UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
COMMISSION FILE NUMBER 0-28284
INFONAUTICS, INC.
(exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2707366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
590 NORTH GULPH ROAD,
KING OF PRUSSIA, PA 19406-2800
(Address of principal executive offices) (Zip Code)
(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, 2001
Class A Common Stock, no par value 12,940,996
Class B Common Stock, no par value 0
INFONAUTICS, INC.
FORM 10-Q QUARTERLY REPORT
INDEX
PART I
FINANCIAL INFORMATION
PAGE
----
ITEM 1 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 (UNAUDITED)
AND DECEMBER 31, 2000 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR
THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8-13
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II
OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 14
2
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,780,819 $ 4,461,106
Marketable securities 1,844,233 7,884,534
Receivables:
Trade, less allowance for doubtful accounts of
$80,114 in 2001 and $35,376 in 2000 338,769 776,786
Other 66,766 86,544
Note Receivable 1,318,873 --
Prepaid expenses and other assets 111,065 215,153
------------ ------------
Total current assets 11,460,525 13,424,123
Property and equipment, net 1,822,207 2,163,562
Intangible and other assets 138,037 208,059
------------ ------------
Total assets $ 13,420,769 $ 15,795,744
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current obligations under capital lease $ 77,532 $ 71,213
Accounts payable 402,047 621,672
Due to affiliate 758,757 667,506
Accrued expenses 1,408,074 1,134,001
Deferred revenue 1,116,620 737,693
------------ ------------
Total current liabilities 3,763,030 3,232,085
Non-current portion of obligations under capital lease 70,745 111,160
------------ ------------
Total liabilities 3,833,775 3,343,245
------------ ------------
Shareholders' equity:
Class A common stock, no par value; 25,000,000 shares
authorized; one vote per share; 12,940,996 and
12,679,906 shares issued and outstanding at
June 30, 2001 and December 31, 2000 respectively -- --
Additional paid-in capital 61,573,472 61,573,472
Accumulated deficit (52,375,370) (49,721,884)
Treasury stock, at cost (483,906) (387,500)
Restricted stock 252,031 --
Other comprehensive income 620,767 988,411
------------ ------------
Total shareholders' equity 9,586,994 12,452,499
------------ ------------
Total liabilities and shareholders' equity $ 13,420,769 $ 15,795,744
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 1,516,951 $ 3,005,707 $ 3,355,977 $ 6,046,844
------------ ------------ ------------ ------------
Costs and expenses:
Cost of revenues 475,921 863,106 1,015,350 1,666,733
Customer support expenses 106,832 98,413 209,990 118,140
Technical operations and development expenses 655,101 1,584,874 1,469,563 3,014,987
Sales and marketing expenses 388,880 1,903,588 1,128,720 4,787,034
General and administrative expenses 1,443,489 536,532 3,141,272 1,239,871
------------ ------------ ------------ ------------
Total costs and expenses 3,070,223 4,986,513 6,964,895 10,826,765
------------ ------------ ------------ ------------
Loss from operations (1,553,272) (1,980,806) (3,608,918) (4,779,921)
Equity in net losses of unconsolidated affiliate -- (3,441,817) -- (5,940,977)
Interest income (expense), net 90,439 7,797 133,608 13,170
Other income -- -- 821,824 --
------------ ------------ ------------ ------------
Net loss (1,462,833) (5,414,826) (2,653,486) (10,707,728)
============ ============ ============ ============
Loss per common share-basic and diluted $ (.11) $ (.44) $ (.21) $ (.88)
============ ============ ============ ============
Weighted average shares
outstanding-basic and diluted 12,936,968 12,212,900 12,784,551 12,123,000
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,653,486) $(10,707,728)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 494,306 294,587
Amortization of discount on debt -- 266,448
Accretion on convertible debt -- 105,000
Provision for losses on accounts receivable 44,739 6,000
Equity in investee losses -- 5,940,977
Issuance of restricted stock 252,031 --
Other income (821,824) --
Changes in operating assets and liabilities:
Receivables:
Trade 393,278 (119,043)
Other 19,778 468,674
Prepaid and other assets 142,444 28,284
