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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 0-28284
INFONAUTICS, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 23-2707366
------------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
590 North Gulph Road, King of Prussia, Pa 19406-2800
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(Address of principal executive offices)
(610) 971-8840
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2000
----- -----------------------------
Class A Common Stock, no par value 12,124,633
Class B Common Stock, no par value 100,000
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INFONAUTICS, INC.
INDEX
Page Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
2000 (unaudited) and December 31, 1999 ....................... 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 2000 and
June 30, 1999 ................................................ 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 2000 and June 30, 1999 ............. 5
Notes to Consolidated Financial Statements ..................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................... 15
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,975,212 $ 3,739,024
Receivables:
Trade, less allowance for doubtful accounts of $11,996 in 2000
and $99,800 in 1999 750,359 637,316
Due from affiliate -- 13,500,000
Other 44,557 513,231
Prepaid expenses and other assets 206,148 267,230
------------ ------------
Total current assets 13,976,276 18,656,801
Property and equipment, net 724,700 492,438
Investments in affiliates 4,944,796 10,885,773
Intangible and other assets 222,824 26,415
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Total assets $ 19,868,596 $ 30,061,427
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 911,750 $ 916,292
Due to affiliate 1,044,581 --
Accrued expenses 610,462 2,438,515
Accrued royalties -- 75,606
Deferred revenue 804,774 858,159
Convertible debt 3,228,771 2,857,322
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Total current liabilities 6,600,338 7,145,894
Total liabilities 6,600,338 7,145,894
------------ ------------
Commitments and contingencies
Shareholders' equity :
Class A common stock, no par value; 25,000,000 shares authorized; one vote
per share; 12,124,633 and 11,757,076 shares issued and
outstanding at June 30, 2000 and December 31, 1999, respectively -- --
Class B common stock, no par value; 100,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 59,377,017 58,316,564
Accumulated deficit (46,108,759) (35,401,031)
------------ ------------
Total shareholders' equity 13,268,258 22,915,533
------------ ------------
Total liabilities and shareholders' equity $ 19,868,596 $ 30,061,427
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 3,005,707 $ 5,977,004 $ 6,046,844 $ 11,208,032
------------ ------------ ------------ ------------
Costs and expenses:
Cost of revenues 863,106 1,818,825 1,666,733 3,527,944
Customer support expenses 98,413 297,750 118,140 569,782
Technical operations and development expenses 1,584,874 1,970,296 3,014,987 4,186,859
Sales and marketing expenses 1,903,588 3,020,682 4,787,034 5,825,234
General and administrative expenses 536,532 817,572 1,239,871 1,569,146
------------ ------------ ------------ ------------
Total costs and expenses 4,986,513 7,925,125 10,826,765 15,678,965
------------ ------------ ------------ ------------
Loss from operations (1,980,806) (1,948,121) (4,779,921) (4,470,933)
Equity in net losses of unconsolidated affiliate (3,441,817) -- (5,940,977) --
Interest income (expense), net 7,797 (411,872) 13,170 (699,201)
------------ ------------ ------------ ------------
Net loss (5,414,826) (2,359,993) (10,707,728) (5,170,134)
Redemption of preferred stock in excess
of carrying amount -- -- -- (74,875)
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (5,414,826) $ (2,359,993) $(10,707,728) $ (5,245,009)
============ ============ ============ ============
Loss per common share - basic and diluted $ (.44) $ (.20) $ (.88) $ (.45)
============ ============ ============ ============
Weighted average shares
outstanding - basic and diluted 12,212,900 11,666,700 12,123,000 11,664,700
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,707,728) $ (5,170,134)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 294,587 727,968
Amortization of discount on debt 266,448 573,820
Accretion on convertible debt 105,000 80,625
Provision for losses on accounts receivable 6,000 206,213
Amortization of deferred compensation -- 62,500
Equity in investee losses 5,940,977 --
Changes in operating assets and liabilities:
Receivables:
Trade (119,043) (195,960)
Other 468,674 (43,138)
Prepaid and other assets 28,284 307,063
