $7.8 million. The Company raised an
additional $3.0 million in July 1998 through a convertible preferred stock
offering and another $3.0 million in February 1999 through convertible debt, to
supplement its working capital. Previously it has been disclosed that the
Company has an option to secure an additional $2.0 million in equity capital
from the same investor but this option was canceled in February 1999. See Note
10 to the Consolidated Financial Statements.
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 to date equity 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 that other sources of liquidity would
be available or available on terms acceptable to the
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<PAGE>
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. There can be no assurance, however, that the Company will be
successful in such efforts or that additional funds will be available on
acceptable terms, if at all. In the event the Company does not meet its expected
cash flows and the efforts to raise financing are unsuccessful, this could have
a material adverse effect on the Company.
The Company used cash in operations of approximately $11.7 million, $12.7
million and $14.0 million for 1998, 1997 and 1996, respectively. The decrease in
1998 is due to increased cash collections from customers. In 1997, the increase
in use of cash in operations was due primarily to the Company's operating
losses.
Net cash provided by investing activities was $9.8 million in 1998
compared to cash used in investing activities of $1.7 million in 1997 and
$12.7 million in 1996. The increase in cash provided in 1998 is directly a
result of investments maturing during the year which were used in
operations. The Company used $853,000 for capital expenditures in 1998. In
1997, net cash was provided by the net redemption of $620,000 of investments
and $2.3 million was used for capital expenditures. In 1996, the net use of
cash was primarily made for the purchase of $11.3 short-term investments and
$1.4 million for capital expenditures.
The Company's principal commitments at December 31, 1998 consisted of
commitments under royalty license and other agreements (including AOL), 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. 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 $223,000 at execution of the amendment. The
Company's revised payment terms require monthly payments of $223,000 March 1999
through July 1999, and $500,000 due in August 1999, $500,000 in September 1999,
and $500,000 due in February 2000. 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. See "Business -- Recent Developments" and
"Business -- Risk Factors -- We are Dependent on Third Party Sites and
Services."
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, 1998, 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 less than $500,000 for
1999, a portion of which the Company will try to finance through equipment
leases, although there can be no guarantee the Company will obtain lease
financing. The Company does not
33
<PAGE>
anticipate that any Year 2000 issues will require any significant expenditures.
Net cash provided by financing activities was $2.8 million in 1998,
$653,000 in 1997, and $41.7 million in 1996. The Company raised $3.0 million on
July 22, 1998 in a private placement of 3,000 shares of Preferred Stock. See
Note 6 to the Consolidated Financial Statements. In February 1999, the Company
raised an additional $3 million through the issuance of convertible debt. 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.
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 the computer hardware and software systems used by the Company's
customers who use the Company's products and services ("Products"). The Company
currently anticipates that its Year 2000 review 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 review by the second quarter of 1999.
The Company has completed a preliminary assessment of all current versions of
its Products and believes they are Year 2000 compliant. 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 of such financial and accounting software on its
IT Systems and Products. 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 estimated total
cost of the Year 2000 review is less than
34
<PAGE>
$250,000. Most of its expenses have related to the opportunity cost of time
spent by employees of the Company evaluating prior and current versions of the
Products, and Year 2000 compliance matters generally. At this time, 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 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 review 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 review assumes that the percentage of non-compliant
code will be consistent with general software industry practices, and as such,
the timing to address this percentage of code is the basis for the Company's
estimated completion of its Year 2000 review by the second quarter of 1999. 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 review.
The Company anticipates having all critical systems Year 2000 compliant no later
than the second quarter of 1999 and has not yet developed a contingency plan. If
Year 2000 compliance issues are discovered, the Company then will evaluate the
need for contingency plans relating to such issues.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position No. 98-I (SOP 98-1), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides, among other things, guidance for determining whether computer
software is for internal use and when the cost related to such software
should be expensed as incurred or capitalized and amortized. SOP 98-1 is
required to be applied prospectively and adopted no later than January 1,
1999. The Company does not expect the adoption of SOP 98-1 to have a material
effect on its results of operations, financial position or cash flows.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS No. 130 requires unrealized gains or losses
on the Company's foreign currency translation adjustments to be included in
other comprehensive income. The Company has not had foreign currency
translation adjustments to date.
Seasonality
The Company experiences certain elements of seasonality related to the annual
school terms. A significant number of schools align their payments and
subscription start dates for the September and October 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 slower
when schools are not in session, primarily during the summer months.
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 and the
filing of a Form S-3 for such shares. In addition, under the February 1998
agreement, Electric Schoolhouse, LLC shall repay the Company for certain
expenses and costs. The Company is attempting to finalize a revised repayment
schedule with Electric Schoolhouse, LLC for the collection of these amounts,
repayment for which was originally due on September 30, 1998 under the
February 1998 agreement and remains outstanding. The Company has agreed in
substance to net the amounts due to and due from Electric Schoolhouse, LLC,
leaving approximately $171,000 to be repaid to the Company. See Note 8 of
Notes to Consolidated Financial Statements.
35
<PAGE>
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.
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.