Accounts payable (219,625) 156,115
Due to affiliate 91,251 1,044,581
Accrued expenses 274,073 (342,700)
Accrued royalties -- (75,606)
Deferred revenue 378,927 (53,385)
------------ ------------
Net cash (used in) operating activities (1,604,108) (2,987,796)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (121,284) (500,459)
Purchases of option contracts (63,520) --
Issuance of note receivable (1,318,873) --
Sale of marketable securities and equity collar 6,558,000 --
Receipts from disposition of businesses, net -- 11,853,990
Purchase of intangibles -- (70,000)
------------ ------------
Net cash provided by investing activities 5,054,323 11,283,531
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 940,453
Repurchase of treasury stock (96,406) --
Payments on capital lease obligations (34,096) --
------------ ------------
Net cash (used in) provided by financing activities (130,502) 940,453
------------ ------------
Net increase in cash and cash equivalents 3,319,713 9,236,188
Cash and cash equivalents, beginning of period 4,461,106 3,739,024
------------ ------------
Cash and cash equivalents, end of period $ 7,780,819 $ 12,975,212
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
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, 2000
and the notes thereto included in the Company's 2000 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 that would be expected for the full year.
2. THE COMPANY AND 2001 MERGER AGREEMENT
Infonautics, Inc. is a provider of personalized information agents and Web
sites. The Infonautics Network includes search and reference sites consisting of
the subscriber-based Electric Library and the free Encyclopedia.com and
Newsdirectory.com sites. The Infonautics Network of web properties also includes
the free, advertising supported Sleuth content notification sites featuring
Company Sleuth and Job Sleuth as well as a subscription-based version of Company
Sleuth.
On March 28, 2001, the Infonautics announced that it signed a definitive
merger agreement ("the merger agreement") with privately held Tucows
Inc.("Tucows"), a leading provider of wholesale digital products to internet
service providers and web hosting companies worldwide. In consideration of the
merger, Infonautics will issue approximately 60 million shares of Class A common
stock to the Tucows shareholders who will own roughly 80% of the merged company
at closing. Upon completion of the merger, which is subject to Infonautics and
Tucows shareholder approval, certain regulatory approvals, and certain other
closing conditions, Infonautics will remain a public company and is expected to
adopt the Tucows name. The transaction is expected to close during the third
quarter of 2001 and a shareholder meeting is scheduled for August 28, 2001 at
which the transaction, among other business, is to be voted on by the
Infonautics shareholders.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities:
At June 30, 2001, marketable equity securities have been categorized as
available for sale and, as a result, are stated at fair value based on quoted
market prices.
Other Comprehensive Income:
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements.
Comprehensive income includes charges and credits to the equity that is not the
result of transactions with shareholders. Comprehensive income is comprised of
two subsets-net income and other comprehensive income. Unrealized gains on
marketable securities and the derivative collars represent the only items of
other comprehensive income reported by the Company at June 30, 2001.
6
4. NOTE RECEIVABLE
On April 26, 2001, the Company loaned Tucows $1,300,000 as provided for in
the Merger Agreement. This promissory note has an interest rate of 8% per annum
with principal and interest due in full on August 31, 2001. In the event the
Merger Agreement between the Company and Tucows is terminated (see note 2), any
termination fee the Company is obligated to pay will reduce the amount of the
note receivable.
5. INVESTMENT IN AFFILIATES
For the three months ended June 30, 2000 the Company recognized a charge of
$3,442,000 as equity in the losses of bigchalk.com, Inc. ("bigchalk.com"). There
was no charge in 2001. The accumulated deficit balance at June 30, 2001 and
December 31, 2000 includes $11,018,772 in undistributed losses from
bigchalk.com.