Accounts payable 156,115 (598,617)
Due to affiliate 1,044,581 --
Accrued expenses (342,700) (305,599)
Accrued royalties (75,606) 424,441
Deferred revenue (53,385) (1,693,104)
----------- ------------
Net cash used in operating activities (2,987,796) (5,623,922)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (500,459) (236,017)
Receipts from disposition of businesses, net 11,853,990 --
Purchase of intangibles (70,000) --
----------- ------------
Net cash provided by (used in) investing activities 11,283,531 (236,017)
----------- ------------
Cash flows from financing activities:
Proceeds from borrowings under accounts receivable
purchase agreement -- 1,790,596
Repayments of borrowings under accounts receivable
purchase agreement -- (257,496)
Net proceeds from issuance of common stock 940,453 169,792
Repurchase of preferred stock -- (333,358)
Proceeds from long term borrowings -- 3,000,000
Payments on capital lease obligations -- (200,823)
----------- ------------
Net cash provided by financing activities 940,453 4,168,711
----------- ------------
Net increase (decrease) in cash and cash equivalents 9,236,188 (1,691,228)
Cash and cash equivalents, beginning of period 3,739,024 3,267,811
----------- ------------
Cash and cash equivalents, end of period $12,975,212 $ 1,576,583
=========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited consolidated financial statements of Infonautics, Inc.
(including its subsidiaries, "Infonautics," and the "Company") presented herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission for quarterly reports on
Form 10-Q. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the financial statements for the year ended December 31, 1999
and the notes thereto included in the Company's 1999 Annual Report on Form 10-K.
The financial information in this report reflects, in the opinion of
management, all adjustments of a normal recurring nature necessary to present
fairly the results for the interim period. Quarterly operating results may not
be indicative of results which would be expected for the full year.
2. THE COMPANY AND OUR RECENT TRANSACTION:
Infonautics, Inc. is a provider of personalized information agents and
Internet sites. The Infonautics Network of web properties includes the free,
advertising supported Sleuth Center content notification sites featuring Company
Sleuth, Sports Sleuth, Job Sleuth, Entertainment Sleuth, Mobile Sleuth and
Shopping Sleuth. The Infonautics Network also includes search and reference
sites consisting of the subscriber based Electric Library and the free
Encyclopedia.com, eLibrary Tracker and Newsdirectory.com.
On December 15, 1999, Infonautics completed a transaction in which
Infonautics contributed its Electric Library K-12 and public library
contracts, assets, liabilities and related commitments into what is now
bigchalk.com, Inc. ("bigchalk.com"), an Internet education company, in
exchange for $16.5 million in cash and a 30.89% interest in bigchalk.com.
Infonautics continues to develop and market its Sleuth Center sites. The
Company also retained the rights to market Electric Library to end-users
(subject to an option granted to bigchalk.com to purchase the end-user
business). Additionally, the Company sold its e-commerce online archive
business for $2 million.
3. INVESTMENT IN AFFILIATES:
During January 2000, the Company's equity interest in the
outstanding common stock of bigchalk.com was diluted from 30.89% to 30.28% as
a result of a private financing closed by bigchalk.com. During the second
quarter of 2000, bigchalk.com issued shares as part of an acquisition which
reduced the Company's common stock ownership to approximately 27.5%. Fully
diluted the Company's ownership position is approximately 19%. For the three
months ended June 30, 2000, the Company recognized a charge of $3,442,000 as
equity in the unaudited losses of bigchalk.com, for a total charge of
$5,941,000 recognized for the six months ended June 30, 2000.
The Company also incurred approximately $725,000 of content royalties
and $250,000 of technical services fees to bigchalk.com during the three months
ended June 30, 2000. For the six months ended June 30, 2000, the content
royalties amounted to $1,422,000 and the technical services fees amounted to
$490,000. These costs were the result of our content and technical services
agreements with bigchalk.com. Content royalties are recorded as a cost of
revenues and technical service fees are included in technical operations and
development expenses. At June 30, 2000, $1,045,000 is due to bigchalk.com for
these content royalties and technical services fees and is recorded on the
balance sheet as due to affiliate.
