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 September 30, 1999
------------------March 31, 2000
---------------
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.(IRS Employer ID No.)
of incorporation orof organization) Identification No.)
900 West Valley Road, Suite 1000, Wayne, Pa 19087
--------------------------------------------------
(Address of principal executive offices)
(610) 971-8840
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
---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 September 30, 1999
----- ---------------------------------
Class A Common Stock, no par value 11,679,858
Class Outstanding at March 31, 2000
----- -----------------------------
Class A Common Stock, no par value 12,075,483
Class B Common Stock, no par value 100,000
1
INFONAUTICS, INC.
INDEX
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1999March 31,
2000 (unaudited) and December 31, 1998 .................................................................31999 3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2000 and
nine months ended September 30,March 31, 1999 and
September 30, 1998......................................................................................44
Consolidated Statements of Cash Flows (unaudited) for the
ninethree months ended September 30,March 31, 2000 and March 31, 1999 and September 30, 1998.............................................55
Notes to Consolidated Financial Statements................................................................6-9Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................10-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................20Operations 8-11
PART II: OTHER INFORMATION
Item 2. Changes in Securities..............................................................................20
Item 5. Other Information..................................................................................20Information 12
Item 6. Exhibits and Reports on Form 8-K...................................................................20-21
28-K 12
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
2
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,ASSETS MARCH 31, DECEMBER 31,
------------- ------------2000 1999
1998
---- ----(UNAUDITED)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.........................................equivalents $ 2,462,98314,563,368 $ 3,267,8113,739,024
Receivables:
Trade, less allowance for doubtful accounts of $77,840$99,800 in 2000
and 1999 and $65,740 in 1998....................... 5,504,455 2,934,597
Trade, assigned.............................................. 589,181756,669 637,316
Due from affiliate -- Other........................................................ 275,100 305,121
Prepaid royalties................................................. 285,398 397,84913,500,000
Other 193,972 513,231
Prepaid expenses and other assets................................. 330,854 446,492
-------------assets 245,797 267,230
------------ ------------
Total current assets...................................... 9,447,971 7,351,870assets 15,759,806 18,656,801
Property and equipment, net........................................... 2,043,699 2,572,617
Other assets.......................................................... 362,027 267,885
-------------net 567,884 492,438
Investments in affiliates 8,386,613 10,885,773
Intangible and other assets 214,616 26,415
------------ ------------
Total assets..........................................assets $ 11,853,69724,928,919 $ 10,192,372
============= =============30,061,427
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
NotesAccounts payable bank............................................... $ 470,595919,404 $ 916,292
Due to affiliate 646,695 --
Current portion of obligations under capital lease................ 214,055 356,898
Accounts payable.................................................. 1,527,390 1,929,598
Accrued expenses.................................................. 1,243,757 1,484,934expenses 920,182 2,438,515
Accrued royalties................................................. 1,994,577 1,334,669royalties -- 75,606
Deferred revenue.................................................. 11,128,991 7,807,016
------------- -------------revenue 834,979 858,159
Convertible debt 3,043,046 2,857,322
------------ ------------
Total current liabilities................................. 16,579,365 12,913,115
Noncurrent portion of obligations under capital lease................. 121,759 47,209
Noncurrent portion of deferred revenue................................ 1,677,616 530,256
Convertible debt...................................................... 2,671,597 --
------------- -------------liabilities 6,364,306 7,145,894
------------ ------------
Total liabilities......................................... 21,050,337 13,490,580
------------- -----------liabilities 6,364,306 7,145,894
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, no par value, 5,000
shares authorized, 0 and 283 shares issued and outstanding
at September 30, 1999 and December 31, 1998........................ -- 258,483
Class A common stock, no par value; 25,000,000 shares authorized; one vote
per share; 11,679,85812,075,483 and 11,522,69211,757,076 shares issued and
outstanding at September 30, 1999March 31, 2000 and December 31, 1998..........................1999, respectively -- --
Class B common stock, no par value; 100,000 shares authorized,
issued and outstanding...............................outstanding -- --
Additional paid-in capital ........................................... 58,127,525 56,666,439
Deferred compensation ................................................ (31,250) (125,000)59,258,546 58,316,564
Accumulated deficit .................................................. (67,292,915) (60,098,130)
---------------(40,693,933) (35,401,031)
------------ ------------
Total shareholders' equity (deficit) ..................... (9,196,640) (3,298,208)
--------------18,564,613 22,915,533
------------ ------------
Total liabilities and shareholders' equity (deficit) ..... $ 11,853,69724,928,919 $ 10,192,372
==============30,061,427
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,MARCH 31,
2000 1999
------------ -------------
1999 1998 1999 1998
---- ---- ---- ----------------
Revenues ............................................... $ 6,171,8933,041,137 $ 4,147,503 $ 17,379,924 $ 10,312,996
------------ -------------5,231,028
------------ ------------
Costs and expenses:
Cost of revenues....................................... 1,726,873 1,079,261 5,254,817 3,006,330revenues 803,627 1,709,119
Customer support expenses.............................. 303,243 318,619 873,025 800,671expenses 19,727 272,031
Technical operations and development expenses.......... 2,077,216 1,939,843 6,264,075 5,775,994expenses 1,430,113 2,216,562
Sales and marketing expenses........................... 3,016,391 4,009,419 8,841,625 10,902,459expenses 2,883,446 2,804,552
General and administrative expenses.................... 798,089 1,023,815 2,367,234 3,642,268
------------ -------------expenses 703,339 751,574
------------ ------------
Total costs and expenses.......................... 7,921,812 8,370,957 23,600,776 24,127,722
------------ -------------expenses 5,840,252 7,753,838
------------ ------------
Loss from operations........................................ (1,749,919) (4,223,454) (6,220,852) (13,814,726)operations (2,799,115) (2,522,810)
Equity in net losses of unconsolidated affiliate (2,499,160) --
Interest income (expense), net.............................. (274,732) 9,182 (973,933) 153,783
------------- ------------- -----------net 5,373 (287,330)
------------ ------------
Net loss.......................................... (2,024,651) (4,214,272) (7,194,785) (13,660,943)loss (5,292,902) (2,810,140)
Redemption of preferred stock in excess of carrying amount -- -- (74,875) --
------------ ------------- ----------- ------------
Net loss attributable to common shareholders................shareholders $ (2,024,651) $(4,214,272)(5,292,902) $ (7,269,660) $(13,660,943)(2,885,015)
============ ============= =========== ============
Loss per common share- basic and diluted....................diluted $ (0.17)(.44) $ (0.44) $ (0.62) $ (1.42)(.25)
============ ============= =========== ============
Weighted average shares
outstanding- basic and diluted.......................... 11,692,400 9,640,900 11,682,800 9,589,700diluted 12,034,300 11,647,200
============ ============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31,
2000 1999
1998
----- ---------------- ------------
Cash flows from operating activities:
Net loss............................................................loss $ (7,194,785)(5,292,902) $ (13,660,943)(2,810,140)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation and amortization...................................... 1,118,822 1,119,461amortization 133,747 349,306
Amortization of discount on convertible debt....................... 707,045 --debt 133,224 296,415
Accretion on convertible debt...................................... 133,125debt 52,500 --
Provision for losses on accounts receivable........................ 293,672 25,000receivable -- 21,800
Amortization of deferred compensation.............................. 93,750 93,751
Severance and related costs........................................compensation -- 398,52531,250
