<PAGE>
Rule 424(b)(1)
Registration No. 333-75343
1,561,051 SHARES
INFONAUTICS, INC.
CLASS A COMMON STOCK
-------------------
RGC International Investors is offering for sale all 1,561,051 shares of
our common stock under this prospectus.
The common stock is listed on the Nasdaq SmallCap Market under the
symbol "INFO." On June 10, 1999, the last reported sale price of the common
stock on the Nasdaq SmallCap Market was $5.375 a share.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF RISKS TO CONSIDER
BEFORE PURCHASING OUR COMMON STOCK.
-------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful of complete. Any representation to the contrary is a
criminal offense.
-------------------
The date of this prospectus is June 10, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Infonautics................................................................. 2
Incorporation of Documents by Reference..................................... 3
Risk Factors................................................................ 3
Disclosure Regarding Forward-Looking Statements............................. 15
Use of Proceeds............................................................. 15
Selling Shareholder......................................................... 15
Plan of Distribution........................................................ 17
Legal Opinion............................................................... 18
Experts..................................................................... 18
Where You Can Find More Information......................................... 19
</TABLE>
INFONAUTICS
OVERVIEW
We are an Internet information company that provides content-rich
research and reference services to schools, libraries, individuals and
businesses. Our 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.
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 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 filings and
news reports.
Our e-commerce online publishing services, formerly referred to as
content management and custom archive services, make use of our 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.
We were incorporated in November 1992 and our principal executive
offices are at 900 West Valley Road, Suite 1000, Wayne, Pennsylvania 19087.
2
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
We refer you to the following documents which we filed with the SEC and
incorporate by reference into this prospectus:
(a) Our annual report on Form 10-K for the fiscal year ended
December 31, 1998.
(b) Our quarterly report on Form 10-Q for the period ended
March 31, 1999.
(c) Our current report on Form 8-K dated June 1, 1999.
(d) The description of our common stock, no par value, set forth
in our registration statement on Form 8-A filed on April 23,
1996, including any amendment or report filed for the purpose
of updating this description.
We also incorporate by reference all reports and documents filed by us
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act
while this registration statement is effective. Any statement contained or
incorporated is superseded by any subsequently filed document that constitutes a
part of this prospectus.
Upon request, we will provide to you a copy of any or all documents
which were incorporated into this prospectus by reference. You should direct
written or oral requests for copies to Robert Wright, Manager, Investor
Relations, Infonautics, Inc., 900 West Valley Road, Suite 1000, Wayne,
Pennsylvania 19087 (telephone number (610) 971-8840).
RISK FACTORS
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE
OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES WHICH COULD DECREASE THE
VALUE OF YOUR SHARES.
We can not assure you that we will ever be profitable. If we are not
profitable, the value of your shares may decrease. Since our founding in 1992,
we have had 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 anticipate that we will continue to incur substantial
operating losses for the foreseeable future.
3
<PAGE>
WE HAVE A LIMITED OPERATING HISTORY WHICH OFFERS LITTLE INFORMATION TO
EVALUATE US AND OUR LONG TERM PROSPECTS.
If we do not successfully address the risks and difficulties that
companies like ours with little operating history encounter, then our business
may not grow and our revenues may decline. Our success depends upon our ability
to address those risks successfully, which include, among other things:
- whether we can continue to expand marketing and distribution for
our services to support an increasing customer base;
- whether we can retain and attract talented employees, to support
and market our existing services and develop and market new
services, and management to execute our strategy, and;
- whether we can respond quickly and effectively to competitive and
technological changes.
AS WE OPERATE IN A NEW AND DEVELOPING MARKET OF PROVIDING ELECTRONIC
INFORMATION, THE MARKET FOR OUR PRODUCTS AND SERVICES MAY NOT GROW FAST ENOUGH
AND OUR PROFITABILITY WILL BE IMPAIRED.
We depend on revenues derived from our services such as Electric Library
and we may not receive these revenues if we do not continue to develop a market
for these products with educational institutions and individual consumers.