36
<PAGE>
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
The Company filed a report on Form 8-K on October 19, 1998 attaching
its press release of that date announcing its third quarter financial results
and its appeal to Nasdaq regarding the possible delisting of its shares of
Class A Common Stock from the Nasdaq National Market System. The Company
filed no other reports on Form 8-K during the quarter ended December 31, 1998.
(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.
Exhibit No. Description
- ----------- -----------
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)
10.5** Employment Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua
37
<PAGE>
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"))
10.9** 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)
10.13** 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)
10.15** 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,
38
<PAGE>
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
10.23*** Interactive Marketing Agreement dated as of March 10, 1998 between
Infonautics Corporation and America Online, Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Report on Form 10-Q for
the quarterly period ended March 31, 1998)
10.24 Electric Schoolhouse Agreement dated as of February 12, 1998
between Infonautics, Inc. and Marvin I. Weinberger (incorporated by
reference to Exhibit 10.2 to the Company's Report on Form 10-Q for
the quarterly period ended March 31, 1998)
10.25 Amendment to Software License Agreement dated as of January 31,
1998 between Infonautics Corporation and Excalibur Technologies
Corporation (incorporated by reference to Exhibit 10.3 to the
Company's Report on Form 10-Q for the quarterly period ended March
31, 1998)
21* Subsidiaries
23* Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney (included as part of the signature page hereof)
27.1* Financial Data Schedule
- ----------
* 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 Gerard J Lewis, Jr.
Vice President, General Counsel and Assistant Secretary, Infonautics, Inc., 900
West Valley Road, Suite 1000, Wayne, Pennsylvania 19087.
39
<PAGE>
INFONAUTICS, INC.
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1996, 1997 and 1998
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.
<PAGE>
INFONAUTICS, INC.
Index To Consolidated Financial Statements
and Financial Statement Schedule
Pages
-----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7-F-22
Schedule II - Valuation and Qualifying Accounts, for the years
ended December 31, 1996, 1997 and 1998 F-23
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:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Infonautics, Inc. and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These 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 of
these statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 12, 1999
F-2
<PAGE>
INFONAUTICS, INC.
Consolidated Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,301,933 $ 3,267,811
Short-term investments 10,095,504 --
Receivables:
Trade, less allowance for doubtful accounts of $32,566 in 1997
and $65,740 in 1998 1,742,070 2,934,597
Other 154,397 305,121
Prepaid royalties 290,214 397,849
Prepaid expenses and other assets 508,913 446,492
------------ ------------
Total current assets 15,093,031 7,351,870
Property and equipment, net 3,019,908 2,572,617
Long-term investments 600,000 --
Other assets 80,729 267,885
------------ ------------
Total assets $ 18,793,668 $ 10,192,372
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of obligations under capital lease $ 297,538 $ 356,898
Accounts payable 1,275,500 1,929,598
Accrued expenses 1,642,421 1,484,934
Accrued royalties 674,723 1,334,669
Deferred revenue 4,039,752 7,807,016
------------ ------------
Total current liabilities 7,929,934 12,913,115
Noncurrent portion of obligations under capital lease 404,107 47,209
Noncurrent portion of deferred revenue -- 530,256
------------ ------------
Total liabilities 8,334,041 13,490,580
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, no par value, 5,000 shares
authorized, 283 shares issued and outstanding at
December 31, 1998 -- 258,483
Class A common stock, no par value; 25,000,000 shares authorized;
one vote per share; 9,391,627 and 11,522,692 shares issued and
outstanding at December 31, 1997 and 1998, respectively -- --
Class B common stock, no par value; 100,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 53,360,221 56,666,439
Deferred compensation (250,000) (125,000)
Accumulated deficit (42,650,594) (60,098,130)
------------ ------------
Total shareholders' equity (deficit) 10,459,627 (3,298,208)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 18,793,668 $ 10,192,372
============ ============
</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, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ 1,441,651 $ 6,831,731 $ 14,924,567
------------ ------------ ------------
Cost and expenses:
Cost of revenues 822,745 2,641,198 4,384,362
Customer support expenses 323,898 578,212 1,093,212
Technical operations and development expenses 5,209,975 6,271,514 7,605,669
Sales and marketing expenses 6,141,962 10,674,468 14,834,567
General and administrative expenses 3,926,853 5,029,100 4,608,715
------------ ------------ ------------
Total costs and expenses 16,425,433 25,194,492 32,526,525
------------ ------------ ------------
Loss from operations (14,983,782) (18,362,761) (17,601,958)
Interest and other income 1,197,562 1,044,204 293,919
Interest expense -- (40,481) (139,497)
------------ ------------ ------------
Net loss $(13,786,220) $(17,359,038) $(17,447,536)
============ ============ ============
Loss per common share - basic and diluted $ (1.61) $ (1.83) $ (1.77)
============ ============ ============
Weighted average shares outstanding - basic and
diluted 8,549,800 9,491,600 9,830,900
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE>
INFONAUTICS, INC.