The unaudited statement of operations of bigchalk.com for the six months ended
June 30, 2000 is as follows, in millions:
6
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<TABLE>
<CAPTION>
Six Months Ended June 30,
2000
----
<S> <C>
Net revenues $ 17
Gross profit 11
Loss before taxes and accretion (20)
Net loss to common shareholders (20)
</TABLE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest expense of $105,000 and $81,000 was accrued on the February
1999 convertible debt instrument during the six months ended June 30, 2000 and
1999 respectively. Approximately $369,000 was recognized during the six months
ended June 30, 1999 as amortization of the discount associated with the
beneficial conversion feature on the convertible debt.
Approximately $800,000 was recorded in February 1999 as an additional
discount related to the valuation of warrants issued in connection with the
convertible debt. For the six months ended June 30, 2000, $266,000 of this
additional discount was amortized and recorded as interest expense, as compared
to $204,000 for the six months ended June 30, 1999.
Cash paid for interest expense was $5,000 and $46,000, for the six
months ended June 30, 2000 and 1999, respectively.
The Company issued common stock in February 2000, as part of the
purchase of intangibles, with a fair value of approximately $120,000. During the
six months ended June 30, 2000, the Company amortized $26,389 of this
intangible.
In connection with the repurchase of 283 shares of Series A Convertible
Preferred Stock made under the July 1998 financing, the Company charged
additional paid-in capital in the first quarter of 1999 for approximately
$75,000, which represents the excess of the redemption price over the accreted
carrying value of the Series A Preferred Stock.
Gross barter income and expenses of $256,548 and $178,550 are included
in revenue and marketing expenses for the six months ended June 30, 2000 and
1999, respectively.
5. COMMITMENTS AND CONTINGENCIES:
Leases:
In April 2000, the Company entered a lease agreement to occupy office
space for a term of three years. The lease terms provide for six free months of
rent, commencing in July 2000, followed by annual commitments of $288,500,
$303,500 and $318,500 for 2001, 2002 and 2003, respectively. The Company moved
its principal office and occupied the space in July 2000, and will begin rental
payments in January 2001. Rent expense will be recognized ratably over the term
of the lease.
The Company entered several financing arrangements to lease $172,000 of
computer and telephone equipment, commencing in July 2000. The leases are
classified as capital leases. The equipment has original lease terms ranging
from 24 to 44 months, with a fair value purchase option at the end of each lease
term. Leased equipment amounting to $172,370 will be included in property and
equipment with aggregate minimum lease payments of approximately $205,000.
6. SUBSEQUENT EVENT:
Agreement to merge company:
On July 31, 2000, the Company, IBS Interactive, Inc. and First Avenue
Ventures, Inc. announced a three-way strategic combination to create a
publicly-held Venture Technology Company that will be named Digital Fusion, Inc.
Under the
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terms of the definitive agreement, Infonautics and IBS Interactive stock will be
converted to Digital Fusion stock at fixed exchange ratios. Shareholders of both
companies will receive one share of Digital Fusion stock for each share of
Infonautics or IBS Interactive stock that they own. First Avenue Ventures will
invest $6 million in the new company and its shareholders will receive shares of
Digital Fusion preferred or common stock, which will represent, in the
aggregate, approximately 4.5% of the issued and outstanding shares of new
company. The merger will be accounted for as a purchase transaction and is
subject to certain closing conditions, including regulatory approvals and the
approval of Infonautics' and IBS Interactive's shareholders.
Exchange of Minority interest in Half.com:
On July 11, 2000, Infonautics exchanged its minority interest in
Half.com to eBay, Inc. for 174,387 shares of eBay, Inc. common stock in
connection with eBay's acquisition of Half.com. The Company will account for
this transaction in accordance with Statement of Financial Accounting Standards
(SFAS) Number 115, "Accounting for Certain Investments in Debt and Equity
Securities". Unrealized holding gains and losses for eBay stock will be excluded
from earnings and reported as a net amount in a separate component of
shareholders' equity until realized.