Specifically, we currently derive revenues from our fee based products, which
includes Electric Library and our e-commerce online publishing services. Our
Electric Library customers include schools and libraries in the education market
in the United States and our e-commerce online publishing services including
publishers and content creators. We may not receive revenues from our fee based
products if we do not continue to develop a market for these products with
educational institutions, individual consumer and publishers. We also have
launched services which are free to the user. Our free services, which include
Company Sleuth, are intended to be advertising supported. Our ability to earn
significant revenues from our free services will depend in part on their
acceptance by a substantial number of subscribers in order to attract
advertising revenues. Furthermore, if we develop these markets slower than
expected, our
4
<PAGE>
financial growth and profitability will be impaired.
WE MAY NEED ADDITIONAL FINANCING, THE TERMS OF WHICH COULD INCREASE OUR INTEREST
EXPENSE OR DILUTE YOUR SHAREHOLDINGS.
If we need to obtain additional financing, it could increase our
interest expense or dilute your shareholdings. If additional financing is
unavailable when we need it, our ability to operate will be impaired. At
March 31, 1999, we had $3,143,000 in cash and $4,956,000 in working capital
deficit. We anticipate that we will have enough cash and cash generated by
operations and utilization of an accounts receivable purchase line 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, but this may
result in possibly significant dilution to existing shareholders. If we raise
additional funds through a debt financing, we will incur interest charges and
will likely become subject to restrictions on our operations and finances.
5
<PAGE>
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE BY THE CONVERSION OF OUR OUTSTANDING
DEBENTURE AND EXERCISE OF OUR OUTSTANDING WARRANTS.
Your holdings may be diluted in the future by conversion of our
debenture or the exercise of outstanding warrants. As of June 2, 1999,
$3,000,000 principal amount of a debenture was outstanding. The debenture is
convertible into shares of common stock at a conversion price equal to $4.13.
This conversion price does not fluctuate with the market price of the common
stock but is subject to adjustment from time to time in the event that, among
other things, we issue shares of common stock, options, warrants or other
convertible securities at less than market price. If fully converted on June 2,
1999, the debenture would be convertible into 726,392 shares of common stock,
but this number of shares could prove to be substantially greater in the event
that the conversion price is adjusted as described above. In addition, as of
June 2, 1999, the following warrants were outstanding:
- a warrant to purchase 522,449 shares of common stock issued to the
purchaser of the debenture at an exercise price of $5.97; this
conversion price does not fluctuate with the market price of the
common stock but is subject to adjustment from time to time
pursuant to antidilution provisions similar to those described
above; and
- two warrants to purchase 100,000 shares each of common stock at
exercise prices of $5.15 and $6.25 respectively.
Purchasers of common stock could therefore experience possibly substantial
dilution of their investment upon conversion of the debenture and exercise of
warrants. The shares of common stock into which the debenture may be converted
and the warrant to purchase 522,449 shares of common stock may be exercised are
being registered pursuant to this registration statement.
In addition, although the selling shareholder is subject to a
contractual restriction which prevents it from converting its holdings into more
than 4.99% of our outstanding common stock, this restriction does not prevent
the selling shareholder from converting and selling some of its holdings and
then converting the rest of its holdings. In this way, the selling shareholder
could sell more 4.99% of our outstanding common stock while never holding 4.99%
at a time.
IF WE FAIL TO MEET THE LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET, WE
MAY UNABLE TO SUSTAIN A TRADING MARKET FOR OUR STOCK WHICH WOULD AFFECT THE
LIQUIDITY OF YOUR SHARES.
If we do not continue to meet Nasdaq's listing requirements, 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. Effective January 5,
1999, our stock is traded on the Nasdaq SmallCap Market. We must maintain one of
three financial standards to stay listed on the Nasdaq SmallCap Market. The only
one of these financial standards we currently meet is the market capitalization
requirement. If, however, our stock price falls below $3 a share and there is no
change in the number of shares outstanding, we may no longer meet this
requirement and may be
6
<PAGE>
unable to maintain our listing on the Nasdaq SmallCap Market. Since January 1,
1998, our stock price has varied from a high close of $8.81 to a low close of
$1.25 per share.