The Company incurred approximately $398,000 of content royalties and
$137,000 of technical services fees to bigchalk.com during the three months
ended June 30, 2001. For the three months ended June 30, 2000, the content
royalties amounted to $725,000 and the technical services fees amounted to
$250,000. The content royalties amounted to $847,000 for the six months ended
June 30, 2001, compared to $1,422,000 for the six months ended June 30, 2000.
Technical services fees amounted to $292,000 for the six months ended June 30,
2001, compared to $490,000 for the six months ended June 30, 2000. Content
royalties are recorded as a cost of revenues and technical service fees are
included in technical operations and development expenses. At June 30, 2001,
$759,000 is due to bigchalk.com for these content royalties and technical
services fees and is recorded on the balance sheet as due to an affiliate.
6. OTHER INCOME
On July 11, 2000, Infonautics exchanged its minority interest in Half.com,
Inc. for 174,387 shares of eBay Inc. common stock in connection with eBay's
acquisition of Half.com. On that date, Infonautics received 90% of the total
agreed exchange amount, or 156,953 shares of eBay. Infonautics reported the
transaction at fair value, resulting in a new accounting basis and a gain to the
extent of the difference in the fair value from the Company's basis in Half.com.
On February 23, 2001, the Company sold 130,500 shares for net proceeds of
approximately $6,556,000. As a result of this sale, the company realized a net
gain of $822,000 during the first quarter of 2001.
7. DERIVATIVE INSTRUMENTS
The Company's maximum and minimum potential gain realized from the sale of
its marketable securities, 26,453 shares of eBay, Inc. ("eBay"), at June 30,
2001 is approximately $727,000 and approximately $167,000, respectively. See
Note 11.
8. BASIC AND DILUTED EPS
Basic EPS is a per share measure of an entity's performance computed by
dividing income (loss) available to common stockholders (the numerator) by the
weighted average number of common shares outstanding during the period (the
denominator). Diluted earnings per share measures the entity's performance
taking into consideration common shares outstanding (as computed under basic
EPS) and dilutive potential common shares, such as stock options. However,
entities with a net loss do not include common stock equivalents in the
computation of diluted EPS, as the effect would be anti-dilutive.
For the three and six months ended June 30, 2001 the Company recorded a net
loss. Therefore, for the quarterly and year to date, basic and diluted EPS are
equal, as common stock equivalents are not included, as inclusion of such shares
would have an anti-dilutive effect.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense was approximately $15,000 and $5,000, for
the six months ended June 30, 2001 and 2000, respectively. Interest expense of
$0 and $105,000 was accrued on the February 1999 convertible debt instrument
during the six months ended June 30, 2001 and 2000 respectively. For the six
7
months ended June 30, 2001 and 2000, $0 and $266,000 respectively, of this
additional discount was amortized and recorded as interest expense.
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, 2001, the Company amortized $31,667 of this intangible
asset. Gross barter income and expenses of $0 and $257,000 are included in
revenue and marketing expenses for the six months ended June 30, 2001 and 2000,
respectively.
During the three months ended June 30, 2001, the Company recognized
compensation expense of $252,000 for the restricted shares issued. See Note 10.
10. STOCKHOLDERS EQUITY
Treasury Stock:
On November 30, 2000 the Board of Directors authorized the repurchase of up
to five percent of the Company's outstanding common stock. Stock repurchases
were to be made from time to time in the open market during the next twelve
months. The plan could be suspended or discontinued at any time. As of June 30,
2001, the Company repurchased 115,800 shares of its common stock at an average
price of $.84 per share. The Company suspended stock repurchases on the open
market in March 2001.
Restricted Stock:
On April 2, 2001, certain employees elected to participate in a restricted
stock program that was offered to employees in February 2001. Under this
program, 782,200 options were surrendered in exchange for 370,100 shares of
restricted stock. On April 2, 2001, 74,020, or twenty percent of the restricted
stock issued vested. The remainder will vest for those employees who are
employed by the Company on either a change of control, which the proposed merger
with Tucows would be considered, or 70% on October 2, 2001 and 100% on April 2,
2002.