Conversion of Class B common stock:
Pursuant to a Notice of Conversion executed July 30, 2000, a co-founder
of Infonautics and the sole holder of the Company's Class B common stock,
converted the outstanding 100,000 shares of Class B common stock into 100,000
shares of Infonautics' Class A common stock pursuant to Article 3.D.1 of the
Amended and Restated Articles of Incorporation. The Company effected the
conversion as of August 3, 2000 and as a result holds the 100,000 shares of
Class B common stock as Treasury stock.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report on Form 10-Q contains, in addition to historical
information, forward-looking statements by Infonautics 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, for example, statements regarding the
sufficiency of Infonautics' liquidity, including cash resources and capital, the
number of registered users and subscribers, gross margins, current and future
expenses and costs, future revenues and shortfalls in revenues, use of system
resources and marketing effects, growth and expansion plans, sales and marketing
plans, changes in our marketing partners, capital expenditures, seasonality,
operating results, licensing and service contracts with bigchalk.com, Inc., the
transaction with bigchalk.com, Inc, the merger with IBS Interactive, Inc and
First Avenue Ventures, Inc., failure of the Infonautics or IBS stockholders to
approve the merger, completion of the transactions related to it, the risk that
the Infonautics, IBS and First Avenue business will not be integrated
successfully, costs related to the transaction, inability to further develop and
achieve commercial success for Digital Fusion's business strategy, the value of
any holdings by the companies, the tax and accounting treatment of the merger
and related transactions, the closing of the transaction, and the deployment of
each company's respective resources following the merger. Such statements are
based on management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ materially
from those described in the forward-looking statements. Factors that may cause
such a difference include, but are not limited to, the risks set forth in the
Company's filings with the Securities and Exchange Commission. All
forward-looking statements included in this document are based on information
available to Infonautics as of the date of this document, and Infonautics
assumes no obligation to update these cautionary statements or any
forward-looking statements.
RECENT DEVELOPMENTS
July 30, 2000 agreement:
On July 30, 2000, IBS Interactive, Inc. ("IBS"), Infonautics, Inc.
("Infonautics") and First Avenue Ventures, Inc. ("First Avenue") entered into an
Agreement and Plan of Reorganization (the "Reorganization Agreement"). The
Reorganization Agreement provides for a business combination to be accomplished
by the formation of a holding company and the merger of subsidiaries of the
holding company with and into IBS, Infonautics and First Avenue so that, after
completion of the business combination, IBS, Infonautics and First Avenue will
be wholly-owned subsidiaries of the new holding company which will be named
Digital Fusion, Inc.
In the business combination, stockholders of IBS and shareholders of
Infonautics would receive one share of the common stock of Digital Fusion for
each share of common stock of IBS or Infonautics that they own. Following
completion of the business combination, stockholders of IBS would hold common
stock of Digital Fusion representing approximately 34% of the outstanding common
stock of Digital Fusion on a fully diluted basis; shareholders of Infonautics
would hold common stock of Digital Fusion representing approximately 61% of the
outstanding common stock of Digital Fusion on a fully diluted basis; and
stockholders of First Avenue would hold common and preferred stock of Digital
Fusion representing approximately 4.5% of the outstanding common stock of
Digital Fusion on a fully diluted basis.
Consummation of the business combination is subject to a number of
conditions, including approval of the stockholders of IBS and the shareholders
of Infonautics. The merger is expected to close in the fourth quarter.
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Even though there can be no assurance that the merger will be
finalized, the Company will incur significant costs and fees while working to
complete the transaction and if the merger is consummated, all direct costs
will be capitalized as part of the purchase price and amortized. If the
merger is not consummated, these costs will be expensed.
December 15, 1999 Transaction:
On December 15, 1999, Infonautics completed a transaction in which
Infonautics contributed its Electric Library K-12 and public library contracts,
assets, liabilities and related commitments into what is now bigchalk.com, Inc.