THE COMPETITION WE FACE FROM THE OTHER PROVIDERS OF ELECTRONIC INFORMATION IS
INTENSE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AND BE SUCCESSFUL IN
ATTRACTING AND RETAINING CUSTOMERS.
Competition in our business of providing electronic information is
intense. We may not be successful in attracting and retaining customers which
would cause revenues to decline.
There are many entities, EBSCO, Information Access Company, UMI,
Encyclopaedia Britannica, Microsoft's Encarta Online Library and Northern Light,
for example, both public and private, some 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:
- responding more quickly to new or emerging technologies;
- responding more rapidly to changes in customer requirements;
- devoting greater resources to the development, promotion and sale
of their products or services than us; and
- 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.
WE ARE DEPENDENT ON THIRD PARTY SITES AND SERVICES WHICH MAY NOT GENERATE THE
ANTICIPATED NUMBER OF NEW CUSTOMERS EVEN THOUGH WE MUST MAKE SUBSTANTIAL
PAYMENTS UNDER SOME OF OUR AGREEMENTS WITH THESE THIRD PARTIES.
We are dependent on third party sites and services, including our
Interactive Marketing Agreement with America Online, Inc. and our Wired Digital,
Inc. agreement (for the HotBot search engine), which may not generate the
anticipated number of new customers even though we must make substantial
payments under some of these agreements. We have entered into these 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. One or more
of these agreements may not generate enough revenue to cover the associated
costs, and a significant shortfall could affect our ability to make the required
payments under these agreements. Additionally,
7
<PAGE>
one or more of these agreements may not be renewed. If they are not renewed,
this could reduce our acquisition rate for new subscribers.
In March 1998, we entered into a third party marketing agreement with
American Online, commonly known as AOL, which is our principal third party
marketing agreement. This is a multi-year, multi-million dollar marketing
agreement pursuant to which we must pay $4 million to AOL for placement fees.
In March 1999, the agreement was amended to revise the placement fee payment
schedule. Pursuant to the terms of the initial agreement, we were required to
pay AOL $500,000 on a quarterly basis commencing in November 1998. The March
1999 amendment revised the payment schedule to provide that $223,333 be paid in
March 1999 upon execution of the amendment, monthly payments of $223,333
beginning in April 1999 and ending in July 1999 and $500,000 due in August 1999,
November 1999 and February 2000. AOL agreed to this amendment to help us meet
our payment obligations under the agreement. If we do not meet the payment
schedule under the agreement, AOL has the right to terminate this agreement
after a 15-day cure period.
AS WE ARE DEPENDENT ON OUR CONTENT PROVIDERS, WE ARE VULNERABLE TO INCREASED
CONTENT COSTS AND THE LOSS OF CONTENT ON OUR SERVICES.
If we are unable to maintain reasonable royalty payment terms with our
content providers, we may be unable to provide our services in a cost efficient
manner. 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 are required to increase the fees payable to our content
providers, we may be unable to provide our services in a cost efficient manner.
We have relationships with content providers that are fundamental to our
goal of becoming a leading online reference service. These agreements contain
limits on the use of the content, including, in some cases, limits in
distribution channels or in geographic locations. In addition, either party
generally may terminate these agreement upon:
- breach of any material obligation, if the breach remains uncured
within a specified number of days after written notice; or
- a bankruptcy, insolvency or similar filing, if the filing is not
withdrawn within a specified number of days.
Finally, the content providers may unilaterally terminate some of the agreements
in the case of our failure to make certain minimum payments and other similar
breaches.
IF WE ARE UNABLE TO LICENSE ADDITIONAL CONTENT ON A COST-EFFECTIVE BASIS, WE MAY
BE UNABLE TO RETAIN OUR CURRENT CUSTOMERS AND ATTRACT NEW CUSTOMERS.
8
<PAGE>
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
which could impact customer satisfaction with our service. 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. If we are unable to license content
at a reasonable cost, our ability to deliver an affordable service could be
impaired which could cause us to lose current customers or attract new
customers.
IF WE ARE UNABLE TO RETAIN ACCESS TO FREE OR LOW COST WEB-BASED CONTENT, THEN
OUR ABILITY TO PROVIDE OUR FREE SERVICES IN A COST EFFICIENT MANNER WILL BE
IMPAIRED.