Equity in investee losses 2,499,160 --
Changes in operating assets and liabilities:
Receivables:
Trade............................................................ (619,603) (1,078,498)
Other............................................................ (141,892) (336,071)Trade (119,353) 220,106
Other 319,259 (51,045)
Prepaid and other assets.......................................... 293,947 (626,721)assets 12,676 170,369
Accounts payable.................................................. (402,208) 672,855payable 163,769 (244,342)
Due to affiliate 646,695 --
Accrued expenses.................................................. (241,177) 71,378expenses (32,980) (300,313)
Accrued royalties................................................. 659,908 449,102royalties (75,606) 310,081
Deferred revenue.................................................. 1,808,140 2,546,998revenue (23,180) (722,343)
------------ -------------------------
Net cash used in operating activities........................ (3,491,256) (10,325,163)activities (1,582,991) (2,728,856)
------------ -------------------------
Cash flows from investing activities:
Purchases of property and equipment............................... (352,698) (756,412)
Investment at cost................................................ (160,000)equipment (198,637) (62,254)
Receipts from disposition of businesses, net 11,853,990 --
Purchases of short-term investments...............................intangibles (70,000) --
(7,852,263)
Proceeds from maturity of short-term investments.................. -- 16,796,440
------------ --------------------------
Net cash provided by (used in) investing activities.......... (512,698) 8,187,765activities 11,585,353 (62,254)
------------ --------------------------
Cash flows from financing activities:
Proceeds from borrowings under accounts receivable
purchase agreement.............................................. 2,443,734 --
Repayments of borrowings under accounts receivable
purchase agreement.............................................. (1,973,139) --
Net proceeds from issuance of common stock ....................... 367,389 53,007
Net proceeds from issuance821,982 84,999
Repurchase of preferred stock and warrants, net .. -- 2,953,139
Repurchase of preferred stock..................................... (333,358) --
Proceeds from long term borrowings................................borrowings -- 3,000,000 --
Payments on capital lease obligations............................. (305,500) (243,374)obligations -- (84,999)
------------ --------------------------
Net cash provided by (used in) financing activities....... 3,199,126 2,762,772activities 821,982 2,666,642
------------ --------------------------
Net decreaseincrease (decrease) in cash and cash equivalents............................ (804,828) 625,374equivalents 10,824,344 (124,468)
Cash and cash equivalents, beginning of period........................period 3,739,024 3,267,811 2,301,933
------------ --------------
Cash and cash equivalents, end of period..............................period $ 2,462,98314,563,368 $ 2,927,3073,143,343
============ ==========================
The accompanying notes are an integral part of these consolidated financial
statements.
5
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:BASIS AND PRESENTATION:
The unaudited consolidated financial statements of Infonautics, Inc. (together with(including
its subsidiaries, "Infonautics," and the "Company")"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, 19981999 and the notes thereto
included in the Company's 19981999 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. BasicTHE COMPANY AND OUR RECENT TRANSACTION:
Infonautics, Inc. is a provider of personalized information agents and
Diluted EPS: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 percent interest in bigchalk.com. Infonautics collected the
$13.5 million note receivable from the transaction in January 2000.
Infonautics continues to develop and market its Sleuth Center sites. The Company
calculates earnings per share (EPS)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).
3. INVESTMENT IN AFFILIATES:
During January 2000, the Company's equity interest in accordance with
Statementbigchalk.com was diluted
to from 30.89% to 30.28% of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which requires public companiesthe outstanding common stock as a result of a
private financing closed by bigchalk.com. For the three months ended March 31,
2000, the Company expensed $2,499,000 as its equity in the unaudited losses of
bigchalk.com for the corresponding quarter.
The Company also incurred $696,241 of content royalties and $240,083 of
technical services fees to present basic earnings per share
and, if applicable, diluted earnings per share, instead of primary and fully
diluted EPS. Basic EPS is a per share measure of an entity's performance
computed by dividing income (loss) available to common stockholders (the
numerator) by the weighted average number of common shares outstandingbigchalk.com during the period (the denominator). Diluted earnings per share measuresthree months ended March 31,
2000. These costs were the entity's performance taking into consideration common shares outstanding (as
computed under basic EPS)result of our content and dilutive potential common shares, suchtechnical services
agreements with bigchalk.com. At March 31, 2000, $646,695 is due to bigchalk.com
for these content royalties and technical services fees.
The unaudited statement of operations of bigchalk.com for the three months ended
March 31, 2000 is as stock
options. However, entitiesfollows, in millions:
Net revenues $ 8
Gross profit 3
Loss from
continuing operations (8)
Net loss (8)
6
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The Company collected a note receivable for $13,500,000 in January 2000 on the
transaction with a net loss do not include common stock
equivalentsbigchalk.com. Related expenses of $1,646,010, which had been in
accrued expenses as December 31, 1999, were paid in the computationquarter ended March 31,
2000.
Interest expense of diluted EPS, as$28,000 and $52,500 was accrued on the effect would be
anti-dilutive.
BasicFebruary 1999
convertible debt instrument during the three months ended March 31, 1999 and
diluted EPS are equal, as common stock
equivalents are not included as inclusion of such shares would have an
anti-dilutive effect.
3. Supplemental Disclosure of Cash Flow Information:
At September 30, 1999, included in accounts receivable and deferred
revenue was approximately $4.5 million representing that portion of
subscription revenue from long-term agreements which have been billed, but
not yet received or recognized as income.2000, respectively. Approximately $370,000$197,000 was recognized during the nine months ended
September 30, 1999 as a discount for the issuance of convertible debt below
market pursuant to the agreement described in Note 4. There was no discount
recorded in the three
months ended September 30, 1999.
Interest expenseMarch 31, 1999 as amortization of approximately $53,000 and $133,000 was accruedthe discount associated with the
beneficial conversion feature on the convertible debt in the three months and nine months ended September 30,
1999, respectively.
Also, approximatelydebt.
Approximately $800,000 was recorded in February 1999 as an additional discount
on debt related to the valuation of warrants issued in connection with the
convertible debt. 6
InDuring the quarterthree months ended September 30,March 31, 1999 $133,000and 2000, $71,000
and $133,225 of this discount was amortized and recorded as interest expense. For the nine months ended September 30,expense,
respectively.
Cash paid for interest expense was $20,342 and $4,933, for 1999 $338,000 of this discount was amortized as interest expense.and 2000
respectively.
In connection with the repurchase of 283 shares of Series A Convertible
Preferred Stock described in Note 5,made under the July 1998 financing, the Company charged
additional paidpaid-in capital in capitalthe 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 accreted carrying value.Stock.
The Company acquired $238,000issued common stock in February 2000, as part of equipment under capital lease during
the nine months ended September 30, 1999.a purchase of
intangibles, with a fair value of approximately $120,000.
Gross barter amountsincome and expenses of $71,000$151,500 and $250,000$55,000 are included in revenuesrevenue
and marketing expenses for the three monthsquarters ended March 31, 2000 and nine months ended September 30, 1999,
respectively.
4. Convertible Debentures:
On February 11, 1999, the Company entered into a Securities Purchase
Agreement with an investor under which it agreed to issue convertible debentures
in the amount of $3,000,000 and warrants to purchase 522,449 shares of Class A
Common Stock, no par value per share, of the Company.
The debentures bear interest at a rate of 7% and mature on August 11,
2000. The Debentures became convertible on May 11, 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 adjustment pursuant
to the terms of the debentures. In connection with this, a discount on
convertible debt of approximately $369,000 was recorded upon the issuance and
was amortized into interest expense between the date the debentures were issued
and the date they became convertible.