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------------------------------- -----------------------
Class A Class B
---------------------- -------------------
Shares Par Value Shares Par Value Shares Amount
---------- --------- ------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,935,748 -- 100,000 -- -- --
Sale of stock 3,451,086 -- -- -- -- --
Deferred compensation -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Notes collected -- -- -- -- -- --
Other 2,523 -- -- -- -- --
Net loss for the year -- -- -- -- -- --
---------- --------- ------- --------- -------- -----------
Balance at December 31, 1996 9,389,357 -- 100,000 -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Other 2,270 -- -- -- -- --
Net loss for the year -- -- -- -- -- --
---------- --------- ------- --------- -------- -----------
Balance at December 31, 1997 9,391,627 -- 100,000 -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Exercise of employee stock options 103,287 -- -- -- -- --
Issuance of stock to former CEO 125,000 -- -- -- -- --
Sale of preferred stock -- -- -- -- 3,000 $ 2,950,139
Warrants issued in connection with preferred stock -- -- -- -- -- (261,000)
Accretion of preferred stock -- -- -- -- -- 48,493
Conversion of preferred stock 1,902,778 -- -- -- (2,717) (2,479,149)
Net loss for the year -- -- -- -- -- --
---------- --------- ------- --------- -------- -----------
Balance at December 31, 1998 11,522,692 -- 100,000 -- 283 $ 258,483
========== ========= ======= ========= ======== ===========
<CAPTION>
Notes and Total
Additional Stock Shareholders'
Paid-In Accumulated Subscriptions Deferred Equity
Capital Deficit Receivable Compensation (Deficit)
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 11,313,997 $(11,505,336) $ (357,478) -- $ (548,817)
Sale of stock 41,526,095 -- -- -- 41,526,095
Deferred compensation 500,000 -- -- $ (500,000) --
Amortization of deferred compensation -- -- -- 125,000 125,000
Notes collected -- -- 357,478 -- 357,478
Other 14,253 -- -- -- 14,253
Net loss for the year -- (13,786,220) -- -- (13,786,220)
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1996 53,354,345 (25,291,556) -- (375,000) 27,687,789
Amortization of deferred compensation -- -- -- 125,000 125,000
Other 5,876 -- -- -- 5,876
Net loss for the year -- (17,359,038) -- -- (17,359,038)
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1997 53,360,221 (42,650,594) -- (250,000) 10,459,627
Amortization of deferred compensation -- -- -- 125,000 125,000
Exercise of employee stock options 216,037 -- -- -- 216,037
Issuance of stock to former CEO 398,525 -- -- -- 398,525
Sale of preferred stock -- -- -- -- 2,950,139
Warrants issued in connection with preferred stock 261,000 -- -- -- --
Accretion of preferred stock (48,493) -- -- -- --
Conversion of preferred stock 2,479,149 -- -- -- --
Net loss for the year -- (17,447,536) -- -- (17,447,536)
------------ ------------ ------------- ------------ ------------
Balance at December 31, 1998 $ 56,666,439 $(60,098,130) -- $ (125,000) $ (3,298,208)
============ ============ ============= ============ ============
</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, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,786,220) $(17,359,038) $(17,447,536)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 487,780 1,096,353 1,499,837
Provision for losses on accounts receivable 48,799 86,181 33,174
Amortization of deferred compensation 125,000 125,000 125,000
Severance and related costs -- -- 398,525
Changes in operating assets and liabilities:
Receivables:
Trade (296,963) (385,024) (542,656)
Other 187,594 (35,356) (125,724)
Prepaid and other assets (462,278) (168,733) (232,370)
Accounts payable 443,452 (19,384) 454,098
Accrued expenses (1,091,064) 1,322,940 (157,487)
Accrued royalties 90,812 450,284 659,946
Deferred revenue 296,129 2,173,905 3,614,374
------------ ------------ ------------
Net cash used in operating activities (13,956,959) (12,712,872) (11,720,819)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,372,825) (2,321,326) (852,445)
Purchases of short-term investments (11,546,956) (22,086,548) (7,789,936)
Purchases of long-term investments -- (600,000) --
Proceeds from maturity of short-term and long-term
investments 232,000 23,306,000 18,485,440
------------ ------------ ------------
Net cash used in investing activities (12,687,781) (1,701,874) 9,843,059
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and
warrant 42,027,826 5,876 --
Proceeds from exercise of stock options -- -- 216,037
Net proceeds from issuance of preferred stock and
warrants, net -- -- 2,950,139
Proceeds from sale - leaseback of equipment -- 766,504 --
Payments on capital lease obligations -- (64,860) (297,538)
Payments under note payable - funding agreement (232,437) -- --
Loans to officer and employees (48,500) (55,000) (25,000)
------------ ------------ ------------
Net cash provided by financing activities 41,746,889 652,520 2,843,638
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,102,149 (13,762,226) 965,878
Cash and cash equivalents, beginning of period 962,010 16,064,159 2,301,933
------------ ------------ ------------
Cash and cash equivalents, end of period $ 16,064,159 $ 2,301,933 $ 3,267,811
============ ============ ============
Supplemental disclosure of cash flow information and
noncash investing and financing activities:
Cash paid for interest expense $ 58,916 $ 27,378 $ 120,865
Noncash items:
Equipment capital leases -- $ 766,504 --
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
Notes to Consolidated Financial Statements, Continued
INFONAUTICS, INC.