11. SUBSEQUENT EVENT
On July 18, 2001, the Company sold 26,453 shares of marketable securities
in eBay and the related collar, for net proceeds of approximately $1,600,000,
for a net gain of approximately $435,000.
On July 11, 2001, an additional 17,434 shares of eBay Inc. stock that were
held in escrow and not valued on the balance sheet were released to the Company.
The Company will recognize a gain of $1,200,000 on these shares in July 2001.
The Company sold these shares on July 13, 2001 for net proceeds of approximately
$1,200,000.
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 merger with
Tucows Inc., any conditions that apply to the merger, the consequences of the
merger, and the costs and fees related to the merger, the sufficiency of the
Company's 'liquidity, including cash resources and capital, the number of
registered users and subscribers, monetization of users and subscribers, traffic
to our sites, gross margins, current and future expenses and costs, future
revenues and shortfalls in revenues, costs of revenue, pricing and its effects
on our business, use of system resources and marketing effects, technology and
systems, growth and expansion plans, product development plans, sales and
marketing plans, our business models, changes in our marketing partners, capital
expenditures, seasonality, effects of the U.S. economy, operating results,
licensing and service contracts with bigchalk.com, inc., the transaction with
bigchalk.com, inc., the Company's equity
8
interest in 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 filings with the
Securities and Exchange Commission. All forward-looking statements included in
this document are based on information available to the Company as 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 March 28, 2001, the Company announced that it signed a definitive merger
agreement with privately held Tucows Inc., a leading provider of wholesale
digital products to internet service providers and web hosting companies
worldwide. In consideration of the merger, the Company will issue approximately
60 million shares of Class A common stock to the Tucows shareholders who will
own roughly 80% of the merged company at closing. Upon completion of the merger,
which is subject to Company and Tucows shareholder approval, certain regulatory
approvals, and certain other closing conditions, Infonautics will remain a
public company and is expected to adopt the Tucows name. The transaction is
expected to close during the third quarter of 2001 and a shareholder meeting is
scheduled for August 28, 2001 at which the transaction, among other business, is
to be voted on by the Infonautics shareholders.
On June 21, 2001, the Company announced that its common stock, previously
traded on the Nasdaq SmallCap Market, commenced trading on the OTC Bulletin
Board. The Company had earlier appealed to the Nasdaq Listing Qualifications
Panel with respect to a Nasdaq Staff Determination to remove the Company's
listing on the SmallCap Market for failure to maintain a minimum bid price of
$1.00 for 30 consecutive trading days. On June 20, 2001, the Company received
notification of the Panel's determination to delist the Company's common stock
from the SmallCap Market effective June 21, 2001 for non-compliance with the
minimum bid price requirements of Marketplace Rule 4310(c)(8)(B) and 4330(f).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2000, AND FOR THE SIX MONTHS ENDED JUNE 30, 2001
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000.
REVENUES
Total revenues were $1,517,000 for the three months ended June 30, 2001,
and $3,006,000 for the three months ended June 30, 2000. Total revenues were
$3,356,000 for the six months ended June 30, 2001 compared to $6,047,000 for the
six months ended June 30, 2000.
End-user subscription revenue accounted for $1,385,000 or 91% of revenues
for the three months ended June 30, 2001 and $2,507,000 or 83% of revenue for
the three months ended June 30, 2000. Total end-user revenues were $2,939,000 or
88%, for the six months ended June 30, 2001 compared to $4,908,000, or 81%, for
the six months ended June 30, 2000. The decrease in the total revenues is
primarily a result of the decreasing number of subscribers, as we had
approximately 66,000 Electric Library subscribers at June 30, 2001 compared to
approximately 100,000 at June 30, 2000. The Company did not incur significant
customer acquisition costs in the second quarter to grow the subscriber base.