("bigchalk.com"), an Internet education company. Infonautics continues to
develop and market its Sleuth Center sites. The Company also retained the rights
to market Electric Library to end-users (subject to an option granted to
bigchalk.com to purchase the end-user business).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1999, AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
PRO FORMA RESULTS OF OPERATIONS:
The pro forma results of operations reflected here are based on
available information and certain information and assumptions that the Company's
management believes are reasonable. As a result of the transaction with
bigchalk.com and Bell & Howell Company, the following pro forma information for
the three and six months ended June 30, 1999 has been prepared for comparative
purposes to the ongoing operations of the Company:
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
<S> <C> <C>
Revenues $ 2,450,000 $ 4,446,000
Costs and Expenses 3,426,000 6,463,000
Loss from Operations (976,000) (2,017,000)
</TABLE>
REVENUES.
Total revenues were $3,006,000 for the three months ended June 30,
2000, and $5,977,000 for the three months ended June 30, 1999. Pro forma
revenues for the three months ended June 30, 1999 were $2,450,000. Total
revenues were $6,047,000 for the six months ended June 30, 2000 compared to
$11,208,000 for the six months ended June 30, 1999. Pro forma revenues for the
six months ended June 30, 1999 were $4,446,000.
End-user subscription revenue, a continuing market for us, accounted
for $2,507,000, or 83% of revenues for the three months ended June 30, 2000 and
$2,154,000 or 88% of pro forma revenue for the three months ended June 30, 1999.
Total end-user revenues were $4,908,000, or 81%, for the six months ended June
30, 2000 compared to $3,921,000, or 88% of pro forma revenues for the six months
ended June 30, 1999. The increase in the total revenues is primarily a result of
the increasing number of subscribers, as we had more than 100,000 subscribers at
June 30, 2000 compared to approximately 88,000 at June 30, 1999.
Advertising and other e-commerce revenues, a continuing market for
us, were $499,000, or 17% of revenues for the three months ended June 30,
2000 and $230,000, or 9% of pro forma revenues for the three months ended
June 30, 1999. Total advertising revenues were $1,133,000, or 19%, for the
six months ended June 30, 2000 and $370,000, or 8% of pro forma revenues for
the six months ended June 30, 1999. The Company expects that advertising and
other e-commerce revenues growth will be impacted by the growing registered
user base of the Company's web sites, and further by the size of the
advertising and sponsorship contracts entered into in any one quarter, and
accordingly, revenue growth may increase or decrease in consecutive quarters,
but is expected to grow on an annual basis.
There was no reseller revenue for the three months ended June 30, 2000,
compared to approximately $66,000, or 3% of pro forma revenues for the three
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months ended June 30, 1999. For the six months ended June 30, 2000 and 1999,
reseller revenue was approximately $6,000 and $155,000, respectively. All
reseller contracts have expired and we are no longer pursuing the reseller
business.
Educational revenues accounted for $3,042,000 or 51% of revenue for the
three months ended June 30, 1999. Total educational revenues were $5,747,000 for
the six months ended June 30, 1999. There were no educational revenues in 2000,
as all educational contracts are now owned by bigchalk.com.
E-commerce online publishing revenue was $192,000 or 3% of revenue in
the three months ended June 30, 1999. Content management and custom archive
services revenue was generated from primarily archive services. Revenue for the
six months ended June 30, 1999 amounted to $415,000. There were no revenues from
E-commerce online publishing in 2000, as we sold this business to Bell & Howell
Information and Learning Company as part of our bigchalk.com transaction.
Extranet and intranet knowledge management services (IntelliBank)
revenue was $22,000, or less than 1% of revenue in the three months ended June
30, 1999. Revenue was $137,000 for the six months ended June 30, 1999. There
were no IntelliBank revenues in 2000 as we have discontinued that business.