If we are not able to continue to access and provide Web-based
content like we have been, our ability to provide low cost or free services
will be impaired. 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, our
ability to deliver the Company Sleuth service and other Company Sleuth-type
services for free will be impaired. We 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 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 UNABLE TO RETAIN OUR CUSTOMERS AFTER THEIR SUBSCRIPTION PERIOD HAS
ENDED OR MAINTAIN THE PRICE OF OUR SERVICES, OUR REVENUES MAY DECLINE.
If our retention and renewal rates or pricing decreases significantly,
our revenues may decline. 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.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS WHICH WOULD CAUSE
INTERRUPTIONS IN THE SERVICES WE PROVIDE TO OUR CUSTOMERS AND ULTIMATELY CAUSE
US TO LOSE CUSTOMERS.
9
<PAGE>
Any delay or failure to the systems we use to deliver our services to
customers would interfere with our customers' ability to access our online
service. 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. We are also dependent on the
ability to maintain our systems in effective working order and to protect it
against damage from:
- fire;
- natural disaster;
- power loss;
- telecommunications failure; or
- 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:
- loss of or delay in market acceptance and sales;
- diversion of development resources;
- injury to our reputation; or
- increased service and support costs.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY RESULT IN A FAILURE TO MEET
ANALYSTS' AND INVESTORS' EXPECTATIONS, CAUSING OUR SHARE PRICE TO DECLINE OR
FLUCTUATE WIDELY.
Our share price may decline or fluctuate widely as a result of
fluctuations in our quarterly operating results and the corresponding failure to
meet analysts' and investors' expectations.
We expect to experience significant fluctuations in future quarterly
operating results that may be caused by:
- introduction or enhancement of services and products by us and our
competitors;
- market acceptance of new services, such as Company Sleuth;
- the mix of distribution channels through which services are sold;
- seasonality of the online services and the educational markets we
market to; and
- general economic conditions.
As a result, we believe that comparing our quarterly results will not
necessarily be informative and is not an indication of future performance.
10
<PAGE>
IF WE FAIL TO PROTECT OUR PROPRIETARY RIGHTS OR IF WE INFRINGE ON THE
PROPRIETARY RIGHTS OF OTHERS, WE COULD LOSE OUR INTELLECTUAL PROPERTY RIGHTS OR
BE LIABLE FOR SIGNIFICANT DAMAGES.
Our efforts to establish and protect our proprietary rights may be
inadequate to prevent misappropriation or infringement of our proprietary
property. 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 third party technology and software.
There is a risk that the remaining licensees will take actions that materially
adversely affect the value of our proprietary rights or reputation.
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. 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.
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
of our services. As policing the unauthorized use of our technology and
proprietary rights is often difficult and expensive anywhere in the world, we
can not be sure our proprietary rights will be honored.
RAPID TECHNOLOGY CHANGE MAY RENDER OUR SERVICES NONCOMPETITIVE OR OBSOLETE.
If we are not able to successfully respond to the rapid technological
change of the Internet, we may not be able to compete effectively. 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:
- inadequate development of the necessary infrastructure (i.e., a
reliable network backbone);
- delayed development of complementary products and technologies
(i.e., high speed modems and security procedures for financial
transactions); and
- delays in the development or adoption of new standards and
protocols (i.e., the next-generation Internet protocol).
11
<PAGE>
The introduction of new technologies and the emergence of new industry
standards and practices 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:
- the latest technologies and technological development;
- changing customer requirements; and
- frequent new product introductions.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, WHO WE MAY BE UNABLE TO RETAIN, AND
OUR ABILITY TO RECRUIT ENOUGH QUALIFIED PERSONNEL TO MEET OUR HIRING NEEDS.
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 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 and manage growth
effectively.
WE ARE DEPENDENT ON EXCALIBUR TECHNOLOGIES CORPORATION FOR THE BASIC SEARCH
SOFTWARE WE USE. IF WE ARE UNABLE TO MAINTAIN THIS RELATIONSHIP OR ENTER INTO
ANOTHER RELATIONSHIP ON SIMILAR TERMS, THEN OUR ABILITY TO PROVIDE SERVICES TO
OUR CUSTOMERS WILL SUFFER.