Therefore, we do not expect revenue growth in the third quarter, and may
experience continued subscription declines. The Company offered primarily an
annual only subscription model after March 14, 2001, which will result in
greater deferred revenue and lower revenue recognized upfront. The Company may
introduce a monthly model again during the third quarter. In June 2001, the
Company launched a paid subscription based service for Company Sleuth. This did
not have a significant impact on revenues for the second quarter and is not
expected to increase revenues for the third and fourth quarter of 2001. This
subscription service may be discontinued in the future.
Advertising and other e-commerce revenues were $132,000 or 9% of revenues
for the three months ended June 30, 2001 and $499,000, or 17% of revenues for
the three months ended June 30, 2000. Total advertising revenues were $417,000
or 12%, for the six months ended June 30, 2001 and $1,139,000 or 19%, for the
six months ended June 30, 2000. We expect this revenue to be affected by the
size of the advertising
9
and sponsorship contracts entered into in any one quarter and industry pressure
on e-commerce advertising. Accordingly, revenue growth may increase or decrease
in consecutive quarters, and is expected to remain flat in the third quarter.
The volatility in pricing for banner advertising in the marketplace may
negatively impact future revenues.
COST OF REVENUES
The principal elements of our cost of revenues during 2001 are royalty and
license fees on end-user revenues paid to bigchalk.com inc., which is currently
the sole provider of content, hardware and software, and communication costs
associated with the delivery of the Electric Library products. Cost of revenues
was $476,000 or 31% of revenues, for the three months ended June 30, 2001
compared to $863,000, or 29% of revenues, for the three months ended June 30,
2000. Cost of revenues for the six months ended June 30, 2001 and 2000 were
$1,015,000 or 30% and $1,667,000, or 28% respectively.
Cost of revenues in absolute dollars decreased in 2001 due the decrease in
end-user revenues. Additionally, the gross margin percentages 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. In December 2000, bigchalk.com had the option to
reprice the content services they provide us based on their actual cost. The
Company has reached an agreement with bigchalk.com to keep the pricing structure
the same for one year from December 2000. In addition, the Company may choose to
use other parties who can provide us with the content and processing required to
deliver the consumer version of Electric Library. However, cost of revenues is
expected to remain approximately the same as a percentage of sales, unless the
Company provides new subscription services for another property within the
Infonautics network.
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
$107,000 for the three months ended June 30, 2001, compared to $98,000 for the
three months ended June 30, 2000. The Company was building its own customer
service department during the early part of 2000, after the bigchalk
transaction. As a percentage of revenue, customer support expenses for the first
quarter were 7% in 2001 and 3% in 2000. Customer support expense were $210,000
for the six months ended June 30, 2001, compared to $118,000 for the six months
ended June 30, 2000. We anticipate customer support expenditures will remain
flat in 2001, unless new products are introduced which could require increased
customer service support.
TECHNICAL OPERATIONS AND DEVELOPMENT
Technical operations and development expenses consist primarily of costs
associated with maintaining our products, 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. Technical operations
and development expenses were $655,000 or 43% of total revenues for the three
months ended June 30, 2001, compared to $1,585,000 or 53% of total revenues for
the three months ended June 30, 2000. For the six months ended June 30, 2001 and
2000, the technical and development and operations costs were $1,470,000 and
$3,015,000, or 44% and 50% of total revenues, respectively. A portion of these
development costs in 2001 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.
During the fourth quarter of 2000, we implemented cost reduction efforts
including headcount reductions and limited use of consultants. However, the
Company has developed a subscription-based version of Company Sleuth that has
certain development and maintenance expenses and other costs may result in an
offset to some of these cost reductions. The Company will continue to incur
certain fees to bigchalk.com under the technical services agreements and is
expected to incur these costs internally over time.
10
SALES AND MARKETING
Sales and marketing costs consist primarily of costs related to
compensation, marketing programs, advertising, and promotion. Sales and
marketing expenses were $389,000 for the three months ended June 30, 2001,
compared to $1,904,000 for the three months ended June 30, 2000. As a percentage
of revenue, sales and marketing costs were 26% and 63% for the three months
ended June 30, 2001 and 2000, respectively. Sales and marketing costs were
$1,129,000 and $4,787,000, or 34% and 79% of revenue, for the six months ended
June 30, 2001 and 2000 respectively. The principal reasons for the decrease was
a Sports Sleuth marketing campaign in March 2000, which cost approximately $1
million and that the marketing of the Electric Library end-user business has
been and will continue to be limited in the near term. We use affiliate and
other marketing programs to acquire registered users. We do not expect to
accelerate these programs, or run any significant marketing campaigns.