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 Class A Common Stock on
February 10, 1999. In connection with the issuance of the warrants, the Company
recorded approximately $800,000 to additional paid in capital as an additional
discount to the debt. This discount is being amortized ratably over the term of
the debt which is eighteen months, see Note 3.
5. Shareholders' Equity (Deficit):
On February 11, 1999, the Company repurchased 283 shares of Series A
Preferred Stock which were issued on July 22, 1998 for $333,358. The Company and
the holder have agreed not to engage in additional financing under the July 1998
agreement. However, the two warrants, each for 100,000 shares of the Company's
Class A Common Stock, under the July 1998 agreement remain in effect. The
exercise price of the first warrant for 100,000 shares is $5.15 per share; the
exercise price for the second warrant for 100,000 shares is $6.25. Both warrants
have a five year term.
6. Commitments and Contingencies:
Marketing Agreement:
The Company entered into a marketing agreement in March 1998, in which the Companywe agreed
to pay $4.0 million in placement fees with $1,200,000 paid
in 1998.to America Online for anchor placements of
our Electric Library site. In March 1999,2000, the Company made the final required
payment scheduleof $500,000 due under this agreement. At March 31, 2000, accrued
expenses included $136,119 related to this agreement for additional fees
calculated in accordance with the contract. Included in prepaid expenses was
revised as follows: $223,333$169,743, representing one month of fixed placement fees paid in March 1999 upon the execution2000.
Letter of the amendment, monthly payments of
$223,333 due through July, 1999, and $500,000 due in August, 1999, November,
1999, and February, 2000. The fees are being amortized on a straight-line basis
as of the launch in May 1998, over the term of the two year agreement, with
$1,543,000 amortized during the nine months ended September 30, 1999. Included
in accrued expenses as of September 30, 1999 is $312,000 resulting from this
agreement.
7
7. Accounts receivable purchase line:Credit:
The Company entered intohad an accounts receivable purchase agreement in
May 1999, to sell its receivables to a bank, with recourse. Pursuant to the
termsoutstanding letter of the agreement the bank may purchase up to $3,000,000credit which expired on March 31,
2000. This letter of the Company's
receivables. The bank will retain a reserve of at least 20% of any purchased
receivable, refunding this amount when the receivable is collected. There is a
1.5% per month finance charge of the average daily account balance and the
Company will pay a fee of .75% of each purchased receivable. This agreement is
collateralized by substantially all the Company's assets and either party may
cancel the agreement at any time. Advances made to the Company are repayable in
full upon demand in the event of a default under the agreement. As of September
30, 1999, the Bank had outstanding advances of $471,000 against trade
receivables with a face amount of $589,000.
The Company has accounted for this transaction as a secured borrowing
in accordance with FAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities."
8. Related Party Transactions:
Investment at cost:
Effective July 6, 1999, the Executive vice president resigned. Pursuant
to the terms of his employment agreement, as amended, the Executive vice
president was entitled to receive either (i) a lump sum payment equal to
$160,000 (subject to taxes) or (ii) an equity investment in the former
executive's newly formed company, subject to certain conditions,credit, in the amount of $280,000$110,000, collateralized our
obligations to a third party under a leasing arrangement.
Leases:
In April 2000, the Company entered a lease agreement to occupy office space for
an initial equity positiona term of 10%.three years. The lease terms provide for up to six free months of
rent, commencing in July 2000, followed by annual commitments of $286,500,
$301,500 and $316,500 for 2001, 2002 and 2003, respectively. The Company electedexpects
to make
an equity investmentoccupy the space in the new companyJuly 2000, and has invested $160,000 through
September 30, 1999, with $120,000 payablebegin payments in October 1999. The Executive vice
president is a consultant to the Company through January 6, 2000, unless his
consulting agreement is terminated earlier or renewed by mutual agreement.
Due from related party:
During the second quarter of 1999, the Company expensed $172,000 as bad
debt. The receivable had been included in other receivables at December 31,
1998. The net amount due to the Company arose pursuant to a 1998 agreement with
the former Chairman of the Board, Chief Executive Officer and founder of the
Company.
The Company previously recognized severance and related expenses of
approximately $500,000 in the first quarter of 1998 related to this agreement.
9. Disposition of business:
Agreement to form a new company:
On July 8, 1999, Infonautics signed an agreement with Bell & Howell
Company, and its wholly owned subsidiary, Bell & Howell Information & Learning
Company(BHIL) to create a new, as-yet-to-be-named company ("EDCO") that will
combine both companies' complementary K-12 reference businesses.
Assuming the transaction receives shareholder approval, Infonautics
will contribute its school and library Electric Library business and will
receive 27 percent of EDCO. BHIL will own the balance of EDCO and also will
purchase
8
Infonautics' e-commerce online archive business. In connection with the
transaction, Infonautics will receive $22 million in cash. Infonautics will
continue to develop and market its suite of Infonautics Sleuth services.
Infonautics will also retain rights to market Electric Library Personal Edition
to end-users (subject to an option granted to BHIL to purchase the end-user
business).
The agreement is subject to shareholder approval. A special meeting of
shareholders is scheduled for November 29, 1999 to seek shareholder approval.
92001.
7
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 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, for example, statements regarding
the sufficiency of the Company's liquidity, including cash resources capital and
utilization of the accounts
receivable purchase agreement,capital, the number of registered users and subscribers, gross margins,
current and future expenses and costs, future revenues and shortfalls in
revenues, contract
pricing and pricing uncertainty,revenue, use of system resources and marketing effects, growth and expansion
plans, sales and marketing plans, changes in number of
sales personnel,our marketing partners, capital
expenditures, the effects of the AOL Agreement on the
Company, Year 2000 readiness and expenses, seasonality, Electric Schoolhouse,
and operating results, licensing and service contracts
with bigchalk.com, Inc., and the proposed transaction with Bell & Howell, its
closing, and consequences.bigchalk.com, Inc, 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 filingsfiling with the Securities and Exchange
Commission. TheAll forward-looking statements included in this document are
based on information available to the Company does not intendas of the date of this
document, and the Company assumes no obligation to update these cautionary
statements or any forward-looking statements.
RECENT DEVELOPMENTS
On July 8, 1999, the Company, Bell & Howell Company ("Bell & Howell")
and its wholly owned subsidiary, Bell & Howell Information & Learning Company
("BHIL"), entered into a Master Transaction Agreement that provides for the
formation and capitalization of a new company, the sale of the Company's online
publishing business to BHIL and the granting by the Company of certain rights to
the new company with respect to the Company's end-user business (collectively,
the "Transaction").
The Company will contribute to the new company its assets and
liabilities that relate exclusively to its Electric Library products and
technology which are used in the educational market and the international
market. However, the Company will not contribute certain assets that relate
directly to the distribution of the Electric Library products and technology in
the end-user market. In exchange for its contribution, the Company will receive
a cash payment of $20 million and a 27% equity interest in the new company.
BHIL will contribute to the new company $20 million in cash and the
assets and liabilities of BHIL that relate exclusively to or arise from sales to
public and private preschool, K-12 programs, teachers and administrators of such
K-12 institutions and students and parents of students of such K-12 institutions
who are targeted through such K-12 institutions for at home use ("K-12
Segment"). In exchange for its contribution, BHIL will receive a 73% equity
interest in the new company. The new company will also perform certain services
under customer contracts transferred to the new company by BHIL.