If we are unable to find replacement suppliers that could offer us
comparable software on similar terms, we may be unable to provide services to
our customers. 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
earlier 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 time frame if Excalibur became
unable to adequately supply the software to us.
WE MAY BE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES WHICH MAY BE
COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS.
U.S. GOVERNMENT REGULATION
If we become subject to claims that we have violated U.S. or foreign
laws, we may have to spend a significant amount of time and money defending
these claims. Moreover, new laws may be enacted that impose restrictions on
our ability to follow current business practices or increase our costs of
doing business. Laws and regulations directly applicable to online commerce
or Internet communications are becoming more prevalent. These laws and
regulations could expose us to substantial liability.
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
12
<PAGE>
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:
- user privacy;
- pricing;
- taxation; and
- 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.
UNLIMITED TERRITORIAL NATURE OF THE INTERNET
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:
- intellectual property ownership;
- defamation;
- personal privacy;
- obscenity; and
- 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:
- copyright or trademark infringement;
- defamation;
- negligence; or
- theories based on the nature and content of the materials we made
available.
POTENTIAL INADEQUACY OF INSURANCE
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
cover any breach of these representations. We still may not receive accurate
representations or adequate compensation for any breach of such
representations. We may have to pay a substantial amount of money for claims
which are not covered by indemnification.
OUR COMPUTER SYSTEMS AND THOSE OF OUR KEY SUPPLIERS AND SERVICE PROVIDERS MAY
NOT BE YEAR 2000 COMPLIANT WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS OF
OUR OPERATIONS.
13
<PAGE>
Our service may be disrupted because of Year 2000 issues. The Year 2000
issue 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
which may materially adversely affect us. 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.
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. However, 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
revenues may decrease 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.
IF WE ARE NOT ABLE TO LOCALIZE OR MARKET OUR SERVICES FOR THE INTERNATIONAL
MARKET, OUR ABILITY TO RETAIN AND ATTRACT CUSTOMERS WILL BE IMPAIRED.
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
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 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:
- compliance with regulatory requirements;
- export restrictions;
- export controls relating to technology, tariffs and other trade
barriers;
- protection of intellectual property rights;
- difficulties in staffing and managing international operations;
- longer payment cycles;
- problems in collecting accounts receivable;
- political instability;
- fluctuations in currency exchange rates; and
- potentially adverse tax consequences.
OUR STOCK PRICE MAY VARY SIGNIFICANTLY WHICH MAY MAKE IT DIFFICULT TO RESELL
YOUR SHARES WHEN YOU WANT TO AT PRICES YOU FIND ATTRACTIVE.
If our stock price continues to vary significantly, the price of our
common stock may decrease in the future regardless of our operating performance.
Additionally, you may be unable to resell your shares of common stock following
periods of volatility because of the market's adverse reaction to this
volatility. There may be several factors contributing to this behavior,
including:
14
<PAGE>
- actual or anticipated variations in quarterly operating results;
- announcements of new technologies or new services by us or our
competitors;
- changes in financial estimates and recommendations by securities
analysts;
- the operating and stock price performance of other companies that
investors may view as comparable to us; and
- news relating to trends in our markets.
The stock market in general, and the market for Internet-related
companies, including ours, 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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains, or has incorporated
by reference, forward-looking statements within the meaning of the federal
securities laws. Forward-looking statements typically are identified by use of
terms such as "may," "will," "expect," "anticipate," "estimate" and similar
words, although some forward-looking statements are expressed differently. You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including changes in technology and customer demand for our product and
increases in competition. You should also consider carefully the statements
under "Risk Factors" which address additional factors that could cause our
actual results to differ from those set forth in the forward-looking statements.
Given these uncertainties, current or prospective investors are cautioned not to
place undue reliance on any such forward-looking statements. We disclaim any
obligation or intent to update any such factors or forward-looking statement to
reflect future events or developments.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by
RGC International and are paying all expenses in connection with this
registration statement. We are registering these shares of common stock held by
RGC International to fulfill our contractual obligations to RGC International.