Notes to Consolidated Financial Statements
1. The Company:
Infonautics, Inc. (the "Company" or "Infonautics") is an Internet
information company that serves the needs of selected markets. The Company
provides premium, subscription-based online information services to the
educational and end-user markets, through the Company's online service,
Electric Library, as well as a free, advertising supported Web-based
service to registered users, through the Company's online service, Company
Sleuth. Electric Library is marketed to educational institutions (schools
and libraries and other educational institutions) and to its end-user
customers (individuals). The Company's e-commerce online publishing
services, formerly referred to as content management and custom archive
services, make use of the Company's technology, systems-operations and
customer-care functions to provide e-commerce archive services to
publishers who wish to make their content available on the Internet. The
Company operates as a single segment throughout North America.
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.
The Company prepares its financial statements on the accrual basis of
accounting. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the financial statements
during the year ended December 31, 1998, the Company incurred a loss of
$17,447,536 and has an accumulated deficit of $60,098,130 and cash balance
of $3,267,811. The Company has raised approximately $3.0 million from the
issuance of convertible debt with detachable warrants since December 31,
1998 (See Note 11), and has retained the services of an investment bank to
act as its financial advisor to explore strategic alternatives.
F-7
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
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, 1998,
the Company has restricted cash of approximately $250,000. 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).
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.
Property and Equipment:
Property and equipment are stated at cost. 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.
Maintenance and repairs are expensed as incurred. When the property or
equipment is retired or otherwise disposed of, related costs and
accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in operations.
The Company reviews assets for impairment whenever events or changes in
circumstances indicate the carrying value of the asset may not be
recoverable. A determination of impairment (if any) is made based on
estimates of undiscounted future cash flows. For the years ended December
31, 1997 and 1998 there have been no asset impairments.
F-8
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
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
$2,374,997, $2,450,904, and $1,172,637, respectively, for the years ended
December 31, 1996, 1997 and 1998.
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.
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.
F-9
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
Revenue Recognition:
Revenue from educational institutions is recognized ratably over the term
of the contract. Revenues from online monthly end-user subscriptions are
recognized in the month the subscription service is provided, and for
annual end-user subscriptions, revenues are recognized ratably over the
term of the subscription. Those subscriptions sold through remarketers are
recognized net of the related fees. 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.
Revenue from contracts for online publishing hosting services are
recognized ratably over the term of the contract. Revenue from the
implementation or integration services associated with online publishing
agreements is recognized upon customer acceptance. 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, 1998, included in accounts receivable and deferred revenue
was approximately $1.8 million representing that portion of subscription
revenue from 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 is 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-10
<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, corporations,
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.
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.
Basic and Diluted EPS:
The Company calculates 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 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.
F-11
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
Recent Accounting Pronouncements:
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1 (SOP 98-1), "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
SOP 98-1 provides, among other things, guidance for determining whether
computer software is for internal use and when the cost related to such
software should be expensed as incurred or capitalized and amortized. SOP
98-1 is required to be applied prospectively and adopted no later than
January 1, 1999. The Company does not expect the adoption of SOP 98-1 to
have a material effect on its results of operations, financial position or
cash flows.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display
of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on the Company's foreign currency translation
adjustments to be included in other comprehensive income. The Company has
not had foreign currency translation adjustments to date.
3. Investments:
The estimated fair value of investments, which approximate cost, are as
follows at December 31, 1997:
Available for sale:
Commercial paper $ 3,981,661
Corporate bonds 6,713,843
-----------
Total available for sale $10,695,504
===========
The Company had no investments at December 31, 1998.
F-12
<PAGE>
Notes to Consolidated Financial Statements, Continued
4. Property and Equipment:
Property and equipment consists of the following at December 31, 1997 and
1998:
1997 1998
---- ----
Property and equipment:
Computer equipment $ 1,883,237 $ 2,160,453
Office equipment 790,724 1,302,867
Furniture and fixtures 760,905 896,523
Leasehold improvements 336,806 459,625
Purchased software 229,049 233,799
Capital leases:
Equipment 766,504 766,504
----------- -----------
4,767,225 5,819,771
Less accumulated depreciation and amortization:
Property and equipment (1,656,691) (2,794,026)
Capital leases (90,626) (453,128)
----------- -----------
Property and equipment, net $ 3,019,908 $ 2,572,617
=========== ===========
Depreciation expense was approximately $529,000 in 1996, $1,005,700 in
1997, and $1,137,300 in 1998. Amortization expense was approximately
$91,000 in 1997 and $362,500 in 1998.
5. Income Taxes:
The significant components of deferred tax assets at December 31, 1997 and
1998 are as follows:
1997 1998
---- ----
Federal tax loss carryforward $ 12,450,000 $ 16,878,000
State tax loss carryforward 132,000 264,000
Accrual to cash basis difference 1,929,000 3,657,000
Research and experimentation credit 710,000 1,120,000
------------ ------------
15,221,000 21,919,000
Less: valuation allowance (15,221,000) (21,919,000)
------------ ------------
-- --
============ ============
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-13
<PAGE>
Notes to Consolidated Financial Statements, Continued
5. Income Taxes:
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $49,641,000 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, $13,005,000 expiring in 2012 and $12,754,000
expiring in 2018, if not utilized. The net operating loss carryforward for
state tax purposes is $4,000,000, of which $1,000,000 expires in 2005,
$1,000,000 expires in 2006, $1,000,000 expires in 2007 and $1,000,000
expires in 2008. 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
$1,120,000, with $96,000 expiring in 2009, $72,000 expiring in 2010,
$168,000 expiring in 2011, $374,000 expiring in 2012 and $410,000 expiring
in 2018. 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):
A 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. Each Class B Common Stock has 50
votes per share.