There were no other revenue for the three months ended June 30, 2000
and there was $271,000 of other revenue, or 5% of revenues for the three months
ended June 30, 1999. For the six months ended June 30, 2000 and 1999, other
revenue amounted to $0 and $463,000, respectively. Other revenue in 1999
consisted primarily of international revenue.
COST OF REVENUES.
The principal elements of our cost of revenues during 2000 are royalty
and license fees on end-user revenues paid to bigchalk.com, which is currently
the sole provider of content, hardware and software, and communication costs
associated with the delivery of the Electric Library services. Cost of revenues
was $863,000, or 29% of revenues, for the three months ended June 30, 2000
compared to $1,819,000, or 30% of revenues, for the three months ended June 30,
1999. Cost of revenues for the six months ended June 30, 2000 and 1999 were
$1,667,000, or 28% and $3,528,000,or 31% respectively.
Cost of revenues in absolute dollars decreased in 2000 due to the
decrease in revenues as a result of the sale of the educational and
international contracts to bigchalk.com. Additionally, the percentage of cost of
revenues decreased as a result of change in the product mix, as the advertising
and e-commerce revenues make up a greater portion of revenues in 2000, and there
are no royalty or license fees on these revenues.
CUSTOMER SUPPORT.
Customer support expenses consist primarily of costs associated with
the staffing of professionals responsible for assisting users with technical and
product issues and monitoring customer feedback. Customer support expenses were
$98,000 for the three months ended June 30, 2000, compared to $298,000 for the
three months ended June 30, 1999. As a percentage of revenue, customer support
expenses for the second quarter were 3% in 2000 and 5% in 1999. Customer support
expenses were $118,000 for the six months ended June 30, 2000, compared to
$570,000 for the six months ended June 30, 1999. The decrease in 2000 resulted
primarily from lower staffing levels as a result of the bigchalk.com
transaction. We anticipate continuing to make increasing customer support
expenditures, including hiring customer support personnel, as we improve our
customer service for all products on the Infonautics Network.
TECHNICAL OPERATIONS AND DEVELOPMENT.
Technical operations and development expenses consist primarily of
costs associated with maintaining our service, data center operations, hardware
expenses and data conversion costs as well as the design, programming, testing,
documentation and support of our new and existing sites. To date, all of our
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costs for technical operations and development have been expensed as incurred.
Technical operations and development expenses were $1,585,000 or 53% of total
revenues for the three months ended June 30, 2000, compared to $1,970,000 or 33%
of total revenues for the three months ended June 30, 1999. For the six months
ended June 30, 2000 and 1999, the technical development and operations costs
were $3,015,000 and $4,187,000, or 50% and 37% of total revenues, respectively.
A significant portion of these development costs in 2000 have resulted from the
technical services agreement with bigchalk.com, requiring a percentage of
Electric Library end-user revenues to be paid to bigchalk.com for use of the
Electric Library technical support and data center operations. The absolute
dollar decrease was largely due to the bigchalk.com transaction, as many of our
personnel and costs associated with those personnel were included in the sale to
bigchalk.com. However, we expect that the level of technical operations and
development expenses may increase quarter over quarter as we develop new and
enhanced sites and upgrades to the current sites which may include the use of
outside consultants and additional hiring.
SALES AND MARKETING.
Sales and marketing costs consist primarily of costs related to
compensation, attendance at conferences and trade shows, marketing programs,
advertising and promotion. Sales and marketing expenses were $1,904,000 for the
three months ended June 30, 2000, compared to $3,021,000 for the three months
ended June 30, 1999. As a percentage of revenue, sales and marketing costs were
63% and 51% for the three months ended June 30, 2000 and 1999, respectively.