Some of the shares of common stock are issuable in the future on the exercise of
the outstanding warrant. We will receive the exercise price paid by RGC
International on the exercise of the outstanding warrant.
SELLING SHAREHOLDER
Based on information provided to us by RGC International Investors, the
table below sets forth information with respect to the common stock beneficially
owned by RGC International as of the date of this prospectus. As RGC
International can offer all, some or none of its shares of common stock, no
definitive estimate can be made as to the number of shares RGC International
will hold after this offering. Therefore, we have prepared the table below on
the assumption that all shares offered under this prospectus will be sold by RGC
International. To our knowledge, RGC International has sole voting and
investment power over the shares of common stock listed in the table below. In
addition, to our knowledge, RGC International has not had a material
relationship with us during the last three years, other than as an owner of our
common stock or other securities.
<TABLE>
<CAPTION>
Beneficial Ownership Number of Shares Beneficial Ownership
of Common Stock to be Sold Under of Common Stock
Prior to the Offering This Prospectus After Offering
--------------------- ---------------- --------------------
<S> <C> <C>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Number Percent Number Percent
Name of Shares of Class of Shares of Class
---- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
RGC International 1,561,051 11.9 1,561,051 0 0
Investors
</TABLE>
RGC International is a party to an investment management agreement
with Rose Glen Capital Management, L.P., a limited partnership of which the
general partner is RGC General Partner Corp. Messrs. Wayne Bloch, Gary
Kaminsky and Steven Katznelson own all of the outstanding capital stock of
RGC General Partner Corp. and are parties to a shareholders agreement
pursuant to which they collectively control RGC General Partner Corp. Through
RGC General Partner Corp., these individuals control Rose Glen Capital
Management, L.P. These individuals disclaim beneficial ownership of our
common stock owned by RGC International that consists of an estimated 907,990
shares issuable upon conversion of the debenture and an estimated 653,061
shares issuable upon exercise of the warrant which is 1.25 times the number
of shares which are currently issuable upon conversion of the debenture and
exercise of the warrant. This number is a good faith estimate of the maximum
number of shares we may issue upon conversion of the debenture and exercise
of the warrant. The debenture and the warrant contain provisions which limit
the number of shares of common stock into which the debenture is convertible
and the warrant is exercisable. Under these provisions, the number of shares
of common stock into which the debenture is convertible and the warrant is
exercisable on any given date (together with any additional shares of common
stock held by RGC International) will not exceed 4.99% of our then
outstanding common stock. RGC International could, however, sell more than
4.99% of our then outstanding common stock by first converting and selling
some of its holdings and then converting and selling more of its holdings for
a total in excess of 4.99% of our then outstanding common stock.
We issued a 7% convertible debenture that is convertible into 726,392
shares of our common stock based on a fixed conversion price of $4.13 a share
and a warrant which gives RGC International the right to purchase 522,449 shares
of our common stock at an exercise price of $5.97 a share. However, the
conversion price of the debenture and the exercise price of the warrant does not
fluctuate with the market price of our common stock but may be adjusted in the
following circumstances:
- if we issue any shares of our common stock for no consideration or
for a price less than the market price on the date of issuance;
- if we issue warrants, rights or options at an exercise price that
is less than the market price on the date of issuance; or
- if we split or subdivide our common stock.
The warrant expires on February 11, 2004. The debenture, if not converted,
matures on August 11, 2000.
In connection with the issuance of the debenture and warrant, we entered
into a Security Purchase Agreement and a Registration Rights Agreement with RGC
International. Under these agreements, we:
- promised to register all 1,561,051 share of our common stock
offered by this prospectus;
- promised to use the proceeds from the sale of the debenture and
warrant for working capital and general corporate purposes;
- agreed to restrictions on our ability to obtain additional equity
financing;
- agreed to pay penalties to RGC International in the event this
registration statement is not declared effective by June 11, 1999;
- agreed to pay penalties to RGC International in the event our
common stock is delisted; and
- granted RGC International piggy-back registration rights for its
shares of our common stock in the event we fail to obtain or
maintain effectiveness of the registration statement underlying
this prospectus.