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 initial public offering in April 1996, 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.
Preferred Stock:
The Company has authorized 1,250,000 shares of no par value preferred
stock of which 5,000 shares have been designated as Series A Convertible
Preferred Stock. At December 31, 1998, 283 shares of Series A Convertible
Preferred Stock were outstanding.
On July 22, 1998, the Company issued 3,000 shares of Series A Convertible
Preferred Stock and warrants to purchase 200,000 shares of Common Stock,
for $1,000 per share, resulting in net proceeds of $2,950,139, net of
expenses of $49,861. The warrants issued in connection with the Series A
Convertible Preferred Stock were valued at $261,000.
F-14
<PAGE>
Notes to Consolidated Financial Statements, Continued
6. Shareholders' Equity (Deficit), continued:
Preferred Stock, continued:
The Series A Convertible Preferred Stock has no voting rights and is
convertible into the number of shares of the Company's Common Stock equal
to the stated value of $1,000 per share plus a premium of 5% per annum
calculated commencing on the date of issuance of the Series A Convertible
Preferred Stock divided by the conversion price calculated in accordance
with the terms of the agreement.
The exercise price of the warrants issued at the initial closing is equal
to $5.15 per share for half of the warrants, and for the other half, 130%
of the average closing bid price of the Company's Common Stock during
specified periods. All of the warrants have a five year term.
In November 1998, the holder of the Series A Convertible Preferred Stock
exercised its conversion rights for 2,717 shares of the preferred stock
outstanding, and received 1,902,778 shares of Class A Common Stock. This
conversion increased additional paid in capital by $2,479,149. On February
11, 1999, the Company repurchased 283 shares of Series A Convertible
Preferred Stock which were previously 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.
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. In 1998, the board of
directors approved an increase in the number of authorized shares for
issuance under the 1996 Plan from 1,000,000 to 1,500,000 shares of Class A
Common Stock.
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, 1997 and 1998.
F-15
<PAGE>
Notes to Consolidated Financial Statements, Continued
6. Shareholders' Equity (Deficit), continued:
Stock Options, continued:
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.
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:
1996 1997 1998
---- ---- ----
Net loss As reported $(13,786,000) $(17,359,000) $(17,448,000)
Pro forma (14,954,000) (18,564,000) (18,649,000)
Loss per share As reported (1.61) (1.83) (1.77)
Pro forma (1.75) (1.96) (1.89)
Such pro forma disclosures may not be representative of future
compensation expense because options vest over several years and
additional grants are made each year.
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 1996, 1997 and 1998,
respectively: expected volatility of 75% percent; risk-free interest rates
of 6.71 percent, 6.48 percent, and 5.23 percent; and expected lives of 5
years.
F-16
<PAGE>
Notes to Consolidated Financial Statements, Continued
6. Shareholders' Equity (Deficit), continued:
Stock Options, continued:
A summary of the Company's stock options plans are presented below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------ ------------------------
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 739,850 $ 3.08 1,331,730 $ 7.20 1,730,330 $ 5.77
Granted 721,030 11.05 536,600 2.00 485,600 2.76
Exercised (1,413) 2.22 (5,150) 2.62 (103,287) 2.36
Expired/canceled (127,737) 8.25 (132,850) 3.59 (446,630) 4.59
---------- ---------- ----------
Outstanding at
end of year 1,331,730 7.20 1,730,330 5.77 1,666,013 4.34
========== ========== =========
Weighted-average
fair value of
options
granted
during year $ 7.42 $ 1.31 $ 1.77
</TABLE>
The following table summarizes information about the stock options
outstanding as of December 31, 1998:
<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, 1998 Life Price 31, 1998 Price
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$1.375 - $2.625 725,588 2.82 1.63 320,003 1.23
$3.000 - $4.938 621,925 3.33 3.48 274,700 3.66
$6.000 - $7.094 47,300 2.49 6.54 10,450 6.46
$11.500 - $14.000 271,200 2.21 13.16 67,800 13.16
----------- -----------
1,666,013 672,953
=========== ===========
</TABLE>
F-17
<PAGE>
Notes to Consolidated Financial Statements, Continued
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, 1998.
8. Related Party Transactions:
The Company entered into, and subsequently amended, consulting agreements
with two of its directors and shareholders during 1994 through 1998.
Consulting expense of $74,000, $72,000 and $64,000 was recognized under
these agreements, in each of the years ended December 31, 1996, 1997, and
1998, respectively.
In 1997, the Company loaned $25,000 and $30,000 to two officers bearing
interest rates of 5.78% and 6.23%, due in March 1999 and August 1999,
respectively. As of December 31, 1998, no payments had been received on
these balances. As part of a December 1998 termination agreement with a
former vice president of the Company, the $30,000 balance due was netted
against the severance payment due such officer, and accrued interest of
$2,959 on the loan was forgiven. The severance, net of the loan, was
subsequently paid to the former vice president of the Company on January
5, 1999. The remaining outstanding loan of $25,000 is included in other
receivables.