Sales and marketing costs were $4,787,000 and $5,825,000, or 79% and 52% of
revenue, for the six months ended June 30, 2000 and 1999 respectively. The
principal reasons for the decrease in absolute dollars was a decrease in sales
personnel costs as a result of the bigchalk.com transaction. Offsetting some of
this cost reduction was a Sports Sleuth marketing campaign expensed in the first
quarter of 2000, which cost approximately $1 million. Additionally, during 1999,
we were implementing cost reduction efforts in our marketing programs. The
marketing of the Electric Library end-user business has been and will continue
to be limited. We use affiliate and other marketing programs to acquire
registered users. We may accelerate these programs which could increase the cost
of acquisition. We currently have no plans for a significant marketing program
similar to the Sports Sleuth marketing campaign in March 2000. Further, we will
no longer incur the same amount of trade show, conference and other costs of
marketing to the educational market as a result of our bigchalk.com transaction.
GENERAL AND ADMINISTRATIVE.
General and administrative expenses consist primarily of expenses
for administration, office operations, finance and general management
activities, including legal, accounting and other professional fees. General
and administrative expenses were $537,000 for the three months ended June 30,
2000, compared to $818,000 for the three months ended June 30, 1999. For the
six months ended June 30, 2000, general and administrative expenses were
$1,240,000, as compared to $1,569,000 for the six months ended June 30, 1999.
The decrease in general and administrative expenses is a result of reduced
administrative costs associated with the e-commerce online publishing and the
educational businesses which were sold as part of the bigchalk.com
transaction. The Company will incur significant professional expenses related
to the recently proposed merger. If the merger is consummated, these
expenses will be capitalized as part of the purchase price and amortized. If
the merger is not consummated, these costs will be expensed.
INCOME (LOSS) IN EQUITY INVESTMENT.
The loss in equity investment consists of our share of the results
of operations of bigchalk.com. The loss from equity in the bigchalk.com
investment was $3,442,000 during the second quarter of 2000, and $5,941,000
for the six months ended June 30, 2000. There were no such investment losses
during 1999. As of June 30, 2000, we held a 27.5% interest in the common
stock of bigchalk.com. We expect that bigchalk.com will continue to generate
net losses in 2000 as it develops its business and expands market share.
These amounts are recognized each quarter based on the unaudited information
provided by bigchalk.com and may change as a result of any quarterly or year
end adjustments.
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INTEREST INCOME (EXPENSE), NET.
The Company earned net interest income of $8,000 in the three months
ended June 30, 2000, as compared to net interest expense of $412,000 in the
three months ended June 30, 1999. Approximately $194,000 of interest income was
earned in the current quarter. Offsetting this income was $186,000 in interest
expense primarily arising from interest accrued upon the convertible debt issued
on February 11, 1999, and the amortization of the debt discount (which is due to
the warrant valuation and beneficial conversion feature of the convertible
debt). Approximately $426,000 of interest expense was incurred in the prior year
quarter, primarily a result of the amortization of the debt discount and
interest expense related to the convertible debentures. The Company earned net
interest income of $13,000 in the six months ended June 30, 2000, as compared to
net interest expense of $699,000 in the six months ended June 30, 1999.
Offsetting the interest income of $390,000 for the six months ended June 30,
2000 is interest expense of $377,000. This expense is primarily related to the
interest accrued upon the convertible debt issued on February 11, 1999, and the
amortization of the debt discount. For the six months ended June 30, 1999,
$746,000 of interest expense was incurred, arising from the interest and
discount on the convertible debt, plus amortization of an additional $369,000
discount recorded for issuance of the convertible debt below market.
The Company expects the interest expense to decrease in the third
quarter of 2000, as the discount on convertible debt will be fully amortized by
August 11, 2000, and we expect that the debt will either be converted by the
holder into approximately 800,000 shares of Class A common stock, or if not
converted, the debt will be repaid by the company.
INCOME TAXES.
A valuation allowance has been established against the Company's net
deferred tax asset due to the Company's history of losses, and the
uncertainty as to the realizability of the asset.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our operations and capital requirements through
proceeds from the private sale of equity securities, our initial public
offering, proceeds from the transaction with Bell & Howell Company and
bigchalk.com, proceeds from the issuance of preferred stock, utilization of an
accounts receivable purchase agreement, and, to a lesser extent, operating and
capital leases.