16
<PAGE>
PLAN OF DISTRIBUTION
We are registering the shares of common stock to fulfill our obligations
under an agreement with RGC International Investors. The registration of the
shares of common stock does not necessarily mean that any of the shares will be
offered or sold by RGC International under this prospectus.
RGC International and its pledgees, donees, transferees or other
successors in interest may offer its shares at various times in one or more of
the following transactions:
- a block trade in which the broker-dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
- face-to-face transactions between RGC International and purchasers
without a broker-dealer.
In effecting sales, brokers or dealers engaged by RGC International may
arrange for other brokers or dealers to participate. These brokers or dealers
may receive commissions or discounts from RGC International in amounts to be
negotiated immediately prior to the sale. These brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In addition, any
securities covered by this prospectus may also be sold under Rule 144 rather
than pursuant to this prospectus. RGC International has the sole discretion not
to accept any offer to purchase shares or make any sale of shares if it
concludes the purchase price is inadequate.
RGC International, alternatively, may sell the shares offered under this
prospectus through our underwriter. RGC International has not entered into any
agreement with a prospectus underwriter. We can not guarantee that this type of
agreement will not be entered into. If RGC International entered into this type
of agreement, we will supplement or revise this prospectus.
Upon being notified by RGC International that any material arrangement
has been entered into with a broker or dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file a supplemented prospectus, if
required, pursuant to Rule 424(c) under the Securities Act, disclosing:
- the name of each broker or dealer;
- the number of shares involved;
- the price at which the shares were sold;
- the commissions paid or discounts or concessions allowed to the
broker(s) or dealer(s), where applicable;
- that the broker(s) or dealer(s) did not conduct any investigation
to verify the information set out or incorporated by reference in
this prospectus, as supplemented; and
- other facts material to the transaction.
17
<PAGE>
RGC International and any other persons participating in the sale or
distribution of the shares of common stock will be subject to the relevant
provisions of the Exchange Act. These provisions may limit the timing of
purchases and sales of any of the shares by RGC International or any other
person.
We will indemnify RGC International, or its transferees or assignees,
against some liabilities, including liabilities under the Securities Act, or to
contribute to payments RGC International or its respective pledgees, donees,
transferees or other successors in interest, may be required to make in respect
thereof.
We are bearing all costs relating to the registration of the shares,
other than fees and expenses, if any), of counsel or other advisers to RGC
International. RGC International will pay any commissions, discounts or other
fees payable to broker-dealers in connection with any sale of the shares.
LEGAL OPINION
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania will opine as to
the legality of the common stock offered under this prospectus.
EXPERTS
The consolidated financial statements and consolidated financial
statement schedule incorporated in this registration statement by reference to
the Annual Report on Form 10-K for the year ended December 31, 1998, have been
so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
18
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the Securities and
Exchange Commission. You can read and copy these reports, proxy statements
and other information at the public reference facilities maintained by the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549;
Midwest Regional office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. You can obtain copies of such
material at the prescribed rates from the Public Reference Section of the SEC
at its principal office in Washington, D.C. You can obtain information about
the SEC's Public Reference Room at 1-800-SEC-0330. In addition, we file this
material electronically with the SEC, and the SEC maintains a website
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding companies (including us) that file electronically with the
SEC. Our common stock is listed on the Nasdaq SmallCap Market and our reports,
proxy statements and other information can also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
We have filed with the SEC a registration statement on Form S-3, with
respect to our common stock. For further information with respect to us and the
shares, we refer you to that registration statement and its exhibits. Statements
made in this prospectus regarding the contents of any contract or other
documents are not necessarily complete. You should read the actual documents
which are exhibits to the registration statement in their entirety.
19
<PAGE>
<TABLE>
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
<S> <C>
We have not authorized anyone to 1,561,051 SHARES
provide you with information that
is different from what is contained
in this prospectus. We are not
offering shares of our common
stock in any jurisdiction where
the offer is not permitted. The INFONAUTICS, INC.
information contained in this
prospectus may not be correct at
any time after its date.
---------------
CLASS A
COMMON STOCK
---------------
PROSPECTUS
---------------
June 10, 1999
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
</TABLE>