Additionally, the Company will sell to BHIL, and BHIL will purchase
from the Company, the assets and liabilities of the Company that relate
exclusively to the Company's e-commerce online publishing markets and customers.
In exchange for the
10
Company's e-commerce online publishing business, BHIL will pay to the Company
$2 million in cash.
Infonautics will continue to develop and market its suite of
Infonautics Sleuth services. Infonautics will also retain rights to market
Electric Library Personal Edition to end-users (subject to an option granted to
BHIL to purchase the end-user business). There will be no change in the stock
owned by Infonautics shareholders.
The completion of the transaction is subject to certain conditions
including shareholder approval. A special meeting of shareholders is scheduled
for November 29, 1999 to seek shareholder approval, although no assurance can be
given that approval will be obtained.
Even though there can be no assurance that the agreement will be
finalized, the Company will incur costs and fees while working to complete the
transaction and such costs will be expensed.
The management's discussion and analysis that follows this "RECENT
DEVELOPMENTS" section does not discuss trends that will change as result of the
closing of the Transaction which is subject to shareholder approval. Upon
closing of the Transaction, the trends that are discussed will change
significantly. For example:
REVENUES. Revenues from educational, international, and e-commerce
online publishing customers will be included in the Company's total revenues
through the date of the Transaction. Upon completion of the Transaction, the
Company will continue earning revenues from the end-user edition of Electric
Library and its Infonautics Sleuth products. This is expected to have a minor
impact on the Company's full year financial information, as the Transaction is
expected to be completed in the latter half of the fourth quarter of 1999.
However, the revenue trends discussed in this report, beginning in the year
2000, will be significantly different than the comparable periods in 1999.
COST OF REVENUES. At closing, the Company will execute a content
licensing agreement with EDCO to provide the content for the end-user business.
The Company will pay to EDCO a royalty specified in the agreement, which the
Company expects to be somewhat less than it is currently incurring. In addition,
the Company will execute a technical services agreement with EDCO, also at a
percentage specified in the agreement to provide for the support of content and
technical services for the end-user business.
CUSTOMER SUPPORT, TECHNICAL OPERATIONS, SALES AND MARKETING and GENERAL
AND ADMINISTRATIVE. As part of the Transaction, approximately 120 of the
Company's current 170 employees will become employees of EDCO. Although the
Company will be hiring additional employees after the transaction, customer
support and development costs are expected to decline in 2000 in comparison to
1999. Beginning in the year 2000, the customer support costs and development
costs are expected to be significantly different than the comparable periods in
1999. Additionally, the Company expects to incur significant sales and marketing
costs, for the marketing of the Company's Sleuth products, after receiving the
cash proceeds described above. Other costs will also decline as a result of the
decrease in the number of employees, while this will be offset by costs such as
hiring and obtaining office space.
OTHER. Upon the completion of the Transaction the Company will
recognize a gain of over $30,000,000 on the sale of all of the net assets of its
Electric
11
Library services to schools and universities as well as the net assets of its
e-commerce online publishing business.
LIQUIDITY AND CAPITAL RESOURCES. The Company will receive approximately
$20 million after fees, following the completion of the Transaction. The Company
expects to use the net proceeds for expenses relating to the expansion of the
Company's sales, marketing and development organizations, capital expenditures,
and other general corporate and working capital purposes. The amounts actually
expended by the Company will vary significantly depending upon a number of
factors, including future revenue growth and the amount of cash generated by the
Company's operations. This cash, as well as the liabilities transferred to EDCO,
will improve the Company's current ratio and provide working capital to the
Company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999MARCH 31, 2000 AS COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998, AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30,MARCH 31, 1999
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. Total revenues were $6,172,000PRO 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 months ended September 30,March 31, 1999 and $4,148,000has been prepared for comparative purposes
to the ongoing operations of the Company:
Revenues $1,996,000
Costs and Expenses 3,037,000
Loss from Operations (1,041,000)
REVENUES. Total revenues were $3,041,000 for the three months ended September 30,
1998. Total revenues were $17,380,000March 31,
2000, and $5,231,000 for the ninethree months ended September 30,
1999 compared to $10,313,000March 31, 1999. Pro forma
revenues for the ninethree months ended September 30, 1998.
Educational revenuesMarch 31, 1999 were $1,996,000.
End-user subscription revenue, a continuing market for us, accounted for
$3,440,000$2,401,000 or 56%79% of revenue for the three months ended September 30,March 31, 2000 and
$1,767,000 or 89% of pro forma revenue for the three months ended March 31,
1999. The increase in the total revenues is primarily a result of the increasing
number of subscribers, as we had approximately 100,000 Electric Library
subscribers at March 31, 2000 compared to approximately 75,000 at March 31,
1999.
Advertising and other e-commerce revenues, a continuing market for us, were
$634,000, or 21% of revenues for the three months ended March 31, 2000 and
$140,000, or 7% of pro forma revenues for the three months ended March 31, 1999.
Barter revenue accounted for $152,000 of this revenue in 2000 and $55,000 in
1999. These revenues consist of advertising revenues from advertising that are
displayed on the Infonautics Network sites. Since March 31, 1999, we have
introduced new sites which are available to sell advertising on, such as Sports
Sleuth, Job Sleuth, Shopping Sleuth and $1,908,000Entertainment Sleuth. E-commerce
revenues include referral revenues from partners who pay us for selling trial
offers for their products (typically magazine or 46%newspaper subscriptions),
revenues from co-branding of our sites, and revenues from participation in
affiliate networks. Direct marketing fee revenues consist of e-mails that are
sent to our users with advertising promotions.
Reseller revenue was approximately $6,000 for the three months ended March 31,
2000, compared to approximately $89,000 for the three months ended March 31,
1999. All reseller contracts have expired and we are no longer pursuing the
reseller business.
Educational revenue accounted for $2,705,000 or 52% of revenue for the three
months ended September 30, 1998. TotalMarch 31, 1999. There were no educational revenues were
$9,186,000 for the nine months ended September 30, 1999 compared to $4,519,000
for the nine months ended September 30, 1998. The increasesin 2000, as all
educational contracts are due to the
increase in the number of institutions subscribing to Electric Library. The
Company served approximately 19,400 institutions at September 30, 1999,
compared to 9,500 at September 30, 1998.
End-user revenue accounted for $2,086,000 or 34% of revenue for the
three months ended September 30, 1999 and $1,154,000 or 28% of revenue for the
three months ended September 30, 1998. Total end-user revenues were $6,007,000
for the nine months ended September 30, 1999 compared to $3,328,000 for the nine
months ended September 30, 1998. The increase is due to the increase in the
number of end-user subscribers to Electric Library. The Company had more than
83,000 subscribers at September 30, 1999 compared to approximately 54,000 at
September 30, 1998.now owned by bigchalk.com.
E-commerce online publishing (formerly content management and custom
archive services) revenue was $183,000$223,000 or 3%4% of revenue in the three
months ended September 30, 1999, compared to $236,000, or 6% of revenueMarch 31, 1999. There were no revenues from E-commerce online
publishing in the three
months ended September 30, 1998. Content management and custom archive services
revenue was generated primarily from archive services. Revenue for the nine
months ended September 30, 1999 amounted to $598,0002000, as compared to $608,000 for
the nine months ended September 30, 1998. Revenue has remained relatively flat
as the number of hosting and archive customers has not changed significantly.
The Company had 15 content management and custom archive customers at September
30, 1999 compared to 14 at September 30, 1998. The Company does not expect these
revenues to increase as a result of its announcement to sell the related assetswe sold this business to Bell & Howell
8
Information and Howell.Learning Company as part of our bigchalk.com transaction.