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 $1,443,000 for the three months ended June 30,
2001, compared to $537,000 for the three months ended June 30, 2000. For the six
months ended June 30, 2001, general and administrative expenses were $3,141,000
as compared to $1,240,000 for the six months ended June 30, 2000. The increase
in general and administrative expenses resulted primarily from approximately
$1,337,000 in expenses related to the proposed business combination with Tucows
Inc and an officer retention plan, and non-cash compensation expense related to
the restricted stock program, offset by cost reduction efforts. The Company
expects that general and administrative expenses will not grow in the third
quarter of 2001.
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 for the three months ended June 30, 2000. We do not
expect that there will be any investment losses during 2001 since that asset
has been written down to zero at December 31, 2000. As of June 30, 2001, we
held a 27.54% interest in the common stock of bigchalk.com and taking into
account subsequent private placements into bigchalk.com, we currently own
approximately 11% of bigchalk.com's stock on a diluted basis. We expect that
bigchalk.com will continue to generate net losses in 2001 as it develops its
business.
OTHER INCOME
During February 2001, the Company sold 130,500 shares of eBay Inc., and the
related collar, and as a result realized a net gain of $822,000 during the first
quarter of 2001. There was no other income during the three months ended June
30, 2001.
During July 2001, the Company sold 26,453 shares of eBay Inc. and the
related collar, and as a result will recognize a net gain of $435,000 during the
first quarter of 2001.
There were 17,434 additional shares of eBay that were held in escrow and
are not valued on the balance sheet or included in the income statement. These
shares share were released to the Company in July 2001. The Company will
recognize a gain on the issuance of shares out of escrow of approximately
$1,200,000 in July 2001 and these shares were soon after sold for net proceeds
of the same amount.
INTEREST INCOME (EXPENSE), NET
The Company earned net interest income of $90,000 in the three months ended
June 30, 2001, as compared to net interest income of $8,000 in the three months
ended June 30, 2000. Approximately $96,000 of interest income was earned in the
current quarter. Offsetting this income was $6,000 in interest expense primarily
arising from interest on capital leases. Approximately $194,000 of interest
income was earned in
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the prior year quarter. Offsetting this income was $186,000 in interest expense
primarily arising from the interest accrued upon the convertible debt issued
February 11, 1999 and the amortization of the debt discount. The Company earned
net interest income of $134,000 in the six months ended June 30, 2001, as
compared to net interest income of $13,000 in the six months ended June 30,
2000. Offsetting the interest income of $146,000 for the six months ended June
30, 2001 is interest expense of $12,000. For the six months ended June 30, 2000,
offsetting the interest income of $390,000 was interest expense of $377,000.
This expense was primarily related to the interest accrued upon the convertible
debt issued on February 11, 1999, and the amortization of the debt discount.
INCOME TAXES
The Company has not recorded an income tax benefit because it has incurred
net operating losses since inception.
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, proceeds from the
sale of equity holdings, utilization of an accounts receivable purchase
agreement, and, to a lesser extent, operating and capital leases.
We had cash and cash equivalents of approximately $7,781,000 at June 30,
2001, as compared to $4,461,000 at December 31, 2000, an increase of $3,320,000,
primarily resulting from the sale of marketable securities. Additionally we had
marketable securities available for sale of $1,844,000 at June 30, 2001. We
monitor our cash balances regularly and invest excess funds in a short-term
government investment fund. We had working capital of approximately $7,697,000
at June 30, 2001.
On July 18, 2001, we sold all of our remaining eBay Inc. marketable
securities and the related collar, for net proceeds of approximately $1,600,000.