In February 1998, the Company entered into an agreement with 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 that is pursuing the Company's Electric Schoolhouse project.
Pursuant to the terms of the agreement, the Company transferred 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 has received an equity interest in
the new company. The cost basis of this investment is zero at December 31,
1998. The Company also has entered 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 terminated upon the issuance by the Company to him of 125,000
shares of Class A Common Stock, one option was cancelled and he was
granted a new option at the same exercise price with an extended
termination, and another option was amended to accelerate the vesting of
such option. The Company recognized severance and related expenses of
approximately $500,000 in 1998.
The Company has agreed to net the amounts due to and due from this newly
formed company. An amount of $339,000 is due from the former Chairman's
company, arising from the agreement discussed above and $193,000 is owed
to the newly formed company as a result of severance costs agreed to upon
resignation of the former Chairman and Chief Executive Officer. At
December 31, 1998, $146,000 is included in other receivables for the net
amount.
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
9. Commitments and Contingencies:
Letters of Credit:
The Company had outstanding irrevocable letters of credit in the amount of
$291,000 at December 31, 1998. These letters of credit, which expire on
January 1, 1999, October 16, 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 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, aggregating up to 29% of the
applicable revenue. Certain content providers are compensated on a
flat-fee basis. Certain agreements with content providers provide for
minimum fees or guaranteed payments.
During 1998, an 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 a 12.5% royalty payment for Intellibank
customer revenue and 1.5% royalty on subscription revenues.
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.
F-19
<PAGE>
Notes to Consolidated Financial Statements, Continued
9. Commitments and Contingencies, continued:
Other Agreements, continued:
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, which
amounted to $437,579 through December 31, 1998 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. In 1998, an
agreement with one of the officers was terminated. The remaining agreement
provides for payment equal to 0.15% of the Company's net income.
Marketing Agreement:
The Company entered into a marketing agreement in March 1998, in which the
Company has agreed to pay $4.0 million in placement fees, with $1,200,000
paid in 1998. In 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 March 1999 through July 1999, and $500,000 due in
August 1999, November 1999, and February 2000. Included in accrued
expenses is $133,333 as of December 31, 1998. The fees are being amortized
on a straight-line basis since the launch of the service in May 1998, over
the term of the two year agreement, with $1,333,333 expensed during 1998.
The Company received $500,000 as consideration for limited exclusivity
contained in a marketing agreement with a software company. A director of
the Company was 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 in 1997.
Leases:
During 1997, 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 a lessor, and leased back the equipment. No gain or loss was
recognized.
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 and the leases are collateralized by
substantially all the Company's property and equipment and receivables.
Leased equipment is included in property and equipment (see Note 4).
F-20
<PAGE>
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 2003. Future
minimum payments as of December 31, 1998, by year and in the aggregate,
under these noncancelable capital leases and operating leases for each
fiscal year ended December 31 are as follows:
Capital Operating
Leases Leases
-------- ----------
1999 $407,846 $1,853,983
2000 49,644 871,158
2001 -- 313,016
2002 -- 149,791
2003 -- 8,917
Thereafter -- --
-------- ----------
Total minimum lease payments 457,490 $3,196,865
==========
Amount representing interest 53,383
------
Present value of net minimum payments 404,107
Current portion 356,898
--------
Long-term portion $ 47,209
========
Total rent expenses for all operating leases amounted to $669,000 in 1996,
$1,549,000 in 1997, and $2,802,000 in 1998, respectively.
10. Statements of Cash Flows:
At December 31, 1998, included in accounts receivable and deferred revenue
was approximately $1.8 million representing that portion of subscription
revenue from agreements which have been billed, but not yet
received or recognized as income.
Additional paid in capital of $398,525 was recorded as of December 31,
1998 for the issuance of 125,000 shares of Class A Common Stock and the
acceleration of vesting of 50,000 options to purchase Common Stock,
respectively, pursuant to the agreement with the Company's former Chairman
and CEO described in Note 8.
Additional paid in capital of $261,000 was recorded as of December 31,
1998 related to the valuation of warrants issued in connection with a
private placement of Series A Convertible Preferred Stock with a stated
value of $1,000 per share (see Note 6). The Company recorded accretion of
$48,000 on the Series A Convertible Preferred Stock.
F-21
<PAGE>
Notes to Consolidated Financial Statements, Continued
11. Subsequent Events:
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.
The debentures bear interest at a rate of 7% and mature in August 2000.
The debentures are convertible 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.
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 warrants will be valued and accounted for as an
additional discount to the debt.
F-22
<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
1998 $15,221,000 $6,698,000 - - $21,919,000
1997 8,905,000 6,316,000 - - 15,221,000
1996 4,292,000 4,613,000 - - 8,905,000
Allowance for doubtful accounts
1998 $ 32,566 $ 33,174 - - $ 65,740
1997 31,590 86,181 - $ 85,205 32,566
1996 - 48,799 - 17,209 31,590
</TABLE>
F-23
<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, 1999 By: /s/ David Van Riper Morris
---------------------------
David Van Riper Morris
President and Chief Executive 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 David Van Riper Morris 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.