Extranet and intranet knowledge management services (IntelliBank) revenue was
$30,000,$115,000, or less than 1%2% of revenue in the three months ended September 30, 1999, compared to $622,000, or 15% ofMarch 31, 1999. There were
no IntelliBank revenues in 2000 as we have discontinued that business.
Other revenue was $192,000, for the three months ended September 30,
12
1998. Revenue was $167,000 and $1,452,000 for the nine months ended September
30, 1999 and 1998, respectively. In the beginning of 1999, the Company
announced that Intellibank services would no longer be sold by the Company,
and all existing customer commitments would be serviced until the agreements
expired. The Company expects no material revenues from Intellibank services
after September 30,March 31, 1999.
Infonautics Sleuth product revenues were $262,000, or 4% of revenues
for the three months ended September 30, 1999, and $632,000, or 4% of revenues
for the nine months ended September 30, 1999. There were no Sleuth product
revenues for the nine months ended September 30, 1998. All Sleuth product
revenues consist of advertising and referral fee revenues, of which nearly 40%
comes from barter transactions with other Internet content providers. Other
revenue consisted primarily of sales of Electric Library through international
partners, which was $171,000, or 3%transferred to bigchalk.com.
At March 31, 2000 we had deferred revenue of revenues for the three months
ended September 30, 1999, and $228,000, or 5% of revenues for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, other
revenue amounted to $790,000 asapproximately $835,000, compared to
$406,000 in the nine months ended
September 30, 1998. Other$858,000 at December 31, 1999. The deferred revenue consists of international and reseller
revenue. The decrease in revenue into be
recognized from annual end-user subscriptions. We would expect deferred revenue
to remain at this level unless the current quarter is a resultnumber of the
expiration of certain Electric Library reseller agreements as a result of the
Company's shifting focus away from reseller sales. The increase in the nine
month periods are a result of international sales arrangements with Korea,
entered in the first quarter of 1999, and Australia, entered in fourth quarter
of 1998.annual end-user subscriptions
increased significantly.
COST OF REVENUES. The principal elements of the Company'sour cost of revenues during 2000 are
royalty and license fees on end-user revenues paid to providersbigchalk.com, which is
currently the sole provider of content, hardware and software, and communication
costs associated with the delivery of the online
services, as well as performance based bounties paid to web sites to obtain
trials.Electric Library services. Cost of
revenues was $1,727,000$804,000 for the three months ended September
30, 1999, asMarch 31, 2000 compared to
$1,079,000$1,709,000 for the three months ended September 30,
1998.March 31, 1999. Cost of revenues as a percentagein the
first quarter of revenue for2000 decreased due to the three months ended
September 30, 1999 and 1998 was 28% and 26%, respectively. Cost of revenues
were $5,255,000 and $3,006,000 for the nine months ended September 30, 1999
and 1998, respectively. As a percentage of revenues, this amounted to 30% and
29%, respectively. The absolute value increasedecrease in cost of revenues for each
period primarily reflects costs incurred to provide services to an increased
number of users. The increase in cost of revenues as a percentage of revenues
is a result of
an increase in bounties paid to web sites, as well as a change
in revenue mix. The revenues from products with higher royalty percentages,
such asthe sale of the educational and end-user, have increased significantly while the
revenue from products with lower royalty percentages, such as extranet and
intranet management services, has actually decreased. This change in the
revenue mix causesinternational contracts to bigchalk.com.
Additionally, the percentage of cost of sales to increaserevenues decreased as a result of change
in relation to
overall sales, while the actual rateproduct mix, as the advertising and e-commerce revenues make up a greater
portion of royalties by product line remains
constant.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 $303,000$20,000 for the three months ended September 30, 1999,March 31, 2000,
compared to $319,000$272,000 for the three months ended September 30, 1998.March 31, 1999, a 93% decrease.
As a percentage of revenue, customer support expenses for the thirdfirst quarter were
less than 1% in 2000 and 5% in 1999 and 8%1999. The decrease in 1998. While absolute dollar costs have decreased slightly, the percentage of
costs to revenues have decreased2000 resulted primarily
from 8% to 5%. This is due to efficiencieslower staffing levels as a result of the bigchalk.com transaction. We
anticipate continuing to make increasing customer support function, as the staffing levels were able to support a
greater number of users.
Customer support expenses were $873,000, or 5% of revenue, for the nine
months ended September 30, 1999, compared to $801,000, or 8% of revenue, for the
nine months ended September 30, 1998. The absolute dollar increase resulted
primarily
13
from growth inexpenditures,
including hiring customer support staffing duringpersonnel, as we improve our customer service
for all products on the nine months ending
September 31, 1999 exceeding the staffing during the nine months ended
September 31, 1998. The customer support expenses, as a percentage of
revenues, declined in 1999, as the staffing levels were able to support a
greater number of users. The Company anticipates customer support spending to
remain the same or increase slightly as the Company provides service to an
increased number of subscribers.Infonautics Network.
TECHNICAL OPERATIONS AND DEVELOPMENT. Technical operations and development
expenses consist primarily of costs associated with maintaining the
Company'sour service,
data center operations, hardware expenses and data conversion costs as well as
the design, programming, testing, documentation and support of the Company'sour new and
existing software, services and databases.sites. To date, all of the Company'sour costs for technical operations and
development have been expensed as incurred. Technical developmentoperations and operationdevelopment
expenses were $2,077,000 or 34%
of total revenues for the three months ended September 30, 1999, compared to
$1,940,000$1,430,000 or 47% of total revenues for the three months ended
September 30,
1998. For the nine months ended September 30, 1999 and 1998, the technical
development and operations costs were $6,264,000 and $5,776,000,March 31, 2000, compared to $2,217,000 or 35% and 56%42% of total revenues respectively.for the three
months ended March 31, 1999. 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 datacenter
operations. The absolute dollar increase in technical
operations and development expensesdecrease was largely due to the Company's shiftingbigchalk.com
transaction, as many of resources,our personnel and costs associated with a greater focus on product development and enhancements forthose personnel
were included in the nine month comparison, while forsale to bigchalk.com. However, we expect that the third quarter of 1999 alone, this increase
was offset by a decrease in costs to support Intellibank revenues and by general
cost containment efforts. The level of
technical operations and development expenses may continue to increase quarter over quarter
as the Company continues to make significant
expenditures as it developswe develop new and enhanced servicessites and upgrades to the current services, but should decline as a percentagesites which may
include the use of sales, as revenues are
expected to grow faster than technical operationsoutside consultants 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.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 promotion and other marketing programs. Sales and marketing costs
are expensed when incurred and revenue from sales is deferred over the term of
the subscription or contract.promotion. Sales and marketing expenses were
$3,017,000$2,883,000 for the three months ended September 30, 1999,March 31, 2000, compared to $4,009,000$2,805,000 for
the three months ended September 30, 1998,March 31, 1999, representing a 25% decrease.3% increase. The principal
reasons for the increase in absolute dollars was a Sport Sleuth marketing
campaign in March 2000, which cost approximately $1 million. This cost was
partially offset by a decrease in sales personnel costs as a result of the
bigchalk.com transaction. Additionally, during 1999, we were
9
implementing cost reduction efforts in our marketing programs. As a percentage
of revenue, sales and marketing costs were 49%95% and 97%54% for the three months
ended September 30,March 31, 2000 and 1999, respectively. We currently have no plans for a
significant marketing program similar to the first quarter of 2000. The
marketing of the Electric Library end-user business has been and 1998, respectively. Saleswill 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. Additionally, we will no longer incur the trade show, conference
and other costs were
$8,842,000 and $10,902,000, or 51% and 106% of revenue, formarketing to the nine months
ended September 30, 1999 and 1998, respectively. The principal reasons for the
decrease in absolute dollars was the Company's decision to decrease marketing
efforts for certain products and services. The Company does not anticipate
significantly increasing its sales force during the remaindereducational market as a result of 1999.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 $798,000$703,000 for the three months ended
September 30, 1999,March 31, 2000, compared to $1,024,000$752,000 for the three months ended September
30, 1998. For the nine months ended September 30, 1999,March 31, 1999.