We had cash, cash equivalents and investments of approximately
$12,975,000 at June 30, 2000, as compared to $3,739,000 at December 31, 1999, an
increase of $9,236,000. We collected a $13.5 million receivable note arising
from the Bell & Howell and bigchalk.com transaction in January. We monitor our
cash and investment balances regularly and invest excess funds in a short-term
government investment fund.
We had working capital of approximately $7,376,000 at June 30, 2000,
which includes $3,229,000 of convertible debt which is due to be paid or
converted by August 11, 2000.
We used cash in operations of approximately $2,988,000 for the six
months ended June 30, 2000 compared with $5,624,000 for the comparable period in
1999. This decrease in cash used is primarily a result of the timing of payables
as well as a decrease in costs related to the sale of the educational and online
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publishing businesses during the fourth quarter of 1999.
Net cash provided by investing activities was $11,284,000 for the six
months ended June 30, 2000, reflecting the collection of the note receivable
from the transaction with bigchalk.com net of related fees. This compares to
cash used in investing activities of $236,000 for the six months ended June 30,
1999. Net cash used for capital expenditures was $500,000 and $236,000,
respectively, for the six months ended June 30, 2000 and 1999. Net cash used for
the purchase of intangibles related to Newsdirectory.com was $70,000 for the six
months ended June 30, 2000.
Our principal commitments at June 30, 2000 consisted of obligations
under the bigchalk.com service, license agreements, leases for facilities and
equipment, and professional fees related to the merger agreement.
Capital expenditures have been, and future expenditures are anticipated
to be, primarily for facilities and equipment to support the expansion of our
operations and systems. We expect that our capital expenditures will increase as
the number of sites on the Infonautics Network increases. As of June 30, 2000,
we had commitments for approximately $1,100,000 in leasehold improvements for
the new office space, furniture and fixtures, and capital expenditures for
equipment to support the increased customer base. We anticipate that our planned
purchases of property and equipment will require additional commitments of
approximately $400,000 for the remainder of 2000, a portion of which we may
finance through equipment leases, or a working capital line of credit. We have
obtained financing for some of this equipment through equipment leases, however,
there can be no guarantee we will obtain future lease financing.
Net cash provided by financing activities was $940,000 in the six
months ended June 30, 2000, compared to $4,169,000 in the six months ended June
30, 1999. During 2000, we received funds through the exercise of stock options
of mostly former employees who were hired by bigchalk.com and had until March
30, 2000 to exercise options. In February 1999, we raised an additional $3
million through the issuance of convertible debt. In May 1999, we entered a
receivable purchase agreement with a bank, which provided a net amount of
$1,533,000 to the company through June 30, 1999.
We currently anticipate that the cash balances and cash from
operations, will be sufficient to meet our anticipated needs for at least the
next twelve months. We may need to raise additional funds in the future in order
to fund more aggressive marketing or growth, to develop new or enhanced
services, to respond to competitive pressures or to make acquisitions. Any
required additional financing may not be available on terms favorable to us, or
at all, and may result in dilution to our shareholders.
SEASONALITY
During the summer months, and possibly during other times of the year such as
major holidays, Internet usage often declines. As a result, our sites may
experience reduced user traffic. For example, our experience with Electric
Library shows that new user registrations and usage of the site declines during
the summer months and around the year-end holidays. Our experience with Company
Sleuth shows that new user registrations and usage of the site declines at about
the same times. Not all of our sites may experience the same seasonal effects
and some might experience increased usage during certain times of the year.
Seasonality may also affect advertising and affiliate performance which could in
turn affect our sites' performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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PART II. OTHER INFORMATION
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
10.1 - Lease between American Baptist Churches USA and
Infonautics Corporation
27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFONAUTICS, INC.
Date: August 14, 2000 /s/ David Van Riper Morris
----------------------------
David Van Riper Morris
Chief Executive Officer
Date: August 14, 2000 /s/ Federica F. O'Brien
----------------------------
Federica F. O'Brien
Chief Financial Officer
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