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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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.
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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.
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PART I
Item 1. BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements by the Company with regard to its
expectations as to financial results and other aspects of its business that
involve risks and uncertainties and may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "may," "should," "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions are intended to identify
forward-looking statements. These include statements regarding 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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<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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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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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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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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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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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>
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<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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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
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<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
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<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
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<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>
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 INDEX
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 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)
<PAGE>
10.16 Agreement of Termination and Assignment dated October 30, 1992
between Telebase Systems, Inc. and Marvin Weinberger and Lawrence
Husick and Bill of Sale dated April 19, 1993 between Infonautics,
Inc. and Marvin Weinberger (incorporated by reference to Exhibit
10.15 to the Form S-1 Registration Statement)
10.17 Agreement dated March 24, 1993 between Infonautics, Inc. and
Lawrence Husick (incorporated by reference to Exhibit 10.16 to the
Form S-1 Registration Statement)
10.18 Amended and Restated Registration Rights Agreement dated as of
February 7, 1996 by and among Infonautics, Inc. and Zero Stage
Capital II-Central Pennsylvania, L.P., Keystone Venture IV, L.P.,
21st Century Communications Partners, L.P., 21st Century
Communication Foreign Partners, L.P. and 21st Century
Communications T-E Partners, L.P. and other individuals and
entities listed on Exhibit A thereto (incorporated by reference to
Exhibit 10.17 to the Form S-1 Registration Statement)
10.19 Amended and Restated Piggyback Registration Rights Agreement dated
as of February 7, 1996 by and among Infonautics, Inc. and 21st
Century Communications Partners, L.P., 21st Century Communication
Foreign Partners, L.P. and 21st Century Communications T-E
Partners, L.P., VIMAC & Co. Nominee Trust and Meridian Venture
Partners and the other individuals and entities listed on Exhibit A
thereto (incorporated by reference to Exhibit 10.18 to the Form S-1
Registration Statement)
10.20 Registration Rights Agreement dated as of February 8, 1996 by and
among Infonautics, Inc. and the persons whose signatures appear on
the counterpart signature pages thereto (incorporated by reference
to Exhibit 10.19 to the Form S-1 Registration Statement)
10.21*** Software License Agreement dated June 27, 1994 between Infonautics,
Inc. and Conquest Software Corp. (succeeded by Excalibur
Technologies Corporation) (incorporated by reference to Exhibit
10.21 to the Form S-1 Registration Statement)
10.22* Agreement of Lease dated June 14, 1994, as amended January 27,
1995, June 30, 1995 and November 13, 1995 (each incorporated by
reference to Exhibit 10.24 to the Form S-1 Registration Statement),
April 18, 1996 and May 22, 1996 (each incorporated by reference to
Exhibit 10.25 to the 1996 Form 10-K), April 14, 1997 (incorporated
by reference to Exhibit 10.1 to the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1997), September 19, 1997
(incorporated by reference to Exhibit 10.1 to the Company's Report
on Form 10-Q for the quarterly period ended September 30, 1997) and
November 17, 1997* between Infonautics, Inc. and West Valley
Business Trust
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
<PAGE>
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.
<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>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State or Jurisdiction
Name of Subsidiary of Incorporation
- ------------------ ---------------------
Infonautics Corporation Pennsylvania
Infoprop, Inc. Delaware
Infoloans, Inc. Delaware
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Infonautics, Inc. on Form S-3 (File No. 333-61199), Form S-8
(File No. 333-61181), Form S-8 (File No. 333-37545) and Form S-8 (File No.
333-12279) of our report dated February 12, 1999, on our audits of the
consolidated financial statements and financial statement schedule of the
Company as of December 31, 1998 and December 31, 1997, and for each of the
three years in the period ended December 31, 1998, which report is included
in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,267,811
<SECURITIES> 0
<RECEIVABLES> 3,000,337
<ALLOWANCES> 65,740
<INVENTORY> 0
<CURRENT-ASSETS> 7,351,870
<PP&E> 5,819,771
<DEPRECIATION> 3,247,154
<TOTAL-ASSETS> 10,192,372
<CURRENT-LIABILITIES> 12,913,115
<BONDS> 0
0
258,483
<COMMON> 0
<OTHER-SE> (3,556,691)
<TOTAL-LIABILITY-AND-EQUITY> 10,192,372
<SALES> 14,924,567
<TOTAL-REVENUES> 14,924,567
<CGS> 4,384,362
<TOTAL-COSTS> 32,526,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,497
<INCOME-PRETAX> (17,447,536)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,447,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,447,536)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
</TABLE>