We do not anticipate that general and administrative expenses were $2,367,000, as compared to $3,643,000 for the nine
months ended
14
September 30, 1998. Includedwill increase
significantly in the nine months ended September 30, 1998, was
a one time chargesecond quarter unless we consider or enter into any
strategic alliances or transactions, or hire additional management.
INCOME (LOSS) IN EQUITY INVESTMENT. The loss in equity investment consists of
approximately $500,000 for separation and related
costs in connection with the resignationour share of the former Chairmanresults of operations of bigchalk.com. The loss of equity in
the Board,
Chief Executive Officer and founderinvestment was $2,499,000 during the first quarter of the Company. Additionally, the Company
has reduced expenses related to headcount, investor relations, and other
professional fees2000. There were no
such costs during 1999. The Company expectsAs of March 31, 2000, we held a 30.28% interest in the
common stock of bigchalk.com. We expect that bigchalk.com will continue to
incur expensesgenerate net losses in association with the integration of the Bell & Howell Transaction, which are
expensed2000 as occurred. Other direct costs for certain professional fees, proxyit develops its business and other fees are deferred and will reduce the gain recognized on the sale of
the assets.expands market
share.
INTEREST INCOME (EXPENSE), NET. The Company incurredWe recorded net interest expenseincome of $275,000$5,000 in
the three months ended September 30, 1999,March 31, 2000, as compared to net interest incomeexpense of
$10,000$287,000 in the three months ended September 30, 1998.March 31, 1999. Approximately $186,000$196,000 of
interest income was recordedearned in the current quarter forquarter. Offsetting this income was
$191,000 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 the 7% interest onbeneficial
conversion feature of the convertible debt. The remaining interest of $89,000 was for leases and the accounts
receivable financing. The Company incurred net interest expense of $974,000 in
the nine months ended September 30, 1999, compared to net interest income of
$154,000 for the nine months ended September 30, 1998.debt). Approximately $369,000$300,000 of
interest expense was incurred in the currentprior year to date for the discount on
the issuancequarter as a result of convertible debt below market. Approximately $471,000 of
interest expense was incurred in the current year for the
amortization of the warrant valuationdebt discount and 7% interest onexpense related to the
convertible debt. The Companydebentures. Interest expense in the second quarter of 2000 is
expected to remain consistent as we will continue to incur interest expense
for the amortization of the debt discount and interest incurred on the
convertible
debt, the amortization of the warrant valuation, the utilization of the accounts
receivable purchase linedebenture, and leases.interest income will decrease as our cash balances decrease.
INCOME TAXES. The Company hasWe have incurred net operating losses since inception and
accordingly, hashave not recorded an income tax benefit for these losses.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company haswe have funded itsour operations and capital requirements through proceeds
from the private sale of equity securities, itsour 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 leases.
In February 1999, the Company also raised funds through
issuance of convertible debt. During the second and third quarters, the Company
has utilized the accounts receivable purchase agreement which it entered into in
May 1999 to fund cash needs. The Company intends to continue to utilize this
arrangement to minimize the effects of seasonality on the Company's cash
collections. For the next twelve months, the Company believes it will be able to
fund its operations through existing cash and cash generated through operations,
including utilizing proceeds from the accounts receivable purchase agreement.
The CompanyWe had cash, cash equivalents and investments of approximately $2,463,000$14,563,000 at
September 30, 1999,March 31, 2000, as compared to $3,268,000$3,739,000 at December 31, 1998,1999, an increase of
$10,824,000. We collected a decrease of $805,000. The Company raised $3.0$13.5 million receivable note arising from the Bell
& Howell and bigchalk.com transaction in February 1999
through convertible debt, to supplement its working capital. The Company
monitors itsJanuary. We monitor our cash and
investment balances regularly and investsinvest excess funds in short-term money market
funds.
Workingfunds, corporate bonds and commercial paper.
We had working capital requirements are financed through a combination of internally generated cash flow from operating activities,approximately $9.4 million at March 31, 2000, which
fluctuate
significantly during the yearincludes $3 million of convertible debt which is due to the seasonal nature of the Company's
business, managing terms with vendors and equitybe paid or accounts receivable
financing.
15
The Company's liquidity and capital resources may be affected by a
number of factors and risks (many of which are beyond the control of the
Company), including, but not limited to, the availability of cash flows from
operations, managing terms with vendors, and the availability of equity or
working capital, each of which may fluctuate from time to time and are subject
to change on short notice. If any such sources of liquidity were unavailable or
substantially reduced, the Company would explore other sources of liquidity.
There can be no assurance other sources of liquidity would be available or
available on terms acceptable to the Company. The rate of use by the Company of
its cash resources will depend, however, on numerous factors, including but not
limited to the rate of increasesconverted in
end-user and educational subscribers and
online publishing contracts. The Company's current and future expense levels are
based largely on the Company's estimates of future revenues and are to a certain
extent fixed. The Company has recently decreased certain expenses, and may not
be able to significantly decrease expenses further. Additionally, the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. However, any projection of future cash needs and
cash flows is subject to substantial uncertainty. If the cash and cash
equivalents balance and cash generated by operations is insufficient to satisfy
the Company's liquidity requirements, the Company may be required to sell
additional debt or equity securities, or seek other financing. The sale of
additional equity or debt securities, if available, could result in dilution to
the Company's shareholders and an increase in interest expense. There can be no
assurance, however, that the Company will be successful in such efforts or that
additional funds will be available on acceptable terms, if at all. There can be
no assurance that the bank will purchase any receivables offered under the
accounts receivable purchase agreement. In the event the Company does not meet
its expected cash flows and the efforts to raise financing are unsuccessful,
this would have a material adverse effect on the Company.
The CompanyAugust 2000.
We used cash in operations of approximately $3,491,000$1,583,000 for the ninethree months
ended September 30, 1999March 31, 2000 compared with $10,325,000$2,729,000 for the comparable period in
1998.10
1999. This decrease in cash used is primarily a result of the timing of payables
as well as a decrease in net losscosts related to the sale of approximately $6.5 million.the educational and online
publishing businesses during the fourth quarter of 1999.
Net cash used inprovided by investing activities was $513,000$11,585,000 for the ninethree months
ended September 30, 1999.March 31, 2000, reflecting the collection of the note receivable from the
transaction with bigchalk.com net of related fees. This compares to cash
provided byused in investing activities of $8,188,000$62,000 for the ninethree months ended
September 30, 1998. The cash provided in
the nine months ended September 30, 1998 is a result of investments maturing
during the year which were not reinvested.March 31, 1999. Net cash used for capital expenditures was $353,000$199,000 and $756,000,$62,000,
respectively, for the ninethree months ended September 30, 1999March 31, 2000 and 1998. There was no cash provided by or used in investment
purchases and proceeds for the nine months ended September 30, 1999. Net cash provided by investment purchases and proceeds was $8,944,000, net,used
for the ninepurchase of intangibles related to Newsdirectory.com was $70,000 for the
three months ended September 30, 1998.