Name Capacity Date
- ---- -------- ----
/s/ David Van Riper Morris Principal Executive Officer March 30, 1999
- ------------------------------
David Van Riper Morris
/s/ Federica F. O'Brien Principal Financial and March 30, 1999
- ------------------------------ Accounting Officer
Federica F. O'Brien
/s/ Israel J. Melman Director March 30, 1999
- ------------------------------
Israel J. Melman
/s/Howard L. Morgan Director March 30, 1999
- ------------------------------
Howard L. Morgan
/s/Lloyd N. Morrisett Director March 30, 1999
- ------------------------------
Lloyd N. Morrisett
40
<PAGE>
/s/Barry Rubenstein Director March 30, 1999
- ------------------------------
Barry Rubenstein
/s/Marvin I. Weinberger Director March 30, 1999
- ------------------------------
Marvin I. Weinberger
/s/Lester Wunderman Director March 30, 1999
- ------------------------------
Lester Wunderman
/s/Brian Segal Director March 30, 1999
- ------------------------------
Brian Segal
41
<PAGE>
EXHIBIT C
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
--------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 0-28284
INFONAUTICS, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
------------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 West Valley Road, Suite 1000, Wayne, Pa 19087
--------------------------------------------------
(Address of principal executive offices)
(610) 971-8840
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
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
1
<PAGE>
INFONAUTICS, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
PART I: FINANCIAL INFORMATION
<S> <C>
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>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(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
-------------- -------------
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
-------------- -------------
Total assets................................................. $ 11,966,318 $ 10,192,372
-------------- -------------
-------------- -------------
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
-------------- -------------
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 --
-------------- -------------
Total liabilities............................................ 19,367,154 13,490,580
-------------- -------------
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)
-------------- ------------
Total shareholders' equity (deficit) ........................ (7,400,836) (3,298,208)
-------------- ------------
Total liabilities and shareholders' equity (deficit) ........ $ 11,966,318 $ 10,192,372
-------------- -------------
-------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
3
<PAGE>
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
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
------------- ------------- ------------- -----------
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
------------- ------------- ------------- ------------
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) --
------------- ------------- ------------- ------------
Net loss attributable to common shareholders................ $(2,359,993) $ (4,774,656) $ (5,245,009) $(9,446,671)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Loss per common share- basic and diluted.................... $ (.20) $ (0.50) $ (.45) $ (0.99)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Weighted average shares
outstanding- basic and diluted......................... 11,666,700 9,634,000 11,664,700 9,564,000
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
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
------------- -------------
Net cash used in operating activities............... (5,623,922) (8,841,091)
------------- -------------
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
------------- -------------
Net cash provided by (used in) investing activities. (236,017) 8,136,089
------------- -------------
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)
------------- -------------
Net cash provided by (used in) financing activities. 4,168,711 (120,203)
------------- -------------
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
------------- -------------
Cash and cash equivalents, end of period........................ $ 1,576,583 $ 1,476,728
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited consolidated financial statements of Infonautics, Inc.
(together with its subsidiaries, the "Company") presented herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission for quarterly reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
financial statements for the year ended December 31, 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
6
<PAGE>
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.
7
<PAGE>
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.
8
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
This Report contains, in addition to historical information,
forward-looking statements by the Company with regard to its expectations as
to financial results and other aspects of its business that involve risks and
uncertainties and may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "may," "should," "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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[LETTERHEAD] EXHIBIT D
July 8, 1999
Board of Directors
Infonautics, Inc.
900 West Valley Road, Suite 1000
Wayne, PA 19087-1830
Gentlemen:
We understand that Infonautics, Inc., Infonautics Corporation
(collectively, "Infonautics"), Bell & Howell Company, Bell & Howell Information
& Learning Company (collectively, "Bell & Howell") and EDCO, Inc. ("EDCO") are
considering entering into a Master Transaction Agreement with terms
substantially as set forth in the draft dated July 8, 1999 (the "Transaction
Agreement") proposing to effect a transaction as described in the Transaction
Agreement and related documentation (the "Transaction").
Pursuant to an engagement letter dated December 30, 1998, you have
asked us to render our opinion as to the fairness of the Transaction from a
financial point of view to the shareholders of Infonautics. In connection with
such engagement, Allen & Company Incorporated ("Allen") will receive a fee upon
consummation of the Transaction.
Allen, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, formations of joint ventures, private placements and related
financings, bankruptcy reorganizations and similar recapitalizations, negotiated
underwritings, secondary distributions of listed and unlisted securities, and
valuations for corporate and other purposes. From time to time in the ordinary
course of its business as a broker-dealer, Allen may also hold positions and
trade in securities of Infonautics, Inc.
Our opinion as expressed herein reflects and gives effect to
information concerning Infonautics which we acquired during the course of this
assignment, including information provided by senior management in the course of
a number of discussions. We have not, however, conducted an independent
appraisal of Infonautics' assets, or independently verified the information
concerning Infonautics' operations or other data which we have considered in our
review, and for the purpose of expressing our opinion set forth herein, we have
assumed that all such information is accurate, complete and current. To the
extent we have been provided with budgetary or forecast information that may be
forward looking, we have assumed that all such information has been prepared by
management of Infonautics based upon good faith judgements as to future
performance and best available information.