On July 11, 2001, an additional 17,434 shares of eBay Inc. stock that were held
in escrow and not valued on the balance sheet or included in the income
statement were released to the Company. The Company sold these shares on July
13, 2001 for net proceeds and an increase in capital resources of approximately
$1,200,000.
We used cash in operations of approximately $ 1,604,000 for the six months
ended June 30, 2001 compared with $2,988,000 for the comparable period in 2000.
Net cash provided by investing activities was $ 5,054,000 for the six
months ended June 30, 2001. This compares to cash provided by investing
activities of $11,284,000 for the six months ended June 30, 2000. Net cash used
for capital expenditures was $121,000 and $500,000, respectively, for the six
months ended June 30, 2001 and 2000.
The Company's principal commitments at June 30, 2001 consist of obligations
under the bigchalk.com service and license agreements, equipment and facility
lease agreements, and fees related to the merger agreement. Additionally,
effective January 1, 2001, the Company's Board of Directors implemented a
retention plan for the executive officers of the Company. The plan was
instituted in order to create incentives for the officers to provide continued
service to the Company operationally as well as strategically following the
termination of the Digital Fusion transaction in late 2000 and as the Company
entered the new year. The retention plan is cash-based and depends on the date
on which an officer continues to be employed by the Company and a substantial
portion is contingent upon the close of a strategic transaction. The Company
accrued $567,000 through June 30, 2001, and such payments in the aggregate will
not exceed $850,000. No officer is entitled to payment under both the retention
plan and any applicable employment or severance agreement.
Capital expenditures have been, and future expenditures are anticipated to
be, primarily for facilities and equipment to support the expansion of the
Company's operations and systems. The Company expects that
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its capital expenditures would increase if the number of registered users
increases. As of June 30, 2000, the Company did not have any material
commitments for capital expenditures.
Net cash used in financing activities was $131,000 in the six months ended
June 30, 2001, compared to net cash provided by financing activities of $940,000
in the six months ended June 30, 2000.
We currently anticipate that the cash balances, cash from operations and
cash from sale of investments, 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.
Since the Company currently trades on the Over the Counter market, this may
make it more difficult to raise funds in the future. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
expansion, successfully market our services, develop or enhance our services,
respond to competitive pressures or take advantage of acquisition opportunities,
which could have a material adverse effect on our business, results of
operations and financial condition. If we raise additional funds by issuing
equity securities, stockholders may experience dilution of their ownership
interest and those securities may have rights superior to those of the holders
of the common stock. If we raise additional funds by issuing debt, we may be
subject to certain limitations on our operations, including limitations on the
payment of dividends.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of SFAS 133 Disclosure
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133, as amended,
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective in the first quarter of 2001. The Company adopted
SFAS No. 133 in January 2001, and the adoption of this pronouncement did not
have a material impact on the Company's financial position and results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have invested in a privately held company, bigchalk.com. There is no
public market for bigchalk.com's stock.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K
On April 11, 2001, the Registrant filed with the Securities and Exchange
Commission a current report on Form 8-K reporting that it had entered into an
Agreement and Plan of Merger dated March 27, 2001 with Tucows Inc. and TAC
Acquisition Corp. and generally summarizing the proposed merger; a copy of the
Merger Agreement and its exhibits was attached to the Form 8-K as Exhibit 10.1.
On June 21, 2001, the Registrant filed with the Securities and Exchange
Commission a current report on Form 8-K reporting that trading in its common
stock had moved to the OTC Bulletin Board from the Nasdaq SmallCap Market as a
result of the determination of a Nasdaq Listing Qualifications Panel to delist
the Company's stock; a copy of the press release was attached to the Form 8-K as
Exhibit 99.1.
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.
Dated: August 14, 2001 By: /s/ David Van Riper Morris
--------------------------
David Van Riper Morris
Chief Executive Officer
Dated: August 14, 2001 By: /s/ Federica F. O'Brien
--------------------------
Federica F. O'Brien
Chief Financial Officer
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