The Company'sMarch 31, 2000.
Our principal commitments at September 30, 1999March 31, 2000 consisted of commitments under royalty licenses and other agreements, as well as obligations under operatingthe
bigchalk.com service and capital leases.license agreements. In connection with the America Online, Inc.
(AOL) Agreementaddition, in April 2000, we
entered into during March 1998, the Company has agreed to pay
AOL $4.0 milliona 42-month facility lease agreement (see Note 5 in placement fees. To date the Company has paid AOL $3.0
million. In March 1999, AOL and the Company amended the AOL Agreement to revise
the payment schedule for placement fees. The Company paid $223,333 at execution
of the amendment. The Company's revised payment terms require monthly payments
of $223,333 through July 1999, and $500,000 due in August 1999, $500,000 in
November 1999, and $500,000 due in February 2000. Included in accrued
liabilities is $312,000 as of September 30, 1999. In addition to the placement
fees, AOL will receive additional fees based on a sliding scale of end-user
revenues. There can be no assurance that
16
this agreement will generate adequate revenues to cover the associated
expenditures and any significant shortfall would have a material adverse
effect on the Company. Additionally, through September 30, 1999, the Company
has invested $160,000 and, in October 1999, invested an additional $120,000
in a former executive vice president's new company in return for an equity
interest in the former employee's new company.Item 1).
Capital expenditures have been, and future expenditures are anticipated to be,
primarily for facilities and equipment to support the expansion of the
Company'sour
operations and systems. The Company expectsWe expect that itsour capital expenditures will increase as
the number of Electric Library subscribers and
archive hosting contracts increase. Althoughsites on the Company anticipatesInfonautics Network increases. As of March 31, 2000,
we had commitments for less than $100,000 in capital expenditures for equipment
to support the increased customer base. We anticipate that itsour planned purchases
of capital equipment, a move to new offices and leasehold improvementsthe related expenses will
require additional expenditures of less than $350,000approximately $1,000,000 for 1999,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 an equipment lease, however, there can be no guarantee the Companywe will obtain
future lease financing. The Company does not
anticipate that any Year 2000 issues will require any significant expenditures.
Net cash provided by financing activities was $3,199,000$822,000 in the ninethree months ended
September 30, 1999,March 31, 2000, compared to $2,763,000$2,667,000 in the ninethree months ended SeptemberMarch 31, 1999.
During 2000, we received funds through the exercise of stock options of former
employees who were hired by bigchalk.com and had until March 30, 1998.2000 to
exercise options. In February 1999, the Companywe raised an additional $3 million through
the issuance of convertible debt.
In May 1999, the company
entered a receivable purchase agreement with a bank which has provided gross
proceeds of $2,444,000 to the Company. Through September 30, 1999, $1,973,000
has been repaid to the bank, resulting in a net amount of $471,000 owed to the
bank. In 1998, the Company issued $3.0 million of preferred stock and warrants.
At September 30, 1999, the Company had available cash, cash equivalents
and investments of approximately $2,463,000. The Company has a working capital
deficiency of approximately $7,131,000. This working capital deficiency includes
deferred revenue of $11,129,000. The Company will change its planned
expenditures or take additional cost cutting measures, if its expected rate of
revenue and subscriber growth is not achieved. IfWe currently anticipate that the cash balances and cash equivalents
balancefrom 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 cash generated by operations and utilization of the accounts
receivable purchase line is insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional debt or equity
securities. The sale of additional equity or debt securities, if available,
could
result in dilution to our shareholders.
SEASONALITY
During the Company's shareholderssummer months, and an increase in
interest expense. There can be no assurance, however, that the Company will be
successful in such efforts or that additional funds will be available on
acceptable terms, if at all. In the event the Company does not meet its expected
cash flows and the efforts to raise financing are unsuccessful this would have a
material adverse effect on the Company.
YEAR 2000 COMPLIANCE
The Year 2000 problem arises because many currently installed computer
systems and software programs accept only two-digit (rather than four-digit)
entries to define the applicable year and as a result are not able to
distinguish 21st century dates from 20th century dates. Commencing in the year
2000, this could result in a systems failure or miscalculations causing
disruptions of operations, including, amongpossibly during 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's Year 2000 compliance effort has already covered or will cover the
following phases: (i) identification of all Products, IT Systems, and non-IT
Systems; (ii) identification of and communication with the Company's significant
17
suppliers, customers, vendors and business partners whose failure to remedy
their own Year 2000 problems will affect the Company; (iii) assessment of repair
or replacement requirements; (iv) repair or replacement; (v) testing; (vi)
implementation; and (vii) creation of contingency plans in the event of Year
2000 failures. The project is being managed internally and the Company currently
plans to complete its Year 2000 compliance, and have contingency plans
developed, by the end of the third quarter of 1999, subject to the discussion
below.
The Company has completed testing of all current versions of its core
Elibrary and Infonautics Sleuth products and believes they are Year 2000
compliant, with the exceptions described below. The Company will continue
testing to ensure that upgrades and updates to the products maintain compliance.
The Company has obtained verification from substantially all third party vendors
that their products are compliant, and is currently testing such compliance.
Even so, the assessment of whether a system or device in which a Product is
embedded will operate correctly for an end-user depends in large part on the
Year 2000 compliance of the system or device's other components, many of which
are supplied by parties other than the Company. The Company's current financial
and accounting software has been upgraded to a fully Year 2000 compliant version
of such software. 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.
We have tested our software in conjunction with our company's credit card
processing services and the software operated correctly during those tests.
Further, the Company relies, both domestically and internationally,
upon various vendors, governmental agencies, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside of the Company's control. There is no
assurance that such parties will not suffer a Year 2000 business disruption,
which could have a material adverse effect on the Company's financial condition
and results of operations.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. The cost
to date of the Year 2000 compliance effort is approximately $250,000. The
Company expects to incur up to an additional $350,000 in Year 2000 compliance
related costs through the endtimes of the year which will include the cost of
consultants. Most of its current expenses to date have related to the
opportunity cost of time spent by employees of the Company evaluating prior and
current versions of the Products, purchases of equipment and Year 2000
compliance matters generally. At this time, the Company has obtained
verification from substantially all of its third party vendors that their
products are compliant. The Company does not possess the information necessary
to estimate the potential impact of Year 2000 compliance issues relating to its
other IT-Systems, non-IT Systems, prior or current versions of its Products, its
suppliers, its vendors, its business partners, its customers, and other parties.
Such impact, including the effect of a Year 2000 business disruption, could have
a material adverse effect on the Company's financial condition and results of
operations.
The magnitude of the Company's Year 2000 problem (if any), the costs to
complete its Year 2000 program and the dates on which the Company believes it
will be Year 2000 compliant are based on management's best estimates and current
knowledge. These estimates were derived using numerous assumptions, including,
but not limited to, continued availability of resources and third party
compliance plans. However, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that
18
might cause such material differences include, but are not limited to, the
ability to identify and correct all Year 2000 impacted areas, the availability
and cost of personnel, and the availability and cost of third party Year 2000
solutions.