<PAGE>
Board of Directors
Infonautics, Inc.
Page 2
In arriving at our conclusion, we have considered, among other factors
we deemed relevant, (i) the terms of the draft Transaction Agreement and related
documentation (which prior to the delivery of this opinion has not been executed
by the parties); (ii) the nature of the operations and financial history of
Infonautics, including discussions with senior management of Infonautics of the
business and prospects of Infonautics relating to, among other things,
Infonautics' operating budget and financial outlook; (iii) the nature of the
operations and financial history of the online information services business of
Bell & Howell Information & Learning Company serving the K-12 and small public
library marketplace, ("BHIL K-12", referred to in the Transaction Agreement as
the "BHIL Contributed Business"), including discussions with senior management
of Bell & Howell of the business and prospects of BHIL K-12 relating to, among
other things, BHIL K-12's operating budget and financial outlook; (iv)
Infonautics' filings with the Securities and Exchange Commission, including
audited and unaudited financial statements for Infonautics; (v) the Board's
familiarity with the regulatory implications of the Transaction; (vi) the
historical trading information for the common stock of Infonautics; (vii)
certain financial and stock market information for certain other companies in
businesses related to those of Infonautics; and (viii) certain financial
information relating to certain merger and acquisition transactions involving
companies in businesses related to those of Infonautics. In addition to our
review and analyses of the specific information set forth above, our opinion
herein reflects and gives effect to our assessment of general economic,
monetary, market and industry conditions existing as of the date hereof as they
may affect the business and prospects of Infonautics.
It is understood that this letter is for the information of the Board
of Directors of Infonautics and may not be used for any other purpose without
our prior written consent, except that this opinion may be included in its
entirety in any filing made by Infonautics with the Securities and Exchange
Commission with respect to the Transaction.
The opinion rendered herein does not constitute a recommendation to the
Board or to shareholders of Infonautics as to whether to vote in favor of the
Transaction.
Based upon and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be received by Infonautics in connection
with the Transaction is fair from a financial point of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By:/s/Kim Wieland
-------------------------
Managing Director
[LOGO]
<PAGE>
INFONAUTICS, INC.
900 West Valley Road, Suite 1000
Wayne, Pennsylvania 19087
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
This Proxy is Solicited by the Board of Directors of Infonautics for the Special
Meeting of Shareholders to be held on November 29, 1999, at 10:00 a.m. Local
Time, at the Philadelphia Marriott West, Matson Ford at Front Street, 111
Crawford Avenue, West Conshohocken, PA 19428.
The undersigned hereby appoints David Van Riper Morris and Gerard J. Lewis, Jr.,
and each of them, proxies, with the powers the undersigned would possess if
personally present, and with full power of substitution, to vote all common
shares held of record by the undersigned in Infonautics, Inc., upon all subjects
that may properly come before the meeting, including the matters described in
the proxy statement furnished herewith, subject to any directions indicated on
the reverse side of this card. IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE
IN ACCORD WITH THE DIRECTORS' RECOMMENDATIONS ON THE SUBJECTS LISTED ON THE
REVERSE SIDE OF THIS CARD AND AT THEIR DISCRETION ON ANY OTHER MATTER THAT MAY
PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
IF YOU DO NOT SIGN AND RETURN A PROXY, OR ATTEND THE MEETING AND VOTE BY BALLOT,
YOUR SHARES CANNOT BE VOTED, NOR YOUR INSTRUCTIONS FOLLOWED.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
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DETACH PROXY CARD HERE
<PAGE>
Directors recommend a vote "FOR":
1. Approval of the proposal described in the accompanying Proxy Statement
providing for:
(i) the contribution to BHW/INFO/EDCO.COM LLC, a new company
formed by Infonautics and Bell & Howell Information and
Learning Company ("BHIL"), of the assets and liabilities of
Infonautics that relate exclusively to the sales, marketing
and distribution of its Electric Library service to schools
and public libraries (but not including certain assets and
liabilities that relate to the sales, marketing and
distribution of the Electric Library service directly to
end-users);
(ii) the sale to BHIL of the assets and liabilities of Infonautics
that relate exclusively to Infonautics' online publishing
business; and
(iii) the grant by Infonautics to BHIL of an option to purchase the
assets and liabilities of Infonautics that relate to the
sales, marketing and distribution of Infonautics' Electric
Library service directly to end-users and the sale of those
assets if BHIL exercises the option; and
FOR / / AGAINST / / ABSTAIN / /
2. Adoption and approval of an amendment to Infonautics' Amended and
Restated 1996 Equity Compensation Plan increasing the authorized shares
thereunder to 2,500,000; and
FOR / / AGAINST / / ABSTAIN / /
3. To transact such other business as may properly come before the Special
Meeting or any adjournments thereof.
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Please sign exactly as name or names appear on
this proxy. If stock is held jointly, each
holder should sign. If signing as attorney,
trustee, executor, administrator, custodian,
guardian or corporate officer, please give full
title.
DATE ______________________________, 1999
SIGNATURE
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SIGNATURE
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Votes must be indicated (x) in Black
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DETACH PROXY CARD HERE