The audit, analysis and assessment phase of the Company's Year 2000
compliance effort is based on numerous assumptions, one of the most significant
of which has to do with the percentage of non-compliant systems and program code
of all systems and program code. The Year 2000 compliance effort assumes that
the percentage of non-compliant code will be consistent with general software
industry practices, and as
such, the Company plans to have all core lines of
business systems compliant and contingency plans in place for all systems
(compliant as well as non-compliant) by the end of the third quarter of 1999.
The Company has revised its estimated compliance and contingency completion date
based in part on meeting with and discussing Year 2000 issues with its key third
party vendors later than originally expected. In addition, the Company spent
additional time establishing a suitable test environment for its Year 2000
compliance efforts. Finally, any significant differences between the assumptions
and actual percentage of non-compliant code will have an impact on the estimated
completion date and the costs of the Year 2000 compliance effort.
The Company believes that the most current versions of its products are
Year 2000 compliant, with the exception of its e-commerce online publishing
sites. The Company has successfully migrated an e-commerce online publishing
site to a Year 2000 compliant platform, but the migration of the remaining sites
is still to be completed. Currently, the Company expects to complete the
migration of the remaining e-commerce online publishing sites by the middle or
end of December, and is dedicating resources to this project in order to meet
this date. However, the Company has also developed a contingency plan for the
remaining e-commerce online publishing sites in the event that they are not
migrated to a Year 2000 compliant platform by December 1, 1999. The Company
believes the cost to make the remaining e-commerce online publishing sites Year
2000 compliant, as well as to implement the contingency plan, if required, will
not require any material expenditures or dedication of resources.
ELECTRIC SCHOOLHOUSE
In February 1998, the Company entered into an agreement with Marvin I.
Weinberger, the former Chairman of the Board, Chief Executive Officer and
founder of the Company, pursuant to which he resigned as Chairman and Chief
Executive Officer of the Company to become the Chief Executive Officer of a
newly formed company called Electric Schoolhouse, LLC that will pursue the
Company's Electric Schoolhouse project. Performance of certain obligations under
the February 1998 agreement remains to be completed, and the Company continues
to attempt to finalize with Electric Schoolhouse, LLC performance of these
obligations. These obligations include, for example, the Company's 10% equity
interest in Electric Schoolhouse, LLC, which as a result of capital
restructuring by Electric Schoolhouse, LLC has resulted in the Company owning
less than a 10% equity interest, and the issuance by the Company of 125,000
shares of Class A Common Stock to Mr. Weinberger. In addition, under the
February 1998 agreement, Electric Schoolhouse, LLC is obligated to repay the
Company for certain expenses and costs. The Company is continuing to pursue
collection of these amounts, repayment of which was originally due on September
30, 1998 under the February 1998 agreement and remains outstanding. The Company
has expensed as bad debt the balance due from Electric Schoolhouse, LLC,
approximately $172,000 which was owed to the Company.
19
SEASONALITY
The Company experiences certain elements of seasonality related to the
annual school terms. A significant number of schools align their payments for
the start of school timeframe.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 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, primarilysite declines during
the summer months.
Item 3. Quantitativemonths and Qualitative Disclosures About Market Riskaround 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 applicable.all of our sites may experience the same seasonal effects
and some, Shopping Sleuth, for example, might experience increased usage during
the gift-buying season around the year-end holidays. Seasonality may also affect
advertising and affiliate performance which could in turn affect our sites'
performance.
11
PART II. OTHER INFORMATION
Item 2. Changes in Securities5. Other Information
On February 11, 1999, the CompanyJanuary 10, 2000, we entered into a Securities PurchaseStockholders Agreement with
RGC International Investors, LDC ("RGC") under which it agreedbigchalk.com, Inc. and Bell & Howell Information and Learning Company, as well
as with the investors in a private placement of bigchalk.com preferred stock and
common stock. The Stockholders Agreement specifies the rights and obligations of
the bigchalk.com founders, Infonautics and Bell & Howell Information and
Learning Company, as well as the private placement investors. Under the
agreement, we have, among other rights, limited registration rights for our
bigchalk.com stock. We, along with the other investors, are also subject to
issue convertible debenturescertain lock-up provisions as specified in the amount of $3,000,000 and warrants to
purchase 522,449 shares of Class A Common Stock, no par value per share, of the
Company. Additionally, on February 11, 1999, the Company repurchased 283 shares
of Series A Preferred Stock from RGC, at a purchase price of $333,358, which
were previously issued to RGC on July 22, 1998. The Company and RGC have agreed
not to engage in additional financing under the July 1998 agreement.
The debentures bear interest at a rate of 7% per annum commencing on
February 11, 1999 and mature on August 11, 2000. The debentures became
convertible after 90 days from the closing date into that number of shares of
Class A Common Stock of the Company equal to the principal amount of the
debentures to be converted divided by $4.13, subject to adjustment pursuant to
the terms of the debentures.
The warrants may be exercised at any time during the five year period
following their issuance at an exercise price of $5.97 per share, which is equal
to 130% of the closing bid price of the Company's Common Stock on February 10,
1999. The Company has registered under the Securities Act of 1933, as amended,
the resale of the Common Stock to be issued upon conversion of the debentures or
exercise of the warrants.
Item 5. Other Information
Effective at the end of September 23, 1999, Barry Rubenstein resigned
as a Director of the Company. Also effective as of the date of Mr. Rubenstein's
resignation, the Board of Directors of the Company reduced the size of the board
by one member to a total of six members.Stockholders Agreement.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits:
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) as amended in part by the Exhibit 3.1 attached to this
Form 10-Q)
10.20 - Stockholders Agreement dated January 10, 2000 between the
Company, bigchalk.com, Inc., Bell & Howell Information and Learning
Company, TBG Information Investors LLC, Core Learning Group LLC, Core
Learning Group - BC, LLC, APA Excelsior V, L.P.., Patricof Private
Investment Club II, L.P., Frank A. Bonsal, Jr., WS Investment Company
99B, Alan K. Austin, The San Domenico Trust, Timothy J. Sparks, and
Daniel K. Yuen
27.0 - Financial Data Schedule
(b) Reports on Form 8-K:
On July 9, 1999, the Registrant filed with the Securities and Exchange
Commission a current report on Form 8-K reporting that Infonautics, Inc. and
Bell &
20
Howell Company announced on July 8, 1999 that they had signed a definitive
agreement to create a new, as-yet-to-be-named company that will combine both
firms' K-12 reference businesses.
On July 23, 1999, the Registrant filed with the Securities and
Exchange Commission a current report on Form 8-K filing the Master
Transaction Agreement by and among Infonautics, Inc. (the "Company"),
Infonautics Corporation (the wholly-owned operating subsidiary of the
Company), Bell & Howell Company ("Bell & Howell") and Bell & Howell
Information & Learning Company (a division of Bell & Howell) entered into in
connection with the transactions disclosed in the Form 8-K filed by the
Company with the Securities and Exchange Commission on July 9, 1999.
On October 4, 1999, the Registrant filed an amendment to the Current
Report on Form 8-K of Infonautics, Inc. filed with the Securities and Exchange
Commission on July 23, 1999 (the "Form 8-K") amending and modifying Item 5 of
the Form 8-K.
21None.
12
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: NovemberMay 15, 19992000 /s/ David Van Riper Morris
----------------------------
David Van Riper Morris
Chief Executive Officer
Date: NovemberMay 15, 19992000 /s/ Federica F. O'Brien
----------------------------
Federica F. O'Brien
Chief Financial Officer
(PrincipalPrincipal Financial
and Accounting Officer)
22Officer
13